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Most governments need to borrow to finance national development, and much of what we think of as ‘aid’ is in fact lending - but usually on concessional terms. While there are challenges aplenty that are squeezing governments’ revenue-raising and spending power, other factors are at play, including a worrying trend towards an increasing share of sovereign debt held by private creditors.
Although most lenders to governments are other governments or international organizations like the World Bank, many countries now borrow from private creditors such as banks and other financial companies.
This trend has accelerated since government aid budgets have stagnated and many countries rich and poor were incentivized to borrow more during an era of low interest rates and seemingly continued economic growth.
For many of the countries where Christian Aid works, however, borrowing from private creditors is riskier and more expensive - leaving economies and people more vulnerable as debt repayment costs escalate, and eat up resources that are desperately needed to finance health, education, social protection and other rights.
Why is private lending problematic?
Private creditors can include investment companies, commercial banks and bondholders. The same companies, often, that invest our pension funds.
Since the global financial crisis particularly, these investors looking for better returns have made money available to governments of poorer countries, ostensibly on easy terms, but usually as higher interest than governments would pay on concessional loans from international financial institutions or donor governments.
Their influence has increased particularly in countries, such as Nigeria, which have recently transitioned to ‘lower middle-income country’ status, according to World Bank classification[3], which means their eligibility for concessional financing is reduced.
Research in Guatemala, El Salvador, Kenya and Nigeria conducted by Christian Aid’s partners Tax Justice Network-Africa, the Civil Society Legislative Advocacy Centre, and Instituto Centroamericano de Estudios Fiscales finds that private lending is often problematic, particularly now as interest rates rise.
Repayment costs leave little public money available for essential services, while often-expensive capital projects are financed, even where money is short for these. Shorter maturities on private loans may also mean citizens bear the costs before desired benefits, such as economic growth, are realised. People also bear the costs in other ways.
The private creditor landscape is complicated, opaque and poorly regulated, limiting public scrutiny of borrowing and complicating debt relief when needed. Simply finding out which private creditors hold what sovereign debt is difficult. There is still no mechanism to compel private creditors to come to the negotiating table when debts become unaffordable.
What we have seen, instead, is governments prioritising debt repayments over funding for essential services, often out of fear of receiving downgraded credit ratings (also set by private companies); and in many cases, borrowing more to ‘refinance’ existing debt, leading to a ‘debt snowball’ effect.
What we and our partners are calling for
At Christian Aid, we are calling:
- on rich countries to provide more grants and concessional financing for poorer countries
- for the sustainability of debt to be measured by its contribution to fulfilment of rights and sustainable and equitable development, not just on governments’ ability to pay irrespective of other priorities.
Our partners are calling for much more transparency of and public scrutiny in decision making surrounding private sovereign debt.
Human rights considerations should remain paramount; citizens have economic and social rights which governments need to prioritise.
The UK has significant influence over private lending. In 2020, the Jubilee Debt Campaign (now Debt Justice) calculated that 90% of foreign currency bonds owed by the 73 countries then eligible for debt relief under the World Bank, IMF and G20’s Debt Servicing Suspension Initiative (DSSI)[4] were governed by English law.[5] In 2021 it was estimated that approximately 30% of these countries’ debts was owed to private lenders in the UK.[6]
The UK government should facilitate dealing effectively with the mounting debt crisis by:
- legislating to limit the ability of private creditors to sue governments for debt repayments in UK courts;
- pressing for private creditors to be mandated to take part in debt renegotiations, and engage positively in sustainable solutions - such as a UN debt workout mechanism.
[4] Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries. Factsheet. IMF. 2021. https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/39/Debt-Sustainability-Framework-for-Low-Income-Countries
[6] 'UK urged to take lead in easing debt crisis in developing countries', The Guardian. 2021: https://www.theguardian.com/world/2021/feb/21/uk-urged-take-lead-easing-debt-crisis-developing-countries-g7
Further reading
Delve into our briefing paper and report to learn more about our research.
