Strengthening the Multilateral collaborative Framework on Tackling Debt and Promoting Trade for Development

Communication from Pakistan

The following communication, dated 9 July 2024, has been received from the Permanent Delegation of Pakistan.

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1  Introduction

1.1.  The burgeoning public debt crisis faced by developing countries, including Least Developed Countries (LDCs), is a critical issue that is threatening their economic and social development aspirations. This escalating debt burden severely hampers these countries' ability to invest in essential sectors such as healthcare, education, and infrastructure, thereby perpetuating a cycle of poverty and hindering progress towards the Sustainable Development Goals (SDGs).

1.2.  To address these challenges, it is imperative that the WTO Working Group on Trade, Debt and Finance intensifies its efforts to explore the intricate link between trade policies and debt management. By leveraging trade policies effectively, Members can identify and implement specific measures that support sustainable debt management, facilitate access to trade finance, and promote long-term economic stability and growth. This submission calls for a comprehensive and collaborative approach within the Working Group to develop actionable strategies and frameworks that will empower developing countries to manage their debt burdens while enhancing their participation in global trade.

2  Global Debt Surge and Unequal Burden

2.1.  In the recent report released on 4 June titled "A world of debt 2024: A growing burden to global prosperity", the United Nations Trade and Development (UNTD formerly UNCTAD) warned of the threat of growing debt burden for global economic stability. The report reveals that public debt worldwide, including both domestic and external borrowing by governments, reached a record high of USD 97 trillion in 2023, a jump of USD 5.6 trillion from 2022.

2.2.  More concerning is the fact that debt servicing costs are rising disproportionately, and developing countries are bearing the brunt of this burden. They paid USD 847 billion in net interest in 2023, a 26% increase compared to 2021. Furthermore, developing countries borrow at 2-12% higher interest rates than developed countries.

3  Debt Hinders Progress

3.1.  The increasing interest payments are squeezing budgets in developing countries. Currently, half of these countries allocate at least 8% of their government revenue to debt servicing, which has doubled in the past decade. The situation has become critical, with 54 developing countries dedicating at least 10% of their government funds to debt interest in 2023. The UN Global Crisis Response Group has indicated three accelerating shifts in Official Development Assistance (ODA) to developing countries. One that it has declined for two continuous years while Global ODA reached record levels of USD 287 billion in 2022 but even so, this record misses SDG target 17.2. Two, a growing share of this aid is now provided through concessional loans rather than grants, exacerbating their debt burden. This is also the case for ODA towards LDCs. Three, the resource allocation to actions related to debt, including debt relief, swaps, restructuring and others, have hit a historical low, falling from USD 4.1 billion in 2012 to only USD 300 million in 2022.

3.2.  The World Bank's International Debt Report 2023 acknowledges the rising fears about unsustainable debt in developing countries. As these countries grapple with an array of destabilizing economic forces, the poorest among them are at increasing risk of tumbling into a debt crisis.

3.3.  The report highlights that in the past three years alone, the number of sovereign debt defaults in Low- and Middle-Income countries has surged to 18, outstripping the total of the previous two decades. For the poorest countries, debt has become a nearly paralyzing burden: 28 countries eligible to borrow from the World Bank's International Development Association (IDA) are now at high risk of debt distress. Eleven are in distress.

3.4.  The World Bank suggests that this situation is a combustible mix— not unlike the conditions 50 years ago that prompted the World Bank to take a crucial step to advance debt transparency across the world.

4  Spillover Effects

4.1.  The debt burdens limit developing countries' capacity to trade and hinder economic growth through multiple channels.

a._         Reduced Investment

·_              Crowding Out Effect: High debt servicing costs eat up a significant portion of government budgets. This leaves fewer resources available for critical investments in infrastructure, education, and healthcare. Without these investments, developing countries struggle to build the foundation for a strong and competitive trading environment.

·_              Private Sector Discouragement: High government debt can crowd out private sector investment. When governments are heavily indebted, interest rates tend to rise, making it more expensive for businesses to borrow money and invest in trade-related activities.

b._        Trade Finance Constraints

·_              Limited Access to Credit: Developing countries with high debt burdens may be perceived as risky borrowers by international lenders. This can make it difficult and expensive for them to access trade finance, which is essential for facilitating international trade transactions.

c._         Currency Devaluation

·_              Debt Denominated in Foreign Currency: If a developing country has a significant amount of debt denominated in foreign currency, pressure to service that debt can lead to currency devaluation. This makes imports more expensive, while putting more pressure on current account.

d._        Focus on Short-Term Gains

·_              Pressure for Quick Revenue: High debt burdens can force developing countries to prioritize short-term revenue generation over long-term trade strategies. This might lead to policies that focus on exporting raw materials or low-value goods, neglecting investments in developing higher-value industries and fostering sustainable trade practices.

e._        Reduced Trade Confidence

·_              Uncertainty and Volatility: High debt creates uncertainty and volatility in the economy. This can discourage businesses from engaging in international trade due to concerns about exchange rates, political instability, and potential economic disruptions.

f._         Limited Bargaining Power

·_              Vulnerability to External Shocks: Developing countries with high debt are more vulnerable to external economic shocks like global recessions or changes in commodity prices. This weakens their bargaining power in trade negotiations and can limit their ability to negotiate favorable trade deals.

5  Call to Action for the WTO

5.1.  The Working Group on Trade, Debt and Finance was established to address the critical intersection of trade and finance in the context of development. While valuable discussions on trade and finance have taken place, the Working Group's examination on the crucial link between trade and debt has remained relatively limited.

5.2.  The Working Group should seize this opportune moment and undertake the following actions towards enhancing work:

a._         Prioritize the Trade and Debt Nexus: Initiate dedicated discussions and workshops focused on the trade and debt nexus. This should involve exploring how trade policies can be leveraged for improved debt management and identifying specific measures to support developing countries in this endeavor.

b._         Develop Concrete Proposals: Encourage Member countries to submit proposals on how trade policies and practices can contribute to sustainable debt management strategies for developing countries. This can include exploring innovative financing mechanisms, facilitating access to trade finance, and promoting responsible trade practices that generate long-term economic benefits.

c._         Technical Assistance and Capacity Building: Strengthen technical assistance and capacity building programs to equip developing countries with the necessary expertise to design and implement trade policies that promote debt sustainability and economic growth.

d._         Explore relationship between the Working Group and Paragraph 21 of the Abu Dhabi Ministerial Declaration: Explore how policies can integrate climate resilience into trade and debt strategies. Paragraph 21 of the WTO MC13 Outcome Document and the role of the Working Group on Trade, Debt and Finance is relevant as it highlights the interconnectedness between trade, debt, and finance in the context of crisis management and resilience-building. It underscores the importance of a holistic approach to addressing the short-term challenges faced by developing countries including LDCs, ensuring that trade remains stable, debt levels are manageable, and adequate financial resources are available for resilience and disaster preparedness.

e._         Multilateral Collaborative Approach: To fulfill its mandate of safeguarding the global trading system from financial instability, the Working Group should join forces with multilateral organizations like the IMF, World Bank, and UNCTAD. Together, they can develop initiatives that tackle the interconnected issues of trade and debt. This collaboration will ensure a unified and synchronized approach to managing both trade and debt, achieving greater coherence between WTO policies and those of other international bodies.

6  Conclusion

6.1.  By prioritizing the trade and debt nexus within the Working Group's mandate, we can pave the way for a more comprehensive approach to development finance and durable solution to the problem of external indebtedness of developing countries including LDCs. Through collaborative efforts, we can unlock the potential of trade as a tool for debt management and empower developing countries to achieve sustainable economic growth and progress towards the SDGs.