Max Townsend is a former Canadian youth delegate to the World Bank/IMF Annual General Meetings and previously worked at Goldman Sachs in New York.
Over the course of the past 12 months central banks in both Canada and the United States have begun to tighten monetary policy, something markets had been anticipating for nearly half a decade. While this has led to increasing concern from Canadians personally indebted at record levels and domestic business interests, related are the burgeoning economic woes abroad and a moral quandary that challenges the venerable international development efforts of Canada’s recent Group of Seven presidency.
At the June G7 meeting in Charlevoix, Que., $3.8-billion was raised, in part with the World Bank and some G7 partners, to fund education initiatives for some of the world’s poorest women. The initiative aims to fund programs for at least 12 years, and to remove institutional barriers in fragile and conflict-affected states. But developments in the global economy could threaten any incremental progress made by such a fund. The World Bank’s most recent flagship Global Economic Prospects report considers a tightening of global financing conditions – from higher interest rates in developed markets – as one of the pre-emptive concerns for developing economies. Just as public debt levels in many developing economies “have increased rapidly” according to the report, higher global interest rates will present ghastly fiscal challenges to the budgets of these same countries.
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In this environment, it is time for Canada to spearhead a new campaign for international debt relief similar to the Heavily Indebted Poor Country (HIPC) initiative, a G20-endorsed endeavour that was largely spearheaded by former prime minister Paul Martin when he served as minister of finance. The HIPC identified countries with unmanageable debt burdens that, when relieved, could channel local government finances toward more productive investments and social development programs. Since HIPC’s inception, 36 participating countries were relieved of nearly US$99-billion in debt.
There are two central issues around development that monetary tightening presents: First, external debts largely financed in U.S. dollars will become more expensive to governments as benchmark interest rates and credit risk premiums increase. Second, stable long-term capital flows will find U.S. government bonds relatively more attractive and exert downward pressure on local currencies across developing economies as investors rotate away from emerging market debt, forcing local central banks to similarly increase policy interest rates in an effort to protect local currencies and stave off import-fuelled inflation. In both cases, local governments can expect to find themselves with a more expensive aggregate debt burden, growing the expenditure side of the budget equation, creating the scenario for a “fiscal hole” and driving higher already pervasive local deficits. There is little that governments can do to counter the latter, as investors cannot be compelled in their asset allocation; but not so in the case of the former, where the quantum of the outstanding debts is directly tied to the size of the fiscal hole that will be created as the debt becomes more expensive.
The last measurable instance of a sudden fiscal hole in developing economies was during the 2008 Financial Crisis, when a 2010 Oxfam report suggested that for 60 per cent of then-coined “low-income countries,” budgetary revenues fell by an average of nearly 10 per cent from the previous year. For context, that’s the equivalent of Canadians waking up tomorrow to realize that our budgetary deficit was $30-billion larger than when we went to sleep. That same Oxfam report, when evaluating the subsequent decisions by governments concerning spending cuts, found that sectors such as infrastructure and agriculture benefited from fiscal stimulus, whereas sectors such as health and social protection fared worse, and education, the report notes, had “done particularly badly.”
This current confluence of events in the global economic system arrives at a time when the successful HIPC initiative comes to an administrative end. Just as a confident Canada previously led the charge for debt relief at the turn of the century, the Trudeau government should again do so in the name of preserving the social protection and education progress central to Ottawa’s strategy at helping the globe’s most vulnerable people.
A well-polished global reputation and the according soft power is properly supplied for this government, and a campaign for the initiative would be a textbook example of a middle-power upholding the global order in the vein that Foreign Minister Chrystia Freeland asserted in the House of Commons in 2017. At a time when China has become increasingly predatory in recouping its “Belt and Road Initiative” loans, the timing of a campaign for debt relief would be an additional signal to developing economies in the morality of the Western alliance. But perhaps most importantly, it would simply alleviate untold millions of people in the developing world from incremental shortages of the funding they need most.