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Published on April 24, 2008

Supachai Panitchpakdi

The global economic situation is fragile, especially if the financial sector losses of US and European corporations start to spread across the globe.

This spread cannot be discounted since global financial markets are becoming increasingly integrated and interdependent. If the fragility spreads, it would undermine some of the gains made by many developing countries in recent years in managing national debt, including its sustainability and composition. The impacts on the poorest countries would be worse.

Such interlinked risks underline the importance of discussing a new policy agenda on external debt at the forthcoming United Nations Conference on Trade and Development (UNCTAD) XII in Accra, Ghana. It should also be given top consideration in progress towards an improved financial architecture of the global economy.

The good news is that, as a group, developing countries no longer have a net external debt problem because their total international reserves grew at record pace last year, up from being about equal to external debt in 2006. Some are experiencing rapid growth combined with a large surplus of foreign assets over liabilities.

Remarkably, the ratio of GDP to domestic and external developing country debt has fallen by nearly 5 per cent over the past six years. The share of public debt owed by governments to foreign creditors has also decreased, although large differences remain among regions. For example, external public debt is less than 30 per cent of total public debt in East and South Asia while it is more than 55 per cent in East Europe.

This is significant because it signals a switch towards more domestic borrowing and suggests that access to external finance is not necessary for all countries or at all times. Some studies show lesser reliance on external capital, whether equity or debt, helps rather than hinders higher economic growth. They challenge the earlier belief that external finance is a necessary condition for igniting growth in poor countries.

Dramatic changes have occurred in the composition of borrowers and lenders. Notably, the public sector long-term debt owed to foreign official creditors, both multilateral and bilateral, fell to 42 per cent in 2006 from 50 per cent in 2000. At the same time, the share of total long-term external debt owed to private creditors increased to 71 per cent from 59 per cent.

Overall, figures for developing country debt in 2006 show lower average external deficits, lower external debt ratios and larger international reserves. But the gains are not evenly shared. Several small developing countries still have large external debt and, contrary to promises, debt relief has not been additional to regular aid flows. Big regional differences remain with some Asian countries enjoying low external debt ratios while those of East Europe and Central Asia facing large and increasing ratios.

The new policy agenda on external debt should recognise that the inability to repay, which is at the core of debt sustainability, is different from the need for external resources. Often, it results from insufficient access to foreign liquidity rather than insolvency. Heavily indebted countries find it hard to borrow although they need more profitable investments to repay creditors. One implication is that developing countries should be helped to create new financial instruments and institutions suited to their needs.

Others can afford to borrow more but that might adversely affect their economic and social development. They should not be penalised for low debt levels and better economic management through unfair treatment by debt relief efforts. Repaying debt is a problem for both low income and middle income countries.

Low-income countries usually have large exposure to official creditors while middle income countries tend to have more commercial debt. Both need help when a debt crisis strikes. So separate but interconnected debt crisis resolution mechanisms are needed for them. Preventing debt crises also requires more detailed and prompt information about the structure of overall domestic public debt going beyond the usual focus on external debt.

UNCTAD XII provides a forum to take account of the new and hopeful elements of the debt situation of developing countries, according to region and level of development. It also offers an opportunity to start tailoring measures that allow all participants in the global economy to move forward together in a win-win manner.

Supachai Panitchpakdi  is the secretary-general of the UN Conference on Trade and Development (UNCTAD). The twelfth quadrennial meeting of UNCTAD started on Sunday and will conclude tomorrow in Accra, Ghana.