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The debt trap

With countries responding to the Covid-19 pandemic and the economic crisis by stepping up spending, the rising debt burden of low income and emerging nations needs to be tackled, a study by credit insurance firm Euler Hermes found.

A decade ago, around six percent of government spending in both rich and poor nations was going towards interest on their public debt. However, for advanced economies, it fell to around four percent in 2020 while for emerging markets, it rose to 7.3 percent and for low-income developing countries it shot up to 13.7 percent.

Euler Hermes estimated low-income countries will need a minimum of $450 billion to step up their response to Covid-19 as well as maintain their finances to avoid long term damage to their economies.

“In the absence of a comprehensive solution, heavy debt burdens may generate a permanent global divergence between rich and poor countries,” the report warned. It added that while the international community was likely to help countries facing difficulties no overall debt resolution mechanism was likely to emerge.

It identified countries that are most vulnerable to sovereign debt stress. The list includes South Africa, India, Brazil and Pakistan as among the top emerging nations at most risk. Iran, Kenya, Nigeria, the Democratic Republic of Congo, and much of Central Asia also made the list of vulnerable countries. Angola, that lost access to international debt markets in 2018, enjoys a temporary freeze in payments to G20 nations and is negotiating with China to lower its debt payments.

China is now the major official creditor to emerging and developing nations, with a third of them owing Beijing more than five percent of their GDP.

As the international community has not yet addressed the divergence of the debt burden of rich and poor countries, the Philippines that has taken on a lot of new debts over the course of the Covid-19 pandemic should take heed of the troubles being encountered by the countries that have fallen into the debt trap in order to avoid a similar fate.*

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