The Unfinished Jubilee
By Tim Thorlby
5 min read
In this blog, Tim looks at the resurgence of international debt as a crisis facing lower-income countries and makes the case for a new Jubilee.
1 – Kenya
There is a huge distance between the primary schools and hospitals of Kenya and the money markets of London, but they are intrinsically linked.
The east African country of Kenya is currently experiencing its worst economic crisis in decades, with rising unemployment, inflation and nearly 3 million people at risk of hunger. This has been prompted by the pandemic as well as local natural disasters, including drought, and climate change.
Faced with this kind of pressure, most governments would probably increase public spending to ensure social protection at a time of distress, possibly borrowing money to do so. In Kenya, they cannot do this. They are limiting public services and raising taxes instead, adding to the social distress. Why? Because the government owes private foreign creditors so much money that it must shift money from public spending to debt repayment.
In Kenya today, the government spends five times more on international debt payments than it does on all of its national health services put together[1]. And the majority of this money is being paid to large, profitable private companies, charging high interest rates. Every pound that is being paid to these commercial lenders is now coming straight out of the budgets of Kenya’s schools and hospitals.
Something has gone badly wrong.
2 – A new international debt crisis is unfolding
Problematic international debt in low-income and lower-middle-income countries is not new. Over a quarter of a century ago, a debt crisis emerged and was recognised as a key brake on development. A concerted effort was successfully made to provide debt relief in the 1990s and early 2000s to restore financial stability and enable participating governments to spend less on debt payments and more on public services. It was accompanied by many other measures to improve governance, economic development and welfare.
The financial crash of 2008 then saw the debt burden of these countries begin to rise sharply again.
The world’s recent economic woes of the last three years have now added to this situation to create the ‘perfect storm’. The pandemic undermined the finances of many countries, the illegal Russian invasion of Ukraine has caused an escalation in energy prices and inflation and the ensuing global economic downturn has put enormous pressure on the public finances of governments around the world. Governments need to spend more on social support just as their tax revenues are falling, requiring many to borrow more.
Governments in low-income countries have obviously found this situation particularly difficult to manage. The result is that some are once again in significant financial distress, as they have borrowed more and the cost of that debt has risen. The World Bank estimates that today the world’s low-income countries are spending nearly 4% of national income on servicing their international debts – the highest for 30 years[2].
When you look at debt as a proportion of the government’s revenue (not just national income as a whole), the situation is even more stark. By 2021, low-and-middle-income countries were, on average, spending over 14% of all government revenue on debt repayments. In some countries, the debt repayments ate up the majority of government revenue – 60% in Sri Lanka and a catastrophic 98% in Somalia.
Every pound spent on debt servicing is a pound not available for public services. Even before the pandemic in 2019, UNICEF identified 25 countries spending more on debt relief than on health, education and social protection combined and this list has since grown. In sub-Saharan Africa, it is estimated that for every dollar of public expenditure there is another 50-60 cents spent on debt repayments[3].
The human cost of this debt servicing is immense. A new crisis of unpayable international debt is now unfolding, and the poorest people in the world are paying the price.
The House of Commons Select Committee on International Development recently concluded that urgent action is now required:
“the amount of debt repayments that African countries are due to make in 2024 and 2025 is six times higher than the total sum those countries expended on servicing debt in 2021. The situation is bleak. Without sustained and effective intervention by the international community, it will deteriorate further in the next few years. The development impacts of such a trend could be catastrophic for many low-income countries.”[4]
3 - Who owes who?
Let us look at the nature of these international debts and where the problem lies.
Sovereign debt (or ‘public debt’) is debt owed by governments. Most governments borrow money at some point and it can be very helpful, but it becomes an issue if the debts become unaffordable and unsustainable.
Sovereign debt comes from three kinds of lender:
Multilateral bodies like the World Bank and IMF
Individual lenders, mainly other governments
Private (or commercial) creditors such as commercial banks, investment companies and private bond-holders
Private debt has been growing substantially over the last decade, not least as private investors have looked for ways to earn higher profits in times of lower interest rates. Private loans to governments can come with less terms and conditions (‘less strings’) but are often shorter term and have higher interest rates than loans from other governments or international institutions, so they often cost more and need to be repaid faster.
Crucially, none of the international debt relief initiatives in recent years have covered private creditors. During the pandemic new international debt relief initiatives were launched by the G20, the World Bank and the IMF. Most recently, the ‘Common Framework’ launched in 2020, applying to 73 countries. This initiative extends to debts held by other governments, the World Bank and the IMF, but not private creditors – they remain the missing part of the debt jigsaw.
The Private creditors
The nature of international debt today is not the same as it was 25 years ago; the world has changed. There is significantly more debt owed to private creditors.
Today, whilst only 20% of international debt is held by private creditors, Debt Justice[5] estimate that they account for over 40% of all debt repayments by lower-income countries.
Whilst various attempts have been made over the years to persuade private creditors to participate in debt relief, they have generally declined to do so. The so-called ‘voluntary’ approach is clearly failing. It is clear that no private lender is going to participate unless all of the other lenders participate on the same basis, requiring a solution which is across the board.
Private creditors are often large and powerful financial institutions making significant profits. Many are well placed to cancel debts or agree to fairer repayment terms. They include companies like Blackrock, JP Morgan, HSBC and UBS.
For example, the UK-based financial giant BlackRock is set to make over 110% profit if debts owed to it by the Zambian government are repaid in full. But Zambia, which has poverty rates among the highest in the world, is in debt distress. As the IMF has acknowledged, its debt servicing costs have become unsustainable[6].
The recent report by the International Development Select Committee proposes a clear and robust solution to the problem of how to secure private creditor participation in debt relief. The UK is uniquely well placed to assist because it turns out that some 90% of the private money lent to lower-income countries is governed by English law. So, the Committee is recommending new legislation to compel private creditors to participate in debt relief:
The UK Government should consult on the introduction of legislation to compel or incentivise participation of private creditors in the Common Framework, such as those proposed by the World Bank[7].
Debt relief is a complex business, and a full solution also requires debt relief from multilateral institutions like the World Bank and IMF as well as individual countries, particularly China, which has become a major lender to lower-income countries in recent years. International co-operation between governments will be required. Nevertheless, the thorniest issue has proved the intransigence of private creditors to get involved and the high level of debt repayments they demand. Tackling this therefore seems like a pretty good place to start.
3 – The Unfinished Jubilee
Comprehensive debt relief has been delivered before.
Towards the end of the last Millennium, there was a significant international push to cancel the unpayable debts of the world’s poorest countries. The World Bank and the IMF constructed the Highly Indebted Poor Countries (HIPC) Initiative in 1996 and in 2005 it was followed by the Multilateral Debt Relief Initiative (MDRI).
The political resolve to deliver debt relief at an unprecedented scale was greatly strengthened by international pressure from below. Grassroots campaigns like Jubilee 2000 (now called ‘Debt Justice’) and ‘Make Poverty History’ in 2005 turned debt relief into a political issue and had a great impact on governments in the UK and USA in particular. The UK has shown international leadership on debt relief over the years, reflecting strong grassroots political concern for this.
Jubilee 2000 was a campaign that originated in churches in the UK, drawing on the Old Testament idea of ‘the Year of Jubilee’. Described in Leviticus 25, the Jubilee was proclaimed in the fiftieth year; the land was left fallow, families returned to their traditional lands and debts were cleared. It was a national social, economic and environmental re-set, a year of liberation and restoration. It ensured that poverty was not endlessly transmitted from generation to generation.
In all, over $130 billion of international debt relief was delivered from 1998 - 2010 to 36 countries, enabling significant new public expenditure into health and education. Millions more children were enrolled into school, midwifery services were greatly expanded and measurable progress made towards social objectives. Debt relief did not achieve all that it set out to achieve, but it made a significant contribution to building stronger public services, improving social outcomes and reducing poverty for millions of the world’s poorest families. The IMF and World Bank estimate that “poverty reducing” expenditure increased by around 40% in the years after these countries benefitted from debt relief[8].
In other words, it worked quite effectively.
It was a Jubilee – not perfect, but good news for some of the world’s poorest communities.
And now it is time to finish the job; as the nature of international debt has changed, so it is time to extend the Jubilee to cover private creditors in particular.
4 – Moral hazards
Economists (and bankers) sometimes like to talk about ‘moral hazards’ in relation to debt. The argument goes that if you have taken out a loan then, come hell or high water, you are bound by law and morality to repay it. If you are let off, then you might be tempted to take out further loans in the future also expecting to be ‘let off’; hence the moral hazard – it may encourage bad behaviour (irresponsible borrowing) in the future.
The problem with this argument is that it is entirely one-sided. There is also a moral hazard for the lender in being allowed to pursue a debt relentlessly even when it has become clear that the borrower is struggling to repay. Here, the issue is irresponsible lending; the moral hazard is that the lender may be encouraged to continue lending to organisations in the future that cannot really afford to repay their loans; this is also bad behaviour.
In reality, neither the governments nor the lenders are usually without blame. Many governments are indeed flawed, sometimes corrupt, and perhaps unwise in some of their financial dealings. The lenders on the other hand are showing a callous disregard for human life by insisting that governments shift massive resources from public services to debt repayments just to shore up this year’s global profit margins.
Bringing private creditors into a well-managed and transparent scheme to deliver significant debt relief to struggling governments would be a significant boost to millions of the world’s poorest families. It is possible to manage such initiatives so that resources go to the right places, not into the wrong pockets. There would be a cost to lenders for sure, but it would also put their ‘clients’ onto a more sustainable footing and perhaps instil more responsible lending practices for the future.
At the heart of the biblical Jubilee is a radical debt forgiveness. The Year of Jubilee was announced on the Day of Atonement – the day that the people of Israel were forgiven by God. In turn, the people were then called on to forgive each other their debts – passing on the grace and generosity. No-one ‘deserves’ it, but everyone gets it nonetheless, and it allows the nation to renew itself and start again. In a broken world, this strikes me as a rather practical approach to avoiding a vicious spiral of decline – no-one is without blame, so let’s cancel each other’s debts and start again.
5 – Let’s act
A campaign for international debt relief is underway, supported by charities in the UK such as Christian Aid and Debt Justice. They are calling on the UK Government to:
Legislate to protect low and middle-income countries facing debt crisis from law suits by private creditors
Legislate to compel private creditors to participate in debt relief, in co-operation with other countries and institutions
Support a new international debt relief initiative, for low and middle-income countries, which will put debt onto a more sustainable footing for the future
You can find out more and get involved by getting in touch with these charities. For example, Christian Aid are running a campaign to cancel the debt which addresses these issues and supports the recommendations of the International Development Committee’s recent report[9].
It’s time to finish the Jubilee.
This blog was written by Tim Thorlby. If you found it interesting, you can subscribe for free alerts for future blogs.
Notes
[1] Christian Aid (June 2022) Submission to International Development Committee Debt and Development Inquiry
[2] World Bank International Debt Statistics 2022
[3] Para 35 in: International Development Committee, Debt relief in low-income countries, Seventh Report of the Session 2022–23, published 10 March 2023
[4] Para 37 in: International Development Committee, Debt relief in low-income countries, Seventh Report of the Session 2022–23, published 10 March 2023
[5] https://debtjustice.org.uk/
[6] Christian Aid (2023) Public Debt in Private Hands | Access here: https://www.christianaid.org.uk/sites/default/files/2023-01/public-debt-in-private-hands.pdf
[7] Para 62 in: International Development Committee, Debt relief in low-income countries, Seventh Report of the Session 2022–23, published 10 March 2023
[8] Para 15 in: International Development Committee, Debt relief in low-income countries, Seventh Report of the Session 2022–23, published 10 March 2023
[9] International Development Committee, Debt relief in low-income countries, Seventh Report of the Session 2022–23, published 10 March 2023 | Access here: https://publications.parliament.uk/pa/cm5803/cmselect/cmintdev/146/report.html