In the second quarter of the 21st century the world, especially the less developed world, is facing a debt crisis. Before digging deeper it is vital to know what foreign debt is and what kind of issue these debts cause.
The term “foreign debt” refers to money lent from a source, state, or private company outside of a country’s borders. Governments or private companies can lend this type of loan for many purposes, such as covering budget deficits and financing new investments or enterprises. Like in most fields, there are a few countries and international organizations that loan the most money to other countries. These major lenders are China, the United States, -The U.S. is no longer a major creditor yet, its past loans make it from the world’s biggest creditors-, the Netherlands, Germany, Japan, Taiwan, the International Monetary Fund (IMF), and the Asian Development Bank (ADB).
This upcoming financial catastrophe has its own unique causes just like the other financial crises that our civilization has faced.
In the COVID-19 pandemic, recessions occurred in many countries due to lower short-run aggregate demand and short-run aggregate supply. In recessionary financial cases, governments execute expansionary monetary policies. Expansionary monetary policy is the type of monetary policy that tries to increase the lowered short-run aggregate demand and supply in order to close the recessionary gap. To do that central banks increase the money supply and lower the interest rates. Lower interest rates encourage borrowing and when this coincided with the COVID-19 pandemic, bigger amounts were borrowed to overcome the financial hardships that the global pandemic caused. When the world was covering up its wounds from the pandemic there was an issue that hasn’t been resolved yet by most countries to this day, inflation caused by the booming demand, expansionary monetary policies, and supply chain crises around the world.
Increasing geopolitical tensions and wars contributed to the supply crisis that the pandemic caused in the first place. The blockade of the Red Sea and Suez Canal by the Houthis in Yemen, increased geopolitical tensions between China and Taiwan, the energy crisis that the war between Russia and Ukraine caused, tensions between the countries of the Horn of Africa -Eritrea, Somalia, and Ethiopia- etc. All these recent developments contributed to one thing in the world economy, inflation.
All the elements that have been added into the equation pointed up one thing, a need for policies against the thriving inflation. A trend that still continues to make the majority of the world’s countries’ monetary policies emerge due to that situation. In such inflationist environments, governments tend to lower the monetary supply and increase the interest rates in order to lower the short-run aggregate demand that caused the inflationary surplus to close the inflationary gap. These policies led to the rapid appreciation of certain key currencies like the USD and Euro. The increase in the interest rates drove the last nail to the coffins of major debtors with less powerful economies.
Today 3.3 billion people in around 48 countries live in countries that spend more money on their interest payments than their education and health systems’ payments according to the UNCTAD. And the situation seems to be growing in the current conjuncture of the world. If the world does not take action against this situation with the reconstruction of the debt and more sustainable financial aid hard times await everyone as the possible crisis can change the structure of our world through mass migrations, new geopolitical tensions, and deeper struggles for resources.
Glossary:
https://unctad.org/publication/world-of-debt
https://thedocs.worldbank.org/en/doc/377151575650737178-0050022019/original/DebtChapter1.pdf
https://www.csis.org/analysis/emerging-global-debt-crisis-and-role-international-aid
https://www.britannica.com/event/stock-market-crash-of-1929
https://www.weforum.org/agenda/2024/09/global-debt-crisis-development-chief-economy/
https://cepr.org/voxeu/columns/demand-supply-imbalance-during-covid-19-pandemic-role-fiscal-policy
https://www.bbc.com/turkce/articles/c72kk68nz66o
https://www.sciencedirect.com/science/article/abs/pii/S1572308923001134#:~:text=Sri Lanka had amassed US,in the preceding 10 years.