Paul Blake and Srimathi Sridhar take us through day 2 of the 2021 Spring Meetings where Rethinking Debt: Financing the future amidst crisis topic is discussed at length. To be able to tackle this topic, questions such as “How can developing countries handle debt financing?” are answered by high level individuals all over the world. You will notice that all individuals concur transparency is important to combat debt crises in all countries.
Covid-19 has indeed aggravated debt distress in the poorest countries which hurt these countries’ ability to finance their future. By reducing debt in a country, the resources are focused where they are really needed on building a green, resilient, inclusive recovery.
What is the best way to do this? How can governments finance development without sinking deeper into debt? And What can we learn from the past?
It is important to note that government debt can affect the lives of everyday people for better or for worse depending on how the debt is used.
Zainub Harun, an Ambassador at One Young World shares her perspectives, “How countries invest and handle their debts can determine whether their people thrive or languish. When a country is burdened with unsustainable levels of debt that is when problems begin. With a high debt burden, norms for regular citizens also come with higher interest rates.”
There is so much unfulfilled potential more so among the youths in many countries around the world. This is seen to be common in almost all countries globally. Debt matters for every single one of us in each country. When countries can finance their future in a sustainable way and invest in their people, everyone wins. Governments today are grappling with how to finance their future development while also supporting their economies through the current crisis.
How then do we better manage debt crises quickly and efficiently to get the world back on track for resilient recovery? To answer this question, youths all over the world were involved to share their opinions pertaining to the debt crisis. They were asked 2 questions, “How are you financing your future? How does your government’s debt affect your ability to achieve your financial goals?”
The young men and women leaders and entrepreneurs had this to say, “one wants to pursue a graduate degree and invest in a home, another wants to keep on investing in his business, to another, support more women entrepreneurs to empower themselves, provide their families with better lifestyles and get better income, travel around the world and get student loans with low interest rates.”
A question to you as our reader, Following the COVID-19 crisis, what is your biggest financial priority? During this pandemic period, young people and especially children have been hit the hardest. It is therefore very critical for all creditors to come together and solve the debt problem. If they are in a position to provide debt relief then they should go ahead and do so. It can clearly be seen that not enough lessons were learnt from past experiences which we can use to make the debt sustainability initiative work.
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When a country is continually servicing their debts, they compromise the ability of the government to provide basic services to some of their most vulnerable citizens and children who are the future of tomorrow. From this unprecedented pandemic, this is the time for the world to come together and to convert unpayable debt liabilities into investments in human capital. What is different about this crisis in terms of the financial aspect different from the 2008 Recession?
The COVID-19 pandemic started as a health crisis with no roots in a financial bubble or financial- driven hence no one foresaw the high impact it would have generally on everything. The other unique thing is that this pandemic hit everyone. There was an output decline in 2020 for everyone which has not been seen historically and the crisis is regressive; it hits the poorest within countries, households, smaller firms and across countries. How are people and development programs affected with the debt crisis? Over the years, Africa has been hit by cycles of debt buildups.
When countries are in distress or debt crisis, they spend their limited finances to pay interest rather than to invest in human capital, develop critical infrastructure, facilitate economic growth and job creation. As a result, countries struggling to transform their economies and invest in their people suffer setbacks.
Our growing young population requires the government to invest in education, skills and job creation, but since we increase in debt payments and in economic downturn, the amount of money countries can invest in is reduced.
As a result, there is a severe risk as we will be adding another generation of poorly educated and unskilled young people to the ones we already have because we are spending our limited resources on debt repayments rather than social protection for the most vulnerable. This will affect our ability to transform our great youth population into the growing demographic dividend that we are looking for.
According to statistics, by 2020, Africa will have more young people entering the labor market than any world region. If these youths are not gainfully employed, we will end up having a social and political unrest hence a robust solution is needed as the foundation is laid but with no robust solution. There is indeed a need for speedy debt reduction to be able to have a fast debt recovery.
There are quick resolutions but very isolated Debt reduction is needed. This takes many forms; face value reduction, lengthening maturities and giving better lending terms. There are many private creditors globally and having them join the Debt Service Suspension Initiative (DSSI) and granting debt relief to the debtors would not get rid of the problem but have an impact towards reducing the debt stress. DSSI was designed with the view that during this global pandemic, countries would be better off diverting resources away from debt servicing to dealing with health and social emergency and social needs.
It is also very important for there to be transparency between creditors and debtors and in terms of borrowing covering any new financing sources which would lead to increase in creditor coordination and speed things along. Using the lessons learnt from past experiences should also help us inform the future. Negotiating ad hoc solutions with different borrowers does not work.
Any solution that is developed should work for all lenders, official and commercial. Pursuing a green, strong policy reform program at the country level, putting the money in the game, and giving creditors real options will reduce uncertainty and restore investor confidence.
What is our perspective as The Youth Cafe? It is important for us to work on innovative solutions to the current debt challenge so that these solutions respond to diverse needs of borrowers and lenders. K.Y Amoako rightly puts it,
““Do not just focus on debt. If Africa is to achieve, rekindle loss to covid in terms of meeting our SDGs goals in the decade ahead, we must transform our economies at a faster pace than we have been so far. It’s about transformation. And to transform, african countries like countries everywhere, must borrow. But to ensure that this borrowing is manageable, it must be affordable to ensure we can repay our debts.””
The current financial system doesn't work, lets fix it.
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