The Jubilee Debt Campaign treats us to some horribly misleading numbers today. The easiest way to explain this being to show how the UK would be faring under their system of measurement. They say that poor countries are using some ghastly fraction of government revenues to repay debt. Which, they way they’re counting, some of them are. But what we want to know is not that percentage in isolation, but how much is that compared to what?
So:.
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Debt repayments by the world’s poorest countries have doubled since 2010 to reach their highest level since just before the internationally organised write-off in 2005, campaigners have warned. The Jubilee Debt Campaign (JDC) said a borrowing spree when global interest rates were low had left many developing nations facing repayments bills that were forcing them into public spending cuts. Plunging commodity prices, a stronger dollar and rising US interest rates had combined to increase debt repayments by 85% between 2010 and 2018, the JDC said. [/perfectpullquote]In more detail:
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Figures released today by the Jubilee Debt Campaign, based on IMF and World Bank databases, show that developing country debt payments increased by 85% between 2010 and 2018. The new analysis from Jubilee Debt Campaign shows that average government external debt payments across the 124 developing countries for which data is available have increased from 6.6% of government revenue in 2010 to 12.2% of government revenue in 2018, an increase of 85%. This is the highest level since 2004, when such payments were 13.8% of government revenue (see graph below). This rapid increase comes after a lending boom driven by low global interest rates. External loans to developing country governments more than doubled from $191 billion per year in 2008 to $424 billion in 2017 (the latest year with figures available). [/perfectpullquote]OK. So, now, compared to what?
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]As of Q1 (the first quarter of) 2018, UK debt amounted to £1.78 trillion, or 86.58% of total GDP, at which time the annual cost of servicing (paying the interest) the public debt amounted to around £48 billion (which is roughly 4% of GDP or 8% of UK government tax income).[/perfectpullquote]OK, Some borrowers have got into trouble – Venezuela, Zimbabwe, say, by government killing the economy. Mozambique by some of the government just stealing the money. Well, OK, that’s going to happen in sovereign states from time to time.
As to the general outlook the average isn’t far off what the UK itself is doing. You know, that place where we’re all told the government should be borrowing more to stave off austerity?
Thomas Sowell’s question. “Compared to what?” is an always interesting one, isn’t it?
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I hesitate to engage with such a misleading blog. But in case any readers are interested in facts rather than fiction:
- The statistics are clear that they compare external government debt payments to government revenue
- The mean average is 12.2%, and has increased from 6.6% in 2010 (the median average has increased by a slightly higher percentage). Jubilee Debt Campaign highlight countries spending over 20% of government revenue on external debt payments as being in a particular debt crisis where government spending tends to be falling.
- The UK government's external debt payments are 6.8% of revenue, so the average for developing country governments is a long way off what the UK is doing - 80% more.
- Interest rates are low in the western world, but the private sector lend at high interest rates to impoverished country governments (eg, 6% to 10%).
- The UK government owes debt in a currency it controls. Most external debt owed by impoverished country governments is owed in foreign currency. This brings with it a huge exchange rate risk.
Since you're here, something I didn't quite glean from reading your report. These debt repayments. They're interest only? Or they're capital repayments too?
If they're the latter of course they're even more misleading. For the UK most certainly isn't paying only 6.8% of revenue in interest and also capital repayments now, is it?
Yes, they are external debt service, so capital and interest. This is the standard IMF and World Bank external debt payment figure to look at, as it is one of the best indicators of debt crisis or debt default. While for domestic debt payments it can be assumed that these are likely to be able to be refinanced, the same is not true for external payments as external lenders are volatile and pro-cyclical. Analysing government external debt service is not highly misleading, it is the best indicator of debt crisis.
Yes, the UK government's external debt service (interest and principal) is 6.8% of revenue.
If you looked just at interest payments, the same pattern would be true of developing country external interest payments - they have increased significantly since 2010. If comparing with the UK, the UK's external debt interest payments would be even more proportionately lower than the developing country average than for debt service, because interest rates on UK government debt are so low.
I would appreciate it if you could change the title of your blog, as you have not presented any evidence as to why Jubilee Debt Campaign's statistics are misleading, while making very misleading statements of your own.
"Yes, they are external debt service, so capital and interest."
That makes your numbers even more misleading. For we're not in the slightest interested in what is the debt burden in this sense. We're interested in ability to roll over debt, as is rather common.
Specifically you link debt repayment to government service spending possibilities. But that depends upon the net financing position, not this one side of the gross you're presenting. It's the net of old debt repayment, old debt refinancing and new debt that determines govt spending possibilities, after all.
"This rapid increase comes after a lending boom driven by low global interest rates"
err, no. It comes after a borrowing boom driven by low global interest rates... Should they have borrowed? Maybe yes, maybe no, but it rather alters the question, doesn't it?
Sure. And why do we have low interest rates? To encourage borrowing. What should a place need capital do when interest rates are low? Borrow more.....