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Financial Instability for Poor Countries

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By: Dr. Firdous Ahmad Malik/ Dr. Shahid Amin Trali

A sovereign default occurs when a nation fails to fulfil its debts when it is due. The sovereign debt slows economic activity and impedes the government’s ability to borrow or invest abroad. The primary cause of a country’s sovereign default is its mismanagement, wars, revolutions, political corruption, etc. (World Economic Report 2023).

The debt treatment of some nations, such as Chad, Zambia, and Ethiopia, is governed by the G20’s common framework. In contrast, larger growing economies such as Turkey, Ghana, Kenya, Tunisia, Pakistan, and Argentina face the possibility of default. China has become the most significant bilateral creditor to several low-income countries, and according to the most recent estimates, China is the largest creditor internationally.

Six Most Risk of Default Countries in 2023 (Source- Tellimer Insights)

Ghana El Salvador Tunisia Ethiopia Maldives Pakistan

Credit-giving countries impose restrictions on the political diplomacy of defaulting sovereign nations. Such countries impose trade, infrastructure, and economic development restrictions on defaulting sovereign nations. Credit-giving governments attempt to revive their soft powers. Their debt trap diplomacy could capture global political lines by pressuring emerging countries to reduce their economic ties, destabilising their security dynamics and leading to their military growth. The sovereign Default nation’s debt exposes them to contagions such as corrupted economic operations, the country’s financial stability position, and pension systems, and captures its state-based creditors. All this leads to national and household investment and government spending problems, which increases political instability and impedes economic activity.

Developed economies discriminate against developing countries when investing in future priorities and demand more from them, such as the burden of social cost to leverage their expenditure on public goods and other infrastructure operations. They compel them to invest in a sustainable environment and green transformations. Developed nations finance them for the benefit of industrial strategy, growing the gap between countries. All this exacerbates health, education, and employment issues, increases poverty rates, low demand, price inflation, and the need to invest in sustainable development goals.

In conclusion, sovereign debt exacerbates the condition and pushes developing nations into recession, which worsens their poverty, inequality, and food security concerns. The population becomes more susceptible. International development organisations have a considerable role to play towards emerging countries. International development organisations should devise policy initiatives to raise these sovereign default nations by providing them with grants and hassle-free, interest-free financial facilities. Both the International Monetary Fund and the World Bank should develop need-based programmes for these developing nations so that they can aid them unconditionally during natural disasters such as earthquakes and floods etc. International financial institutions (IFIs) must play a significant role in the social and economic development programs of nations with developing or transitional economies. This role should include advising on development projects, funding them and assisting in their implementation. In addition, developing economies should help the entries overcome their debt, focusing on the well-being of their populations, particularly children, women, and the elderly.

Dr. Firdous Ahmad Malik is Research Fellow, National Institute of Public Finance and Policy (NIPFP) and can be reached [email protected]

Dr. Shahid Amin Trali is an Associate Professor in the School of Management, ITM University Gwalior, Madhya Pradesh and can be reached at [email protected](Sovereign debt exacerbates the condition and pushes developing nations into recession, which worsens their poverty, inequality, and food security concerns)


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