The Future of Finance in Developing Countries

Before the pandemic started, developing countries had been increasing their debt levels since the 2000s. By the end of 2019, 44% of IDA-eligible countries were already considered at high risk of or in debt distress. Debt servicing costs of least developed countries (LDCs) and low-income countries increased twofold from 2000 to 2019 to reach 13% of government revenue. A growing proportion of this debt was privately owned, or commercial.

Then the pandemic hit, sending countless public health systems, many already under pressure, into disarray. Up to 1.6 billion livelihoods – half the world’s workforce – have been lost. Health and unemployment benefit expenditures skyrocketed at the same time as the release of some US$9 trillion worth of stimulus packages.

Governments faced with huge pressure on public expenditure levels simultaneously saw their tax base collapse as lockdowns caused both productive activities and public consumption to stall. The near-shutdown of key components of the world economy such as tourism and the steep drop in commodity prices were especially harsh on tourism-dependent countries, including many Small Island Developing States (SIDS), and commodity exporters respectively. Many countries, both low and middle-income, now find their fiscal space squeezed on all sides to the extent that a wave of sovereign debt default has now become a major risk.

In the midst of all the human suffering these multiple crises have caused, we need both a clarion call and a message of optimism. We can create a sustainable future: financing resources are there and the means and the instruments are already at our disposal, but we must act now, while the window of opportunity is still open.

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