MARY LOUISE KELLY, HOST:
In the United States, there has been intense focus on the down-to-the-wire negotiations between President Biden and House Republicans over whether to authorize payment of America's debt. But across the world, a different type of debt crisis is looming. It's already forcing dozens of lower-income countries to make excruciating choices between funding schools and hospitals or avoiding defaults. And it is driving up the cost of food to record levels. NPR's Nurith Aizenman reports.
NURITH AIZENMAN, BYLINE: To understand the magnitude of this problem, we need to go back to the early 2010s, when, thanks to historically low interest rates, the cost of borrowing money became very affordable. This was really helpful for governments of many low- and middle-income countries. Take those in Africa.
DAVID MCNAIR: The population of Africa has doubled over two decades, and the infrastructure needs are massive.
AIZENMAN: That's David McNair, head of global policy at the advocacy group the ONE Campaign.
MCNAIR: So finance ministers did the logical thing and said, you know, here's cheap money. Let's borrow to fund this infrastructure.
AIZENMAN: They went to traditional sources - governments and banks and wealthy countries like the U.S., multilateral organizations like the World Bank - but also to newer lenders like China.
MCNAIR: What they weren't expecting were a series of once-in-a-generation shocks.
AIZENMAN: Starting with the COVID pandemic. The resulting economic slowdown has taken a big bite out of the revenues low- and middle-income countries count on to pay the interest on their debt.
MCNAIR: Then layer on another problem. Putin invades Ukraine.
AIZENMAN: Because Russia and Ukraine supplies so much of the world's grain and oil, the war helped drive up already record-high prices for food and other goods, which brings us to a third shock. In the United States, the Federal Reserve has tried to tame recent inflation by raising U.S. interest rates. Many countries' debt is denominated in U.S. dollars, and it was loaned on variable interest rates. So these hikes by the U.S. Fed...
MCNAIR: That's almost like, you know, if you had, like, a mortgage or a credit card and the rates went up. Because the cost of servicing debt has gone up, countries can no longer pay it.
AIZENMAN: The upshot - 1 in 5 people on the planet now lives in a country that's at or nearing what's called debt distress, meaning there's a high likelihood the nation will default. This includes 60% of low-income countries and plenty of middle-income countries, too.
MCNAIR: We've already seen defaults in Sri Lanka, in Ghana. Pakistan could default next month.
AIZENMAN: Countries and their citizens pay a high price when they default because their credit rating plummets. So for years after, it can become prohibitively expensive for them to borrow money needed for vital services like subsidizing food at this time of high prices. But McNair says the trade-offs countries make to avoid defaulting are often equally damaging.
MCNAIR: They're having to make impossible choices about whether to pay salaries, whether to keep schools and hospitals open.
AIZENMAN: Or use those funds to keep paying their debt bills. Nigeria is now spending 96% of its revenues on debt service. Kenya delayed salary payments to thousands of government workers in March to avoid a default. It gets worse. Sara Menker is founder and CEO of the data company Gro Intelligence. She notes that those U.S. interest rate increases have also strengthened the dollar and therefore weakened the currencies of many low- and middle-income countries. And because food is generally priced in dollars...
SARA MENKER: What that means is that if you're an importer of food into that country, the price of actual imports has gone up drastically. In places like Lebanon, they're up almost 2,000%.
AIZENMAN: Menker says she's especially worried about a subset of countries, including Egypt and Turkey, that, on top of all this, happen to have sizeable short-term loans coming due for full repayment in the next two years. To settle up, these countries will have to draw on their reserves of U.S. dollars, which is going to devalue their currencies even further.
MENKER: And that then sort of drives inflation even further for food. You end up in this very precarious situation.
AIZENMAN: There is a solution. The holders of all this global debt could agree on a plan to take a loss on it. But multiple efforts by world leaders have gotten bogged down in accusations by Western officials that China is largely to blame for unfair lending practices. Still, McNair says the biggest holdup is that key leaders in the U.S. and other wealthy countries aren't treating this as the emergency that it is. Nurith Aizenman, NPR News. Transcript provided by NPR, Copyright NPR.
