Dr. Motaher Abdulaziz Al-Abbasi
Sana'a University
Foreign debts is one of the most important sources of financing for development projects in developing and poor countries, but it is a double-edged sword it is useful if it is easy, long-term and within safe and sustainable limits. it is used to implement development and production projects. it has serious risks for the economy and society if it is accumulated recklessly, and its burden increases beyond the safe and sustainable level. Yemen has its own experience with foreign debt five decades ago and has passed through stages of critical situations to acceptable levels. In light of the disastrous war that the country is going through, the accumulation of debt and its burdens will continue to be a heavy burden on the national economy in the recovery and reconstruction phase.the external debt crisis is one of the thorny and complex issues at the level of Yemen and developing countries in general, and it needs to highlight its dimensions, risks and lessons learned from it.
Overview:
By the end of the last decade, the external debt of developing countries (121 countries) - low - and middle-income-has accumulated in a striking and alarming way, and has become the most important obstacle to the sustainability of development in those countries.according to the data contained in the "international debts" report, issued by the World Bank for 2022, the external debts of those economies reached 9.3 trillion dollars at the end of 2021, more than double its value recorded ten years ago.
During the same period, the total external debts of countries eligible to borrow from IDA (69 countries, including Yemen) almost tripled to one trillion dollars. Due to the repercussions of the covid-19 pandemic, the outbreak of the Russian-Ukrainian war, and the resulting slowdown in global growth and rising interest rates, many developing countries have fallen into a debt crisis, and 60% of the least-income countries have become in the critical indebtedness phase, which portends an acute external debt crisis that has risks to the economic, social and political conditions in the least-developed and developing countries in general.
Why resort to external debts?
Developing countries face great challenges in providing the necessary financial resources to finance economic and social development projects and to achieve sustainable economic growth, and these challenges include three structural and chronic gaps:
(1) the domestic savings gap and the need to attract foreign investment to fill the deficit in domestic savings.
(2) the gap of public resources and the importance of external borrowing to finance development projects within the framework of the general budget of the state.
(3) the foreign trade gap and the need for external resources to stimulate exports and stabilize the balance of payments.
It is clear that the imbalance in these gaps leads developing countries to resort to borrowing from external sources to finance development projects implemented by governments or to finance investment projects for the private sector in those countries, and they obtain these loans in accordance with agreements concluded between the government and the lender, and are obliged to the borrower to meet the repayment of debt installments and interest, and default makes the country in a debt crisis and lenders stop financing, and thus the failure of development projects and the country's entry into a vicious circle leading to the expansion of unemployment, poverty and instability.
Sources of financing and external debt:
Developing countries borrow from international and regional financial institutions distributed over the continents and regions of the world, at the international level, the role of the Bretton Woods institutions - the IMF and the World Bank-stands out - The World Bank provides development loans to the least developed countries (including Yemen) through its arm, the International Development Foundation, and these loans are characterized by concessional and interest-free loans with a grace period of up to 10 years and a repayment period ranging from 30 to 40 years, while the bank provides loans to middle-income developing countries according to commercial terms.
Regional financial institutions also play a pivotal role in providing development loans and grants to their member countries, such as the Asian Development Bank and the African Development Bank. In the Arab region, there are the Islamic Development Bank and the Arab Fund for economic and social development, in addition to national funds such as the Saudi fund, the Kuwaiti fund and others.
There is another way to provide loans to developing countries through international commercial banks located in the United States, China, Europe and Japan, which provide their loans according to commercial terms in interest, payment of installments and guarantees, and the global financial markets "stock exchanges" represent one of the sources of mobilizing resources and loans to developing countries - middle income - through the issuance of government bonds in foreign exchange and the obligation to repay them and interest according to their deadlines.
Over the past two decades, the rivalry between the United States, Europe, Japan on the one hand, and China on the other has intensified over the mechanisms and volume of financing and debt provided to developing and poor countries, especially in Africa, Central Asia, Southeast Asia and South America, the First party provides development support through existing international and regional institutions, such as the International Bank and the fund, while China adopts the bilateral path and through its own mechanisms, such as the Belt and Road Initiative and Chinese state banks, and each party accuses the other of trying to flood developing countries with debt and practicing so-called economic coercion to ensure influence and dependence and maximize the interests of lending countries in those countries In need of financing and debt،
External debt sustainability:
There is no doubt that the accumulation of external debt burdens of any country has serious repercussions on the economic, social and political conditions in it, and makes those debts unsustainable, and is also a reason for the reluctance of international and regional financial institutions to provide loans to that country, and both the fund and the World Bank usually prepare the so-called "debt sustainability analysis" of، Without prejudice to economic growth and resorting to debt rescheduling or the accumulation of arrears.
There are a number of indicators that determine the threshold of the burden of indebtedness and whether the debt is sustainable or unsustainable, including:
(1) the ratio of external debt to GDP, and external debt is sustainable if it does not exceed 50% of GDP, and does not exceed the threshold of 150% of total exports, according to these indicators, about two thirds of the least developed countries have reached high rates of external debt, which warns that these countries are in the so-called "debt trap or trap," and some even reached the stage of bankruptcy, Lebanon and Venezuela, for example.
The inevitability of debts:
In modern times, there is no government in the world that manages its financial and economic affairs without domestic or foreign debts, and resorting to external debts becomes an imperative necessity in developing countries that suffer from a domestic resource gap. In general, external debt is useful when it does not exceed safe limits and is used to implement development projects in the productive sectors (agriculture, industry, mining), in the infrastructure sectors (roads, electricity, water and sanitation, communications) or in the human development sectors (education, health), in which case external debt effectively contributes to increasing economic growth rates, improving the income level, reducing unemployment and poverty rates and achieving relative development in the economic and social development of the country.
The safe level of external debt enables the state to fulfill its obligations to pay debt installments and interest on time without being a burden on foreign exchange reserves and without falling into the risks of indebtedness and its consequences. External debt is useful if it is used to finance productive projects with a decent return that meets the debt repayment, and it constitutes a heavy burden if it is used for consumer purposes or to finance the deficit in the general budget of the state.
External debt risks:
On the other hand, the external debt has catastrophic risks and consequences for the national economy and the political and economic situation in the country if the external debt exceeds the safe limits and becomes "unsustainable", such as more than 100% of GDP with a low volume of national exports abroad, for example in the Arab world, Lebanon, Egypt and Tunisia. In such a situation, the risks of external debt include:
-- The risks of non-payment of debt installments and interest, and this has negative repercussions on the degree of uncertainty of lenders, which negatively affects the flow of foreign direct and indirect investments into the economy, and may be accompanied by capital flight abroad, Lebanon is an example.
-- There are three American international institutions that handle this rating, which is an indicator or measure to determine the extent of the eligibility and ability of the country subject to the rating to borrow and meet the repayment of debt to borrowers, and classifies countries into grades A to D, grade A represents the highest in the credit rating and confidence in fulfilling financial obligations, while Grade D is considered high-risk and expresses default and default in all financial obligations, which is the stage at which the state reaches bankruptcy, and almost all the least developed countries do not fall into this classification, the lower the credit rating of a country, the more it is an indicator of the reluctance of lenders to provide loans or invest in that country.
-- The accumulation of external debts and their burdens in any country expresses deep imbalances in its economy, forcing it to turn to international financial institutions - the IMF and the World Bank - to seek financial and technical support, accept economic restructuring programs and implement austerity measures that have negative repercussions on the standard of living of citizens, and may lead to political and social unrest and instability in the country.
-- In addition, the accumulation of external debt increases the size of repayment installments and interest of the debt denominated in foreign currency, and this leads to the depletion of the state's balance of foreign reserves, causing fluctuations in the exchange rate and a rise in inflation rates, and thus deteriorating the standard of living of citizens.
- The increasing debt service bill (installments and interest) constitutes a heavy burden on the general budget of the State at the expense of public spending on economic and social development projects, especially in the field of basic social services.
-- The risks of external debt reach their peak when the state resorts to obtaining new debts to pay off old debts, which is known as the" Ponzi model", which means exacerbating the problem of debt for present generations and accumulating the burden of paying it off for future generations.
The case of Yemen:
During the past fifty years, Yemen's foreign debt has not accumulated and has not reached the dangerous borders, only after the Blessed unity as a result of the accumulation of the Soviet Union's debts on the southern part, and it was re-evaluated and scheduled within the consultations of the Paris Club, in the second half of the nineties of the last century, and became within safe and sustainable limits, but the repercussions of the war made Yemen default on debt payments and interest and this will be a burden on the economy in the post-war phase and achieve peace and stability.
The current state of external debt:
According to the data published in the "international debts" report issued by the World Bank, the size of Yemen's external debt amounted to about 7.6 billion dollars in 2021, and represented about 40% of GDP, and this percentage is acceptable and at a safe and sustainable level, as debt constitutes an economic crisis when its size exceeds 100% or more of GDP, as happened in some countries "Lebanon for example"
Due to the outbreak of war in 2015, Yemen stopped paying debt installments and interest, and withdrawals from current loans froze, as most donors stopped the agreed loans, and replaced them with grants to finance humanitarian relief programs and projects and improve livelihoods, as happened with the World Bank.
Most of Yemen's foreign debts are soft and long-term and constitute about 80% of the total debt, provided by international and regional "multilateral" institutions - the World Bank, the Arab Fund, the Islamic Bank and others - where its debts contribute about 38% of the total debt and "bilateral" sources - the Saudi fund, the Kuwait Fund and others - contribute about 42% of the debt, there are no external debts on Yemen provided by international commercial banks, and also there are no external debts on the Yemeni private sector.
On the other hand, the Yemeni economy is facing a critical crisis in the accumulation of local debts, which the government obtained over the past two decades from issuing treasury bills and government bonds, with benefits amounting to more than 5 trillion Yemeni riyals, mostly to banks, pension funds and the private sector, and these debts have caused an acute crisis in the liquidity of the banking system in the areas of the authority of Sana'a as a result of the government's failure to meet its obligations to creditors, and the situation has been further complicated by the issuance by the authority of Sana'a of legislation criminalizing interest on this type of investments and canceling the interest accrued on them, which has confused and paralyzed the banking system and made the investor is in the stage of financial insolvency or in the case of Undeclared bankruptcy.
Moreover, the aforementioned law issued by the SANA'a authority abolished all the provisions and rules in the ratified international laws and agreements, which included the permissibility of interest on foreign debts provided by lenders, and thus legislation represents a declaration of Yemen's isolation and closure from its regional and international environment, a revocation of contracts and charters and a denial of the gratitude provided by those countries and institutions to modernize society in various sectors, and a direction for Yemen's position among the countries shunned by the international community.
Debt and development financing:
During the period 1970-2014, Yemen implemented a series of economic and social development plans in the North and south of the homeland and in the unified homeland in 1990, and many development projects were implemented with external funding from grants and aid or through external debts, and it can be said that successive governments have exploited external debts in the implementation of important projects that included all governorates and various vital sectors such as Main and rural roads, power plants, transportation and distribution system, water and sanitation, general, technical and university education projects, public health facilities from hospitals, health centers and other sectors, and the government has stumbled in the implementation of vital debt-financed projects Due to suspicions of corruption and abuses in violation of the laws in force and agreements concluded with lenders, Sana'a airport is an example.
During the past decades, successive governments have failed to attract foreign direct and indirect investment as one of the important sources of financing economic development projects, with the exception of investment in the oil and gas sectors, despite similar suspicions of corruption and abuse of sovereign rights.Governments have also failed to legalize partnership frameworks between the public sector and the local and foreign private sector to implement long-term projects in the productive sectors or in infrastructure that the government is unable to implement. this model has proven successful in a number of countries, for example Turkey.
External borrowing policy:
Since the beginning of the seventies of the last century, when the central bank and the central planning authority were established in the northern part, successive governments have followed a rational and national approach in dealing with foreign debts, and the Ministry of planning and international cooperation continued that approach, as the policy of borrowing from abroad was embodied in a number of principles, including:
- Ensuring that external debts are soft, that is, their interest is minimal and the repayment period is long-term, and their terms are appropriate and take into account the economic situation of the country
- Obtaining external debt from international financing institutions such as the World Bank or regional financing institutions such as the Arab Fund for economic and social development, according to the ceilings set by those institutions.
- The use of external debt to finance development projects in the sectors of electricity, roads, airports, ports, water, sanitation, education, health and others
- Not to borrow from banks and commercial financial institutions, because their benefits are high, their conditions are unfair and their consequences are devastating, as happened to some developing countries in the past and present،
- Commitment to repay loan installments and interest according to the schedules agreed with the lenders.
Repercussions of the war:
Almost 9 years after the outbreak of the war, foreign loans have become a burden on the available financial resources, current and future, of the Yemeni economy, as the value of loans denominated in riyals increased by almost 3 times, in the areas of Sana'a, and doubled to 7 times in the areas of Aden, due to the continuous escalation of the exchange rate of the riyals against the dollar, and the large variation in price between the areas of Sana'a and Aden, and in both cases, they constitute a high percentage of the already declining GDP, which makes them in unsafe limits, and this requires entering into negotiations with lenders in order to re-evaluate outstanding debts, their interest, rescheduling and the possibility of exemption from them In whole or in part, the task of rebuilding what was destroyed by the war is a great challenge in the future, and the country needs everything available to help the economy recover and overcome the horrors of war and its remnants.
We hope that the war will put an end to it so that the country's resources can be used for development and reconstruction and relations and fruitful cooperation with lenders and donors can be resumed so that the wheel of development can be turned again and peace and stability will prevail in the stricken Yemen.
Lessons learned:
There are lessons learned for developing countries resulting from dealing with all international and regional financial institutions and the accumulation of external debts from them, and they can be highlighted as follows:
- During the past decades, there have been numerous international, regional, multilateral and bilateral financing institutions, and they have had a role in providing debt to support and finance development projects in developing countries, but the development gap between developed and developing countries is widening over time, which has made the impact of these financing and projects limited impact on the development conditions and the standard of living of the individual in the countries receiving debt and assistance, in turn, the external debt and its benefits accumulated on the borrowing developing countries and became a heavy burden on limited domestic resources and present and future generations.
- In recent years, the external debt crisis in a number of developing countries, Lebanon and Sri Lanka, has emerged as an example, where those countries have reached a state of default on debt installments and interest, which is known as the "state bankruptcy", as the World Bank reports show that a number of developing countries are going through a "bottleneck" and may fall into a "debt trap", if they do not carry out structural and fundamental reforms in their economies, and these countries include: Argentina, Egypt, Kenya and Tunisia, and certainly, those countries will be forced to implement strict reforms and austerity measures imposed by IMF programs to improve the monetary and financial situation in their economies, and it may result in grumbling and anger among the lower-income segments and economic, social and political instability, on the other hand, the World Bank reports that Yemen, along with a number of less developed countries (Afghanistan, Eritrea, Mauritania, Tajikistan, Somalia, Sudan), faces the risks of his peers.
- If foreign loans are a necessary evil, one should not be reckless in expanding and accumulating them because of their risks to the creditworthiness of the national economy and exposing the country to the dictates and interventions of international financial institutions, and governments should pursue viable alternatives that benefit the economy and society, the most important of which is to create and provide a favorable and incubator environment for national investment and attractive for foreign direct investment, and this requires extraordinary efforts to ensure political stability, sound economic and administrative policies, the existence of an effective banking system, strengthening the judiciary and government, and law enforcement to protect the rights of investors. foreign direct investment is an area of intense competition between countries Developed and developing countries, this gives hope to developing countries in reforming their situations to get a piece of the pie, it is said.
The experiences of some emerging economies in different regions of the world have proven a tangible success in attracting and attracting foreign investments and its returns to the economy and society, such as the economies of China, Brazil, Malaysia, Turkey, Vietnam and Rwanda, all of which have achieved amazing economic growth over the past two decades, depending on the provision of an appropriate and incubating environment for national and foreign investment.
As for the Yemeni economy, foreign direct investment was concentrated, before the war, mainly in the oil and gas sectors, and with the current war conditions, the investment environment has become repellent for both national and foreign investors, and the economy will remain far from meeting the requirements of an attractive environment for investment in the foreseeable future.
In general, developing countries, especially the least-income countries, including Yemen, are facing vast and deep political and economic challenges, and it is imperative for developed countries, through international and regional financial institutions or through global initiatives, to neutralize development support from any conflict or competition and help the less fortunate countries to stand on their feet and exploit their material and human wealth to improve the standard of living of both individuals and society.
