Anis Chowdhury & Jomo Kwame Sundaram :
International Monetary Fund (IMF) Managing Director Kristalina Georgieva has warned that developing countries would need more than the earlier estimated US$2.5 trillion to provide relief to affected families and businesses and expedite economic recovery.
With their limited fiscal capacities, developing countries will need to borrow more, increasing their often already high public debt burdens. Developing country debt has grown rapidly since the 2008-2009 global financial crisis (GFC), reaching historical highs even before the pandemic.
A deep pandemic induced depression may also require governments to take over huge private debt liabilities. All this has increased calls for urgent debt relief, cancellation and restructuring, and for new IMF and World Bank lending lines, including new IMF special drawing rights (SDRs).
Not enough debt relief
On 13 April, the IMF approved debt service relief for 25 eligible low-income countries (LICs), estimated at US$213.5 million, for six months, i.e., from 14 April until mid-October 2020.
On 15 April, G20 leaders announced their ‘Debt Service Suspension Initiative for Poorest Countries’ from May to the end of 2020 for 73 primarily LICs. The G20 initiative would cover around US$20 billion of bilateral public debt owed to official creditors by International Development Association (IDA) and least developed countries (LDCs).
Such steps are welcome, providing some temporary relief, but far short of the eligible countries’ long-term public and publicly guaranteed external debt of US$457 billion in 2018.
UNCTAD estimates that in 2020 and 2021, middle- and low-income countries face debt service repayments between US$700 billion and US$1.1 trillion, while upper middle-income developing countries expect to pay US$2.0~2.3 trillion.
The G20 initiative is already seen as merely kicking the can down the road. It does not cancel any debt, which is to be repaid in full over 2022-2024, as interest continues to grow. Hence, it is quite unlike the Heavily Indebted Poor Country (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI).
Furthermore, money saved from debt relief “can be used to pay the private creditors on time and in full”, i.e., prioritizing private over public creditors. The G20 initiative only applies to a limited number of countries, and does not impact the US$8 billion owed to private lenders and the US$12 billion debt to multilateral creditors.
An Oxfam report estimated that eligible countries are still required to pay at least US$33.7 billion for debt servicing this year, or US$2.8 billion monthly, “double the amount Uganda, Malawi, and Zambia combined spent on their annual health budget”.
Furthermore, the initiatives presume that Covid-19 shocks to developing economies will be short and swift, and that developing countries can make debt repayments over the next 3-4 years.
IMF and World Bank falling short
The World Bank has put in place a US$14 billion fast-track package to meet immediate health and economic needs, envisaging financial support of around US$160 billion during 2020-2021.
The IMF has doubled access to its Rapid Credit Facility and Rapid Financing Instrument to meet greater expected demand for emergency financing of about US$100 billion, without requiring “a full-fledged program in place”. By mid-June, various IMF facilities had committed around US$300 billion.
Although these financing instruments involve fewer conditionalities and faster approval, eligibility still depends on familiar – and, in current conditions, very restrictive – criteria. These include, inter alia, having to satisfy the ‘revamped’ joint Bank-Fund r” target=”_blank”>debt sustainability framework, which critics deem “obsolete”.
Therefore, actual urgent liquidity support falls far short of the IMF’s US$1 trillion lending capacity while the attempt to issue new SDRs for Covid-19 has been blocked by the Trump administration.
Debt reduction wrong priority now
The UN warned of the dire consequences of the Covid-19 pandemic in April, and in May, argued that without bold policy action, the pandemic would set back the SDGs. Facing the greatest economic crisis since the 1930s, many developing countries have little choice but to borrow to create fiscal space, rather than focus on complicated, time-consuming long-term debt restructuring, workouts or buybacks.
Instead of obsessing over debt, some developing countries are tapping global debt markets to meet Covid-19 financing needs. When governments can borrow on reasonable terms to invest in projects needed for sustainable development, debt may even be desirable, if not necessary, especially in resource-poor countries. For some, in a low interest rate environment, it is reasonable for developing countries to borrow more, even raising their debt/GDP ratios to levels previously regarded as dangerous, to fund recovery. This time, it is really different as debt costs are lower and are expected to stay low for some time to come.
Furthermore, the consequences of fiscal inaction, so as to not take on debt, can be disastrous for the developing world, paradoxically making current stock of debt unsustainable. On the other hand, new borrowing to mitigate the negative impact of the pandemic on growth can make debt sustainable.
However, most non-investment grade developing countries have to pay substantially higher risk premiums, due to the prejudices and biases of market finance, even when their macroeconomic ‘fundamentals’ are sound.
Pandemic emergency financing fiasco
After the 2014 Ebola epidemic in West Africa, the Bank launched the Pandemic Emergency Financing Facility (PEF) in July 2017, using insurance-like ‘catastrophe bonds’ and derivatives to raise private sector money for LICs’ pandemic responses.
The PEF promised to “blend the best of the public and private sectors, helping to keep 1.6 billion people safe” while “transferring [financial] risk [from governments] to international markets”.
To draw investors, the PEF has stringent and controversial rules on when and how much to pay-out. To make them attractive to investors, PEF bonds were designed to reduce the probability of paying out.
Due to its complicated approval process the PEF had not paid out a single dollar until the end of March, although the World Health Organization designated the Covid-19 outbreak a “public health emergency of international concern” on January 30, and a “pandemic” on 11 March. The pay-out decision was only made on 27 April; as of 27 July, only a paltry US$146.5 million had been “transferred to support” 48 countries – “too little, too late”, even for The Wall Street Journal.
Meanwhile, its “cash window” – funded by donors – has not been replenished after being used up for the Ebola outbreak in the Democratic Republic of Congo in 2018-2019.
In April 2019, Larry Summers, former World Bank chief economist and US Treasury Secretary, described the PEF as “an embarrassing mistake” and “financial goofiness”, noting that the programme was “loved” for promoting private sector involvement.
Intermediation role required
With preferred creditor status, the Fund and the Bank can borrow ‘cheaply’, i.e., at the much lower interest rates available to them. By intermediating, they can enable developing countries, especially LICs and LDCs, to borrow cheaply for their relief and recovery.
A first step would be to ditch the last Bank president’s now discredited ‘mobilizing finance for development’ (MFD) framework to use public funds, including official development assistance (ODA), to leverage private finance for public-private partnerships (PPPs).
As with the PEF, the MFD approach has failed to leverage billions in ODA into trillions of development finance, as promised, mobilizing only US$0.37 of additional private capital for LICs for every US$1 of public money invested.
(Anis Chowdhury held various senior positions in the United Nations Secretariat in New York and Bangkok. Jomo Kwame Sundaram was UN assistant secretary general for economic development).
