WASHINGTON — Debt relief is critical for the world’s lowest-income countries, and while steps by the G-20 and the International Monetary Fund this week are a move in the right direction, they won’t be enough, according to development experts.
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Low-income countries cannot make the kind of fiscal and monetary policy moves that the wealthiest countries can, but they still need fast access to additional capital to respond to both the health and economic crisis resulting from COVID-19.
Debt relief frees up money immediately, allowing governments to use funds that had been reserved for debt repayment to address urgent needs and work to shore up their economies, said Eric LeCompte, the executive director of the Jubilee USA Network.
"While we see progress, we still need to answer a lot of questions. What about other developing countries and emerging markets who need relief? How will a process move forward to cut debt when debt is unsustainable for countries?" he said.
IMF announced Monday that it would provide debt relief to 25 of its poorest member countries using its revamped Catastrophe Containment and Relief Trust, through which it will provide grants to cover their debt obligations to the fund for six months.
After back and forth discussions, and questions about whether China would participate, the G-20 announced Wednesday that it supports a suspension of debt payments for the lowest-income countries that request the support and that all bilateral official creditors would participate “consistent with their national laws and internal procedures.”
“[The G-20 agreement] provides immediate payments and relief to countries combating health effects of the pandemic ... and sets the stage for more difficult ... negotiations around outright debt relief.”— Scott Morris, senior fellow, Center for Global Development
The G-20 also called on private creditors to participate in a suspension of debt service payments and asked multilateral development banks to explore options for doing so as well.
The G-20 debt suspension will begin May 1 and continue to the end of the year and applies to the World Bank International Development Association countries, or countries that meet the United Nations’ definitions for least developed countries.
Suspending debt payments will mean that those countries have access to an additional $20 billion in the next six months that they can use to bolster health services and pass economic stimulus measures, Saudi Finance Minister Mohammed al-Jadaan told reporters after the meeting.
“[The G-20 agreement] provides immediate payments and relief to countries combating health effects of the pandemic and severe economic effects, and sets the stage for more difficult, no doubt longer-term negotiations around outright debt relief,” said Scott Morris, a senior fellow at the Center for Global Development.
While this week’s agreement will have an immediate impact, low-income countries will need more coordinated action on debt in order to withstand the crisis.
“The problem is the slow phased response we’re seeing from the international community is likely to be swept away by events.”— Jesse Griffiths, director, development strategy and finance program, Overseas Development Institute
The G-20 debt decision merely pushes the can down the road — it hasn’t canceled repayments and countries will just owe the money later, and will continue to pay interest — and it only applies to a limited number of countries, said Jesse Griffiths, the director of the development strategy and finance program at the Overseas Development Institute.
“The problem is the slow phased response we’re seeing from the international community is likely to be swept away by events,” he said, adding that it falls short of the scale that is necessary.
The IMF debt forgiveness plan, while welcome, is financed through official development assistance contributions, and the fund should consider using its own resources and expanding the number of eligible countries, LeCompte said.
IMF has some $140 billion in gold reserves and several development experts have called for the institution to take money out of the reserves to fund debt cancellation.
There are also some shortfalls in the G-20 communique — it provides only short-term relief, calls for only voluntary participation from other creditors, and doesn’t address long-term challenges.
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The G-20 communique called on private creditors and multilateral development banks to consider debt relief on the same terms as the bilateral creditors. Any debt relief initiative that isn’t comprehensive could result in a country using the funds from debt relief to pay other nonparticipating creditors.
That is a concern, especially as private creditors are being asked to participate voluntarily and there are often challenges with transparency and understanding the full extent of a country’s debt, said Mark Perera, the debt justice policy and advocacy manager at Eurodad.
The challenge for the World Bank and other multilateral development banks is that they don't have a facility such as the IMF trust that would allow them to provide grants for debt relief, Morris said.
The World Bank IDA, its main financing arm for low-income countries, gets some money from donors, but a large share of the funding it provides comes from loan repayments. If those repayments are paused, it would limit future funding, unless donors step up, he said.
Despite the importance of even a short-term debt freeze, experts believe it will not be enough as countries borrow more to address critical needs and permanent debt cancellation will likely be necessary.
African leaders have called for more comprehensive debt relief from bilateral, multilateral, and commercial partners, asking for a forbearance of interest payments for all African countries for two to three years. They also called for $100 billion in support from donors to address the COVID-19 crisis, of which $44 billion would go towards debt relief.
“We can't pretend that these are normal times when we see reaction from Congress and the various European capitals as to what they feel they have to do for their population; then by extension it is that type of forbearance that needs to be looked at … for us to really survive this menace in a much better way,” said Ken Ofori-Atta, Ghana’s finance minister, during a recent CGD online event.
Experts agree that this crisis also needs to finally be the opportunity to reform international financial systems and develop a new more permanent institutional approach to debt, so crises can be resolved more quickly and fairly.
Future conversations should begin to develop that system, consider debt cancellation, and address the needs of a broader group of countries that may also face debt distress.
Special Drawing Rights
In addition to debt relief, global leaders had also been discussing a new IMF issuance of Special Drawing Rights, which would provide countries with additional liquidity, which many leaders have called for as a critical piece of the response.
German Chancellor Angela Merkel, French President Emmanuel Macron, Ethiopian Prime Minister Abiy Ahmed, South African President Cyril Ramaphosa, and other leaders called for the allocation of SDRs in The Financial Times earlier this week.
The United Nations Conference on Trade and Development has called on IMF to issue about $1 trillion in Special Drawing Rights, saying that it would be “a serious step towards alleviating liquidity constraints, particularly in low- and middle-income economies.”
The G-20 did discuss SDRs and how to create a mechanism that would allow wealthier countries to transfer their shares to low-income countries, but it could not reach a consensus, largely due to objections from the U.S., according to multiple sources.
While there wasn’t an agreement on SDRs at this meeting, leaders seem to have left an opening to discuss it in the future, and several development experts told Devex that as events get worse, it may force the hand of world governments to do more to support the global economy.
IMF is exploring whether existing SDRs can be used in this crisis, which would likely mean wealthier countries transferring those funds to poorer countries.
“What we are concentrating on is to act decisively with what we have and where there is full consensus among members,” said IMF Managing Director Kristalina Georgieva. “We recognize there are other options to be explored and we will continue to do so.”
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