World teeters on a $235 trillion debt mountain – and there is no ‘magic wand’ to wipe it away, warns head of the World Bank
By John Paul-ford Rojas Updated: 12:06 BST, 12 October 2023
‘I wish there was a magic wand that said abracadabra,’ the new head of the World Bank said when talking about the problem of debts facing developing countries.
The comments from Ajay Banga illustrate some of the seemingly intractable issues facing the great and the good of global finance who have been meeting in Marrakech this week.
In the plus thirty degree heat, the International Monetary Fund (IMF) and World Bank joint meetings are meant to be a place where cool heads with an eye for financial spreadsheets can find common ground. Ajay Banga: The new head of the World Bank has spoken about debt in developing countries
And until a few days ago the clear blue skies above the Moroccan city seemed to herald a sunnier outlook for the global economy.
Indeed, Treasury Secretary Janet Yellen jetted in from Washington insisting that the ‘pessimism’ enveloping the shindig when it was held in the US a year ago had proved to be unwarranted.
Yet Yellen had to acknowledge that events at the other end of the Mediterranean, after Gaza terrorists mounted an horrific attack on Israeli civilians, had cast a shadow – and could pose a fresh challenge to the global recovery by pushing up oil prices.
It is not the only cloud on the horizon, with the Ukraine war continuing to take its toll, the battle against inflation still not won, and the prospect of interest rates remaining higher for longer threatening to drag the recovery down.
And while many including Yellen are talking up the prospects of a so-called ‘soft landing’, the recovery envisaged is hardly triumphant, with the IMF’s forecasters seeing the global economy ‘limping along not sprinting’.
That is even before mentioning the challenges of trying to wean the world off fossil fuels in a way that is fair to developing countries lacking the resources to make the change – and who in many cases will bear the brunt of climate change.
All this with the world teetering on a $235 trillion debt mountain – and relations between the US and China, the world’s two biggest economies (and who themselves have the biggest debt), strained at a time when consensus is most needed. The squabbles extend to who provides the funding and makes the decisions at the IMF.
At the same time, the emergence of China as a major lender to poorer countries has become a major headache.
A key problem is what happens when one of those borrower nations is struggling and needs to restructure that debt, with lenders needing to agree to a so-called haircut – getting back less than they were expecting.
Without the various lenders being transparent with each other, some of them will be reluctant to accept such terms if they think the others are not having to suffer.
‘You first need to get the facts and then you can sit down together and negotiate how to get that debt down,’ said Banga.
‘I’m a believer that that is the right way to get it done.
I wish there was a magic wand that said abracadabra, we’ll just wipe the debt out of the system. I don’t think that’s likely to happen.’
A meeting between Janet Yellen and China’s central bank governor Pan Gongsheng taking place in Marrakech should aim to smooth over such issues. Positive outlook: Treasury Secretary Janet Yellen jetted in from Washington insisting that the ‘pessimism’ of last year’s event had proved unwarranted
But the debt burden facing richer countries is also a problem.
As the IMF notes, the US and China represent 30 per cent and 20 per cent of global debt respectively. They are examples, says Vitor Gaspar, director of the fund’s fiscal affairs department, of countries on an ‘unsustainable fiscal path’.
With debts already high and the cost of servicing that debt rising – while public expectations of the role of the state have risen after the pandemic, ‘something must give to balance the fiscal equation’ – despite what he acknowledges is a ‘widespread aversion’ to putting up taxes.
That is hard for finance ministers to broach with voters.
And it is certainly the case for UK chancellor Jeremy Hunt, in Marrakech this week for high-level meetings with ministerial counterparts and already presiding at home over a tax burden that is set to become the highest since the war.
Yet the IMF judges that Hunt is on course to miss his target of bringing borrowing levels down.
Some of the solutions to the world’s problems are made to sound simple when discussed in the air-conditioned tents sheltering ministers and officials from the scorching heat.
Banga used a climate event to riff on the reduction in emissions possible if only rice farmers in India could be persuaded to change the way they irrigate their fields.
At other times, the level of discussion is enough to confirm the view of anyone sceptical about the ability of the world’s elites to solve problems.
‘We need to move from the culture of pointing fingers to the culture of holding hands,’ intoned IMF managing director Kristalina Georgieva at the same meeting, reaching out theatrically to grasp Banga’s. Share or comment on this article: Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
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