The spring meetings of the World Bank and International Monetary Fund are underway this week in Washington, D.C., and representatives of both organizations will have much to discuss amid a slew of problems afflicting the global economy.
One priority will be assisting lower-income countries that are at risk of defaulting on their debt in an environment of elevated inflation, high borrowing costs and U.S. dollar strength. These all combine to make it harder for countries to repay loans as central banks across the rich world raise interest rates. That’s been on the mind of David Malpass, the outgoing president of the World Bank. Early this year, Malpass said he would step down in June amid accusations of downplaying climate change.
“We see a process, month by month, quarter by quarter, of countries either declaring defaults or declaring strain and asking for help from the international community,” Malpass said in an interview with Marketplace’s David Brancaccio. “The higher interest rates are part of it, the slower world growth. My concern is that it may take years and years to resolve the interest rate situation, that the rates were so low for so long in the advanced economies that it’s going to take some years to straighten that out.”
The following is an edited transcript of their conversation.
David Brancaccio: People are talking about an emerging debt crisis. What are you seeing? Are low-income countries going into default?
David Malpass: A lot of them are under severe pressure. Sixy percent of the poorest countries are at high risk. And so we see a process, month by month, quarter by quarter, of countries either declaring defaults or declaring strain and asking for help from the international community. And you’re right that the higher interest rates are part of it, the slower world growth. My concern is that it may take years and years to resolve the interest rate situation, that the rates were so low for so long in the advanced economies that it’s going to take some years to straighten that out.
The role of lenders in the debt problem
Brancaccio: And you’re hosting the first in-person meeting of a high-level roundtable on global sovereign debt. That’s the debts of nations. This group includes countries that do lending, like China, as well as private sector lenders, I understand. There must be options for lenders to help ease this emerging debt crisis. What would you like to see?
Malpass: Progress on any area. You know, it’s been now frustrating because the system really isn’t working to reach debt relief for countries that have hit the wall. One part of that is the composition of debt is different than it used to be. For example, we’re now at a point where 70% of the debt even of the poorest countries on average is what we call nonconcessional. That means it’s a high enough interest rate, and a lot of it, a quarter of it, is floating interest rate, meaning as the [Federal Reserve] raises rates or the European Central Bank raises rates, their interest rates go up. And it’s already at a high level. So some of the countries are paying 8, 10, 12% interest rates on debt. So it compounds rapidly on them. We’re looking at payments from the poorest countries of as much as $62 billion in 2022. And that number is going up. So this is a giant challenge to actually get movement on any country at any point in time.
Brancaccio: I don’t have to remind you of that, but I’m just sitting here reflecting on this, that we’re talking about sovereign debt, the debt of nations. We’re talking about big international lenders. But you know, we’re really talking about struggling, actual people who feel the brunt of this if a country were to go into default. This is about individuals, and it’s about poverty.
Malpass: That’s exactly right. And the poverty numbers have gone up over the last four years. That’s worrisome. And it’s connected to what’s gone on in the advanced economies. You went through a period of 10 years of near-zero rates, where a lot of the capital was being pushed up to a narrow group. And some of it went to governments in developing countries, they were able to borrow for a while. But that really has come to an end. And we’re now in an environment where we have a whole new economic landscape in the advanced economies post-monetarism, where the banking sectors are feeling some of the stress. There’s this giant maturity mismatch on the books of banks, meaning they borrowed short and they put it into bonds. And there’s no easy way out of that. And some of the countries are caught in this same mix.
Brancaccio: I mean, this is also a lesson for the U.S.-based banking crisis, right? What looks like a safe investment, “I’m going to store some money in government bonds,” that’s what a lot of banks did. It is safe, right, if you hold the bonds to maturity. But if you get into a crunch like now, with rising interest rates, the older bonds are hard to sell in the market.
Malpass: That’s exactly right. And so as you think about a developing country, a poor one, one with per-capita incomes of, say, $800 per year for people in the country, this puts giant strain. Their government was able to borrow one time with a zero-coupon eurobond, a fancy instrument that had a reasonable rate. That was, let’s say, four or five years ago, but now the principal comes due. And there’s really no way to do that. So what the countries are doing, the governments of the countries, are then going into the internal banking system and borrowing from those banks. And that takes it straight away from the businesses in those countries. So we’re putting a high priority on the need to have a better business climate in the countries to enable new capital to come into the private sector.
Brancaccio: You think the lenders bear some responsibility here for pushing too much of this debt on those countries?
Malpass: Yes, the lenders bear responsibility, as well as the borrowers. It’s a two-way street, and they looked at the country and said, “Hmm, this is not such a good long-term risk. But in the short term, I think the world system will make the country pay.” So that so far is what’s happening. All of the creditors, the lenders, have done very well in this environment. And so we’re pushing transparency so that in the contracts that the lenders make, you can actually see what’s in the contract. You know, China has become a big lender in the countries and tends not to have transparency in their lending contracts. And that’s still going on now. We’ve encouraged them to, if you’re lending someone money, let others see what the contract is so that you can see if it’s fair. That’s one of the topics for this debt roundtable that I’m co-chairing. I’ve really wanted to get a more inclusive group of people, participants talking about this problem. So we have the debtor country finally able to come and sit at the table and say, “Here’s our problem. The debts are too much, and the contracts are not disclosable.” And then have the lenders actually respond to that. The private sector, the various parts of China that have lent into these countries, are at the table, and I hope going to find a way to break through the stalemate.
Brancaccio: It draws, I think, from a recent report the World Bank put out that I was reading on global economic growth. Help me understand this: The potential for growth, your team finds, is the lowest in 30 years. What does that mean? And what’s causing it? Pandemic?
Malpass: It’s partly the pandemic, but it’s primarily the lower new investment. If you think about, “What’s my growth rate going to be three years from now?” you need to know how many new machines are being put in place, how many tractors am I buying in order to help the yields in the farms. And so as you look at what’s going on in the world, the investment rates into developing countries has turned downward. So they’re not even getting enough investment to keep their capital stock going. I was just in the Niger and Togo, two countries in West Africa, very difficult environment because they’re having trouble, they’re not getting capital from international markets now at all. And then they’re looking to borrow within domestic markets. World Bank can help a little bit because we can provide trade finance and some working capital finance. But the big change has to be a better climate in the countries and then new investment by their own citizens and by outsiders.
Brancaccio: And in broad brush, what you’re talking about is a delay for lifting people out of poverty, possibly.
Malpass: That’s key to the world. If you have a billion people, 3 billion people, that are being left behind by a system that really doesn’t work, that has consequences everywhere, has consequences that they can’t adapt to climate change. There’s just not money for them to move from one part of the country to another. They migrate, which has consequences for their neighbors, and they don’t get educational skills, and even nutrition, a severe problem now because of the high price for fertilizer, for natural gas and other inputs to farming. The farmers aren’t planting enough, and so we’re worried about the crop cycle going into next year. I really think the world has to think about this from the standpoint of development. What is your concept for development? And right now what the world is saying is that the advanced economies are going to borrow all the available money and put it into their national debts. And the central banks are going to buy bonds of governments. And so there’s really nothing left for private sectors to grow.
An early resignation amid climate criticism
Brancaccio: Mr. Malpass, you’re leaving your job before the end of your five-year term. You were criticized for not fully “getting” the need to deal aggressively with climate change. What can you say about that controversy now?
Malpass: Well, there are big problems in the world. And one of the tendencies of the world is to point fingers elsewhere. So really, the key thing is, I’ve been superbusy for four years. It’s a very challenging job here at the World Bank. And that comes on top of a superchallenging job within the U.S. government. So I’ve put in six years of public service. I’m exploring new things and looking forward to that. We accomplished a lot at the World Bank, including on climate. You know, in my tenure, we doubled our spending on climate. But whatever you do, the world is going to look at it and say, “Well, we want to go to conferences, and we aren’t really going to put new money in. But it should be solved by the World Bank.” The World Bank is doing a huge, immense effort in this area. I hope it can have impact and impact on the world.
Brancaccio: But you would say you get it on the pressing nature of climate change? That’s your position.
Malpass: In every country, you see the impact of climate on what the people are feeling in terms of their agriculture sector, in terms of how they interact with [the] rest of the world. I also see it, though, in the energy realignment that’s going on. You know, Europe is buying up every contract they can get on LNG, on natural gas and on coal. And so one of the things being felt in developing countries is they can’t get the resources that they need. So electricity access rates are going down, not up. So we have this mixed-up world in which greenhouse gas emissions are going up because of what the advanced economies are doing. And the complaint is that people in poor countries aren’t doing enough. And so I really don’t agree with that read of the world. And we have to find better ways to have dialogue.
Source: Norvanreports