When the debt crises hit, don’t simply blame the pandemic

Every debt crisis begins with unheeded warnings and ends with severe limits on investmentshutterstock_2051836073_blog_june_28heroimage1 in education, health, and infrastructure among other things. These crises often spark civil unrest and government collapse, delivering a lasting setback to the growth prospects of the affected country. 

In the wake of the COVID-19 pandemic, global debt has surged. Today, 58 percent of the world’s poorest countries are in debt distress or at high risk of it , and the danger is spreading to some middle-income countries as well. High inflation, rising interest rates, and slowing growth have set the stage for financial crises of the type that engulfed a series of developing economies in the early 1980s. 

But it would be a mistake to pin the blame on the pandemic should those crises arrive. The seeds were sown long before COVID-19. Between 2011 and 2019, public debt in a sample of 65 developing countries increased by 18 percent of GDP on average–and by much more in several cases. In sub-Saharan Africa, for example, debt increased by 27 percent of GDP on average.  

What drove the pre-COVID debt accumulation? Let’s be clear: it wasn’t economic surprises that were beyond the government’s ability to foresee. It was simply bad policy.   

Our analysis of debt sustainability in 65 developing economies suggests that sustained primary deficits were the single-largest driver of public debt in those countries. Countries were simply spending beyond their means. Between 2011 and 2019, the median public-debt increase attributable to primary deficits amounted to a whopping 14 percent of GDP. In sub-Saharan Africa, it was 18 percent.  Yet, in South Asia, it was just slightly over 5 percent.  

In Africa, in particular, the evidence is that governments ran up primary deficits not to make productive long-term investments but simply to pay current bills. They took on far more debt to pay the wages of public sector workers than they did to build roads, schools, and factories. Among the 33 sub-Saharan countries in our sample, current spending outstripped capital investment by a ratio of nearly three to one.  

That did nothing to strengthen their ability to repay the debt. Nor did these countries opt to borrow inexpensively—from multilateral lenders offering concessional financing rates. In 2010, multilateral lenders accounted for 56 percent of the public and publicly guaranteed debt of sub-Saharan countries; by 2019, that share was just 45 percent. In 2010, loans from Paris Club creditors accounted for 18 percent of the debt; by 2019, the share was just 8 percent. On the other hand, borrowing from China and commercial creditors nearly tripled over the same time: from 6 percent to 16 percent, and from 8 percent to 24 percent, respectively.   

So long as real economic growth remained strong, the risks were masked. Growth curbs the accumulation of public debt: according to our data, from 2011 through 2019, economic growth—adjusted for inflation—reduced public debt by the equivalent of about 12 percent of GDP.  Today, however, the dynamics are in the opposite direction: developing economies are expected to grow just 3.4 percent in 2022, barely half the rate in 2021. And as interest rates surge to tackle inflation, growth is likely to remain weak for the next couple of years. 

It’s time for policymakers to adopt the first law of holes: when you’re in one, stop digging. Adopting good policies now can still repair a lot of the damage: 

Ramp up growth. The best way to escape a debt trap is to grow out of it. Measures to improve business conditions, better allocation of resources, and healthy market competition are essential policy actions to boost productivity growth.  Governments should take advantage of this crisis to move faster on key structural reforms. 

Accelerate fiscal policy reforms. Improving tax administration efficiency and closing loopholes are a good start, but governments should move to broaden tax bases in ways that support rather than impede long-term growth. That can be accomplished by focusing on activities that are harmful to sustainable growth and public health—taxes on tobacco consumption and carbon emissions, for example—while reducing taxes on productive activities. Tax compliance can be improved by making tax systems more equitable. The debt overhang can be dismantled if governments improve debt-management procedures and public spending while strengthening the legal environment for debt contracting.  

Speed up debt restructuring. Many of the countries in trouble today are set to fail if they cannot get help. The international community must help them by improving global initiatives that facilitate debt restructuring.   Policymakers should explore every opportunity to encourage different types of creditors—bilateral, commercial, and multilateral—to come quickly to an agreement that provides relief to overindebted countries. 

Crises also bring opportunities. Amid the overlapping crises we are seeing today, governments have an opening to plant the seeds for a more stable and prosperous future. They should not pass up the opportunity.

said that we now find ourselves in the “Golden Age of Innovation.” While it is undeniably true that we live in a time when the pace of technological change is faster than ever before, from available new digital technologies to the data that fuels them the picture is not always as rosy as some would have it.

Unsurprisingly, the Digital Age of Accelerated Innovation brings with it both opportunities and challenges and nowhere more so than when it comes to data.  On the one hand, data has the potential to solve some of our most pressing societal challenges, from the pandemic to poverty to climate change. But that data can only be effectively leveraged if individuals and organizations trust those bodies that are responsible for handling it, rather than suspect that their privacy and wellbeing might be compromised without their knowledge or consent. This is where the challenges lie.

Where do we stand on trust?

Many organizations, including the World Economic Forum, note that “declining trust, prompted by unease at the way some organizations are using digital technology, could undermine the societal benefits of digitalization.” No one can deny that new innovative technologies have brought a commensurate wave of data breaches, tech industry scandals, a rise in cyberattacks, and a general lack of transparency regarding personal data use.  Whether the facts support it or not, a general sense of wariness accompanies every new request for personal data.

Organizations have a role to play to build and maintain trust in how they handle data.   Indeed, there is a pressing need to establish comprehensive practices for the development, design, and deployment of emerging technologies, such as Artificial Intelligence.  Without measured and responsible guardrails, heedless and irresponsible personal data collection threatens to run rampant. This project starts at home by setting high levels of Privacy and Information Governance. New privacy regimes are surfacing weekly across the globe to safeguard the protection of personal information, which is good news. However, trust is not a simple box-ticking exercise. This requires organizations to instill a culture of privacy and to invest in education and awareness at all levels.   This translates into ethical commitments for a responsible data innovation system that safeguards and enhances privacy principles  – where people know and control what is being done with their data, how it is being used and shared, and how they are benefiting from these activities. Trust is an umbrella that, in data privacy terms, encompasses awareness, transparency, control, and security among others. Ultimately, this allows organizations to turn a heavy compliance obligation into a strategic imperative and business opportunity.

What’s next?

We are still at the start of our journey to re-establish trust in the digital era. Everyone – governments, industry, civil society, and academia – has a role to play in the collective effort needed to bring about real change. Therefore, the World Bank is so pleased to be working alongside Mastercard on a knowledge and thought leadership partnership to strengthen trust across the global digital economy.

Please view the replay of our Fireside Chat with Tami Dokken, Chief Data Privacy Officer, World Bank and Caroline Louveaux, Chief Privacy Officer, Mastercard which took place on June 21, 2022.