Thank you, Michelle, and thanks to the panelists for joining us today.
Your topic, making debt work for development, is critical for the World Bank’s mission of poverty alleviation and shared prosperity.
Debt is a two-edged sword. For forward-moving developing country governments, debt financing can improve infrastructure and provide better services -- in ways that substantially increase growth rates and median income. Transparent, responsible increases in government debt and investment are vital to development.
But debt used to finance unproductive spending and investment poses serious risks to economic growth and stability. Government over-indebtedness can adversely affect economic development through many channel -- debt overhang, reduction in fiscal space, crowding out, expectations about future policy, and increased risk during crises.
If misused, debt can weaken long-term stability and growth even if interest rates are attractive and maturities are long. That's because debt proceeds are only available once -- a future government may be able to roll over the debt, but it won’t get the benefit of the proceeds a second time.
Thus, sitting governments are faced with a giant conflict of interest -- borrowing now brings material political benefits but deprives future governments. This makes the quality and transparency of current spending and investment decisions one of the biggest challenges facing development. Of course, the same challenge applies to state-owned enterprises and sub-national borrowers.
The urgency of debt transparency and quality of investment isn't confined to developing countries. Looking around the world:
Mis-allocation of capital by over-leveraged financial sectors and even central banks adds dramatically to inequality -- for example, through the systematic over-allocation of capital to bond issuers at the expense of small businesses. That’s creating inequality.
Lack of transparency blocks proper evaluation of debt and investment decisions -- one glaring example is the U.S. municipal bond sector which is exempt from normal disclosure rules for liability disclosure and bond issuance.
And the sharp rise in government indebtedness highlights gaps in the governance process and debt limitations laws.
Addressing these problems starts with full transparency for debt and investment contracts and decision-making. This is the only way to evaluate the costs and benefits of government debt and investment.
I'll turn now to the current debt crisis facing developing countries. Debt burdens were heavy even before the pandemic. With the surge in inflation in 2021 and the war in Ukraine, many developing countries are facing an acute debt problem. Debt is at a 50-year high -- equal to roughly 250 percent of government revenues. Currency depreciations are driving poverty rates rapidly higher. Higher prices for energy, food and fertilizer are depleting resources that should be going to clean water, nutrition, electricity, health, education, and climate. And in many cases scarce resources are being used for unsustainable debt and debt service.
To make debt work for development and not against it, we must redouble our efforts to --
Allow for a rapid debt restructuring process, including debt service standstill, for countries that have no other path;
Support medium-term reductions in unsustainable debt burdens; otherwise, the current debt burden blocks crucial new investment;
And create better borrowing practices for future borrowing so that it is sustainable; a key step is to strengthen transparency and accountability for debt contracts.
Those goals are difficult to attain, but I’ll mention several areas of progress:
Partly as a result of World Bank analytical work on debt transparency and the new IDA Sustainable Development Finance Policy (SDFP), the number of low-income economies providing disclosures on government debt has increased by 17 percentage points, a positive trend.
Our International Debt Statistics report now includes information on what each borrowing country owes to each official and private creditor—as well as the financial terms on which loans were extended. We are planning to include information on state-owned enterprise debt, central banks swaps, and collateralized debt.
We're working with the IMF to implement the G20's Common Framework for Debt Treatment and have jointly proposed several steps to improve the Common Framework implementation.
First, establishing a timeline: for example, the creditors committee should be formed within six weeks after IMF staff-level agreement on a program.
Second, suspension—for the duration of the negotiations— of debt-service payments and penalty interest for eligible Common Framework applicants.
Third, expanding the countries eligible for debt relief.
And fourth, clarity on how comparability of treatment will be evaluated and enforced on creditors.
The World Bank has also proposed establishing a simple formula to determine “comparability of treatment”; and bringing commercial creditors to the negotiating table from the very beginning of the discussions.
To conclude, it’s urgent that we act now to end the repeated boom-and-bust debt cycles that have devastated and destabilized developing countries.
Thank you all very much. I look forward to hearing the panel’s views.