Low-Income Countries Face Worst Debt Crisis Ever, Says New Report – OpEd

A new report on global economic governance says low-income countries are faced with the worst debt crisis they have ever encountered.

Currently, debt service eats up over 50 per cent of public revenue in Kenya; over 60 per cent in Morocco and over 70 per cent in Bangladesh. Meanwhile, Zambia defaulted in 2020 and has suspended debt service to most of its non-multilateral external creditors.

Released on May 23, the report exposes major shortcomings in global economic governance and the resulting impact on countries in the global south. It also makes a range of recommendations for reform.

‘Financing Development? An assessment of domestic resource mobilisation, illicit financial flows and debt management’ brings together an in-depth analysis of nine countries—Bangladesh, Ecuador, Grenada, Kenya, Morocco, Nepal, Peru, the Philippines and Zambia —as well as the global level structures impacting debt sustainability and illicit financial flows.

All of the focus countries, which range from least developed to middle-income economies, have been profoundly disadvantaged by costly debt crises and large-scale illicit financial flows.

The failure of bodies like the G20, OECD and IMF to tackle these issues has meant that many have not been able to adequately respond to climate extreme events or make much-needed progress towards the Sustainable Development Goals (SDGs).

Tove Maria Ryding, Tax Coordinator at the European Network on Debt and Development (Eurodad) and one of the authors of the report said: “This report shows that the availability of public resources for services like health and education at the national levels is being eroded by high costs for sovereign debt payments and by large-scale illicit financial flows”. 

“The fact is that governments are finding it increasingly difficult to mobilise the necessary financing to fulfill the sustainable development goals, and deliver their human rights and environmental objectives. This has clear, severe and direct impacts on the livelihoods and rights of people all over the world. 

“These challenges require global solutions, and must be addressed through transparent and inclusive intergovernmental processes where all governments can participate on an equal footing.

“The upcoming 4th UN Financing for Development Summit, as well as the ongoing UN Tax Convention negotiations, provide crucial opportunities for governments to take urgent action,” Ryding pointed out.

Key findings

Key findings from the report include:

• The availability of financing for development continues to be heavily undermined by major shortcomings in the global economic architecture, including in relation to debt resolution, tax fairness and the fight against international tax abuse.
• The systemic failures within the global architecture continue to undermine the prospects of governments to mobilise the necessary financing to fulfil the SDGs, human rights and environmental objectives.
• The findings in the nine focus countries underline that several intersecting factors, including the COVID-19 pandemic, the geopolitical situation and the impacts of climate change, have exacerbated the situation in recent years.
• Low-income countries are faced with the worst debt crisis they have ever encountered. Among the focus countries, debt service currently eats up over 50 per cent of public revenue in Kenya; over 60 per cent in Morocco and over 70 per cent in Bangladesh. Meanwhile, Zambia defaulted in 2020 and has suspended debt service to most of its non-multilateral external creditors.
• The world still lacks a permanent multilateral sovereign debt resolution framework that ensures the primacy of human rights over debt service and a rules-based approach to orderly, fair, transparent and durable debt crisis resolution. Proposals to set up such a framework under the auspices of the UN continue to be blocked by global north countries.
• Domestic resource mobilisation remains extremely difficult in developing countries, and the failure of global tax cooperation is at the heart of this problem. The findings from the focus countries reflect the global picture, which is that international tax abuse continues to cost governments around the world – in both richer and poorer countries – billions of dollars in lost tax income every year.
• The lack of global cooperation and continued large-scale international tax abuse has created a political environment where governments are failing to apply effective and progressive taxes that can reduce inequalities. This is the case for taxes on wealth, but also corporate income taxes. This development is also very evident in the nine focus countries of this report. Whereas, in 1990, the average corporate tax rate among the nine countries was 38.7 per cent, it was down to 27.4 per cent by 2023 – a drop of over 10 percentage points.
• While increasingly turning away from taxes on wealth and corporate profits, governments are instead relying on taxes that come with the risk of regressive impacts and can in fact result in increasing inequalities, including gender inequalities. This includes consumption taxes such as value added tax (VAT), and the heavy reliance on this type of tax is evident in all the focus countries.
• In the context of the ongoing discussions about the new OECD corporate tax deals (Pillar 1 and Pillar 2), which would include a ban on digital services taxes, the findings from the focus countries illustrate that this is indeed a tax that some developing countries have already shown an interest in as a much-needed source of new revenue. Both Kenya and Nepal have thus introduced digital services taxes.
• The environmental agenda is also bringing some newcomers to the world of taxes (and levies), but also here the trend is pointing towards tools that come with risks of regressive impacts.

Meanwhile, the findings also clearly illustrate the point that there has—until now—been no truly global process where all countries participate on an equal footing in the development of global tax standards.

For example, among the focus countries, two out of three of the least developed countries (Nepal and Bangladesh) are not a part of either the OECD’s Global Forum nor Inclusive Framework.

The recommendations outlined in the report include the immediate and unconditional cancellation of all unsustainable and illegitimate debts, to all countries in need, by all creditors, and the creation of a permanent multilateral sovereign debt resolution under the auspices of the UN.

It also urges all governments to join the current process to negotiate and adopt a UN Convention on Tax as a global framework for international tax cooperation.