WASHINGTON — While the World Bank has been vocal about pushing bilateral and private creditors to take stronger action to provide debt relief, it maintains that it shouldn’t be part of existing debt suspension initiatives.
The world’s lowest-income countries owe the World Bank about $4 billion in debt service payments this year, and some advocates argue that since funding is critical, the World Bank should at least consider suspending those payments to provide additional liquidity. This comes amid concerns that the World Bank’s COVID-19 response is too slow and may not be reaching the most vulnerable.
“We think the bank needs to go for debt relief, not just requesting it from others.”— Jaime Atienza, debt policy lead, Oxfam
“Accelerating the flow of funds to the world’s poorest countries is a great move and can reduce the collateral impact of the pandemic in key sectors such as health and education, but the poorest countries also urgently need the liquidity that debt service suspension provides,” Gayle Smith, the president and CEO of the ONE Campaign said in a statement.
“By failing to suspend debt service payments, the World Bank is taking a tool off the table at a time when the world’s poorest countries — just like wealthier nations— need to stabilize their economies and respond to the pandemic,” Smith said.
Between April and September, the World Bank disbursed more than $8 billion in financing for the poorest countries participating in the G-20 Debt Service Suspension Initiative, including $2.6 billion in grants, a World Bank spokesperson said to Devex in an email. The World Bank is providing grants, near zero interest loans and loans with a long maturity which are critical for highly-indebted countries, the spokesperson said.
“The World Bank has agreed with our shareholders that our role during the crisis is to front-load resources to ensure countries have timely and significant positive financial inflows without increasing debt vulnerabilities,” the spokesperson said.
The World Bank has argued that it is providing net positive flows to these countries by offering additional COVID-19 funding, and a debt service suspension could jeopardize its AAA credit rating and limit or make its financing more expensive in the future, according to an explanatory note it released in July.
“Debt service suspension by MDBs would likely reduce net funding to IDA countries by undermining the attractiveness of MDB debt, including IDA debt, and increasing IDA and IBRD’s funding costs significantly. Given that IDA and IBRD have slim margins to cover their administrative costs,” the note says.
It goes on to explain that the long term costs of the debt service suspension would outweigh the short term benefits. The bank is concerned that if it offers debt suspension while private creditors continue not to participate in the G-20 DSSI, the bank would jeopardize its preferred creditor treatment, which means it gets paid back first — a key factor in maintaining its AAA rating, the note said.
“Our ability to commit record amounts during the crisis would be much less if we jeopardized our market access by suspending debt payments without the support of shareholders to make IBRD and IDA whole,” the World Bank spokesperson said.
Some civil society groups are warning the institution is prioritizing speed over ensuring assistance reaches those most vulnerable to the pandemic.
Despite the bank’s emphasis on its net positive flows and its support to countries, an analysis by the Center for Global Development shows that there are some countries that are paying more in debt payments to the World Bank than they are getting in support.
For example, El Salvador will pay the World Bank 0.15% of its GDP in debt service this year but has received no funding to date. Other countries including Yemen, Indonesia, and Ukraine are paying more to the bank than they are receiving, according to CGD.
“The feeling up to now is that there is a denial of this issue and that the bank is directly putting pressure on others and trying to get away without doing their part in this,” Jaime Atienza, Oxfam’s debt policy lead, told Devex.
“We think the bank needs to go for debt relief, not just requesting it from others,” Atienza said, adding that the bank could explore a number of ways to do so, but it needs to make a decision and get moving.
In its communique this week, the G-20 said that it welcomed the multilateral development bank commitments to the world’s lowest-income countries, but also said that they should do more, including providing more details about all new resources that are provided on a country by country basis.
“While protecting their current ratings and low cost of funding, MDBs are encouraged to go further on their collective efforts in supporting the DSSI, including through providing net-positive flows to DSSI-eligible countries during the suspension period, including the extension period,” the communique said.
The World Bank’s Development Committee Communique released Friday issued a similar message calling on MDBs to go further, explore additional proposals for COVID-19 emergency financing, strengthen the quality of debt data, and improve debt disclosure.
“Amid high public debt levels, shrinking economies, and rising fiscal pressures, we recognize that debt treatments beyond the DSSI may be required on a case-by-case basis,” the development communique also said.
Earlier this week the G-20 agreed “in principle” to a common framework for debt treatments, and will work on details of a process for handling debt reductions and restructuring at a meeting in November.
Even if the World Bank is not participating in debt service suspension, as conversations move ahead about broader debt restructuring or forgiveness, multilateral development banks including the World Bank “need to be part of a debt reduction process like the private sector does,” Eric LeCompte, executive director of Jubilee USA Network, told Devex.
“If we really want a comprehensive solution all debt needs to be on the table for relief and restructuring,” he said.
Oct. 19, 2020: This article has been updated with comments from the World Bank.