After nearly two years of the pandemic, its global economic consequences still cannot be fully understood. One thing is clear, however: the economic and financial policy options to counter the negative consequences of the pandemic are extremely unevenly distributed around the world. While the G20 countries were already able to mobilize a gigantic 24% of their gross domestic product to support their economies in 2020, most countries of the South do not have such financial opportunities at all. For many low- and middle-income countries in particular, there is virtually no way out of the crisis that these states alone could manage.
In just one year, Tunisia’s public debt has increased by 18 percentage points to almost 90 percent of economic output.
In 2020, Tunisia, a typical middle-income country that implemented the reforms recommended by the World Bank and the International Monetary Fund (IMF) for many years, experienced the greatest economic crisis since its independence. In just one year, public debt has increased by 18 percentage points to almost 90 percent of economic output. While economic recovery is now starting in other countries, the outlook for Tunisia is unclear. It also has to do with the political crisis and its national debt. In June 2021, Tunisian President Kais Said suspended parliament and resumed his powers. The fundamental rights of Tunisians are widely respected, but four months after taking office, it is still not clear how things will develop in the long term.
Is austerity the answer?
Even before the political situation deteriorated, the IMF considered it likely that Tunisia’s indebtedness would continue to increase unsustainably in the medium term. In order to bring it back to a sustainable level, he recommended austerity measures as early as February 2021, including reducing wage spending in the public sector, removing energy subsidies and targeting social spending only on segments. the poorest of the population. But these measures would place an additional burden on the already shrinking middle class. A quick move away from a loose fiscal policy would also jeopardize the post-pandemic economic recovery.
Alternatively, once it has reached its peak, the high debt ratio could also be reduced by adjusting the debt level or the debt service. This would involve involving the creditors in restoring the sustainability of the Tunisian debt by forcing them to renounce their debts. In fact, debt relief as an instrument to combat the consequences of the pandemic was a political priority in 2020: the IMF offered debt service relief to 29 low-income countries. In April 2020, the G20 agreed to suspend short-term debt service for 73 of those countries, and a few months later they created a framework for debt restructuring – the G20 Common Framework.
But these opportunities did not exist for middle-income countries. Access to these initiatives was not regulated according to real relief needs, but according to countries’ per capita income. Only countries classified as poor according to the World Bank categories had access to it. As a country with average income per capita, Tunisia was not eligible, despite its debt problem. Debt restructuring and partial cancellations are therefore not part of the IMF’s recommendations to reduce the Tunisian debt burden. On the contrary: the austerity measures recommended by the IMF aim to maintain the full level of debt service between 2021 and 2025.
A “good debtor”
Tunisia is not an isolated case. Middle-income countries threatened by a debt crisis face the dilemma of either taking on more debt and thus worsening their debt crisis, or opting for fiscal austerity and thereby jeopardizing their economic development. Given their already critical debt situation, many of these countries have little room to borrow more anyway. Already in 2021, 85 countries in the global South had to reduce their spending. By 2023, that number is expected to increase to 115 countries. Yet in many countries, public health and social spending was already at dangerously low levels before the Covid-19 pandemic.
Countries excluded from G20 and IMF debt relief initiatives can seek debt relief from their creditors outside of the G20 framework. However, in the context of the pandemic, private creditors and their institutions have successfully used the argument that debt relief is not in the best interests of debtor countries. Bankers and fund managers have been repeatedly cited as saying that debt relief could make future borrowing more expensive. On the other hand, according to the bankers, by keeping the debt service on schedule, stable financial relations with private lenders could be maintained even during the crisis.
The threat worked. In April 2021, the governor of the Tunisian central bank publicly dispelled rumors that Tunisia may seek to negotiate a debt rescheduling. Soon after, the country serviced its $ 1 billion bond debt on time, which caused its foreign exchange reserves to drop to dangerously low levels. And so, the argument that reliance on debt relief leads to exclusion from the capital market is empirically untenable. Either way, this good obedience has not delivered the promised support to lower middle income countries. In fact, this group of countries repaid more interest and principal to private creditors abroad than they received in new loans from them during the same period.
Particularly in such a severe global crisis, it would behoove us to distribute the burden of adjustment fairly between debtors and creditors.
To date, the initiatives created by the IMF and the G20 have not been extended to all countries in need of assistance. On the contrary, despite the IMF’s rhetoric about the serious risk of a “major divide” between the richest countries and most of the developing countries, the international community is outright abandoning the middle-income countries that risk debt distress. These countries have little room to invest in a recovery and therefore cannot expect a rapid economic recovery.
From the point of view of creditors, Tunisia has so far been a “good debtor” which has always paid off its debts on time. In the current crisis, however, this is only possible if the rights of creditors take priority over the economic and social rights of Tunisian citizens. Even before the crisis, health care was no longer guaranteed in some regions of Tunisia.
Restructuring unsustainable debt can be an effective way to stabilize the debt ratio and create fiscal space without placing an excessive burden on the debtor’s population. Particularly during such a major global crisis, it would be crucial to distribute the burden of adjustment fairly between debtors and creditors. In this situation, the greatest risk of a debt crisis is not that payments to creditors will be missed, but that countries will be stifled in their development by the costs of servicing the debt and, for example, that major investments to fight poverty and climate change will not materialize.
End the debt crisis
The top priority must therefore be to stabilize the health, economic and social situation in the affected countries as quickly and comprehensively as possible and to enable sustainable investments in climate protection measures and the achievement of the United Nations Sustainable Development Goals (SDGs). United. In contrast, securing the short-term income expectations of individual creditors is of secondary importance. Considering the way forward to meet climate and sustainability goals, everything else would be a huge loss – not just for the countries themselves, but for the whole world.
Faced with the G20’s lack of initiative, the governments of highly indebted developing and emerging countries are forced to defend their own interests more vigorously. Individual countries like Pakistan and Jamaica, and entire groups of countries like the Alliance of Small Island States (AOSIS), have made proposals on the reforms needed to emerge from the debt crisis. It is important to make these initiatives visible and audible so that debtor countries are not excluded from finding solutions in the future.
The new German government plays a crucial role here. Tunisia, which is the “most important target country in the transformative partnership between the German government and the Arab world” since the upheavals of 2011, should receive stronger political and diplomatic support from Germany. Important aspects of the traffic light coalition’s foreign policy, from green hydrogen to migration and a values-based foreign policy, have their fulcrum in North Africa.
In addition, the future federal government created the political base to implement lasting solutions to the debt crisis, and not just in poor countries. The coalition agreement presented on November 24 includes an agreement to create a sovereign insolvency framework.
However, the 2002 (red / green) and 2009 (black / yellow) coalition agreements already contained similar wording without the agreements ever being implemented. This time around, the new government must translate the good words of the coalition agreement into action. The German Presidency of the G7 in 2022 would be a good starting point. The world simply cannot afford a decade of debt crisis.