The great sovereign debt conundrum

THE exponential growth of international capital flows, predominantly in the form of debt, has been one of the great development successes of the past 50 years. But while foreign lending has played a pivotal role for developing economies, loans are a double-edged sword.

When used judiciously, they can generate high returns, boost gross domestic product growth and improve the well-being of borrower countries. But if debts accumulate and the debt-servicing burden increases without a commensurate increase in repayment capacity, the consequences can be severe and even disastrous.

During the Covid-19 pandemic, for example, many countries grappled with a dramatic increase in fiscal demands, driven by rising public health expenditures and a drop in revenues due to reduced economic activity.