Opinion: Vulnerable countries need more development aid post-COVID-19

When 193 countries adopted the Sustainable Development Goals — with its game-changing targets across 17 carefully considered themes and a firm deadline of 2030 — at the United Nations General Assembly on Sept. 25, 2015, many did not foresee a global pandemic.

The eradication of poverty and hunger, the end of discrimination, a new paradigm for healthy living, equitable access to quality education, and a promise to protect our planet were just some of the commitments made by virtually every country in the world.

Indeed, the SDGs were designed to be a "blueprint to achieve a better and more sustainable future for all." Alas, there was no built-in contingency to offset the devastating impact of an unexpected, powerful, and enduring global health crisis. Today, this curveball has become a formidable threat to the attainment of the SDGs. As many countries look for a path to recovery, another crisis looms dangerously close: mounting global debt.

Increase of debt levels exacerbate debt sustainability

Debt levels were already a major concern before the pandemic, with the average global public debt at a record high of 84% of GDP at the end of 2019. But in 2020, the International Monetary Fund reported that global public debt had exceeded prior projections, reaching an unprecedented 97% of GDP.

This increase is largely due to fiscal deficits caused by the redirecting of financing to respond to the unexpected onslaught of the pandemic. While these exceptional COVID-19 measures are helping to save lives and cushion the economic blow to individuals and industries, they are also exacerbating debt sustainability concerns and, therefore, threatening the revival of the global economy.

While it is clear that all countries will face additional spending for vaccinations and social safety nets, more needs to be done to level the playing field and support the most vulnerable. Even before the pandemic, many low- and middle-income countries were facing the dilemma of limited access to concessional financing, and the pandemic is further hampering their ability to achieve key development milestones.

The issue of interest rates is one of the areas that must be examined because we have already seen that while lowering rates help facilitate access to financing in advanced economies, this was not the experience of low-income countries. At present, the cost of borrowing is still too high for many developing economies.

Current levels of external grants, emergency assistance, and concessional financing measures do not fill the gaps for the vulnerable countries rerouting development financing to manage pandemic-related challenges.

Many of these countries are being forced to choose between lifesaving COVID-19 responses and SDG-related projects for education, nutrition, and climate action. This signals the need for an urgent conversation about the innovative financing strategies that could ensure every country remains on the pathway to SDG attainment.

4 proposed solutions

Of course, solutions will require collaboration and concerted action. Renowned for its convening power and its long history of promoting and supporting all the pillars represented in the SDGs, the 54-member Commonwealth Secretariat is already supporting public debt management in numerous countries around the world.

Several solutions were discussed at a recent two-day forum on financing recovery and debt sustainability. These solutions aren’t unique to the commonwealth. In fact, countries across the world can consider these solutions in their attempt to balance debt sustainability and sustainable recovery.

First, there is a need for collective responsibility of creditors and borrowers to respond to the continuing challenges imposed by the pandemic. The international community must scale up provision to assist vulnerable countries through outright debt relief as well as with other innovative financial instrument options including debt-for-climate and nature swaps.

This can help address the issue of burdensome debt levels, while at the same time providing resources to enhance climate resilience in many LMICs of the commonwealth which are extremely vulnerable.

Although international financial institutions such as IMF and World Bank have responded to the dire need of countries for concessional financing to boost their response to the pandemic, this has increased their debt burdens with very little prospect at present of debt forgiveness from said institutions.

The success of debt relief initiatives, such as the G-20-supported Common Framework for Debt Treatments beyond the Debt Service Suspension Initiatives, depends significantly on the participation of private creditors and some nontraditional bilateral creditors. However, there has so far been only very limited — if any — participation by this major creditor category in providing debt service relief to countries.

Fairer burden sharing is therefore critical to this process. It is the combined responsibility of borrowers and creditors to work together toward resolving these issues of sustainability through transparency and in a spirit of mutual support and joint responsibility.

Second, the publication of comprehensive debt data provides critical support to effective debt relief initiatives.

Publication of key debt reports including debt strategies and detailed debt data is not only crucial to strengthening debt transparency, but also for crafting effective debt relief programs and to reduce uncertainties that can be reflected in higher debt servicing costs.

The current lack of debt transparency makes it exceedingly difficult to find sustainable solutions to these far-reaching and multifaceted problems.

Third, more grants and concessional financing should be made available to LMICs. Access to adequate concessional financing continues to be a challenge for LMICs, and those countries graduating from low-income status. At the same time, there has been an increase in the availability of financing from commercial and non-Paris Club bilateral creditors.

About a decade ago, multilateral debt accounted for about half of the financing for low-income countries. Today, that figure has declined by more than one-third as countries contracted debt at higher rates and shorter maturities from commercial and bilateral sources.

This has led to a rise in the cost of borrowing for many countries, increasing pressure on public finances. Clearly the issue of debt sustainability is compounded when countries have to fund their development agenda with debt contracted at market rates.

Over the years, the share of official development assistance in gross national income of Organisation for Economic Co-operation and Development countries has significantly reduced. In 2019, before the pandemic, the average ODA-GNI ratio in OECD was at 0.38%, well below the target level of 0.7%. It is therefore critical that the international community increase ODA to the targeted 0.7% level, to help avert a debt crisis.

Finally, creating an environment which supports debt sustainability is essential. The onus for placing national economies on the path to debt sustainability is on those to whom responsibility has been entrusted whether as elected representatives or as government officials. Reducing the level of debt and the associated debt service costs is only part of the solution. Governments need to create environments which support debt sustainability and prevent development gains from being eroded.

Proper governance frameworks need to be in place. Fiscal Responsibility Legislation and Public Debt Management Acts will help countries manage and limit borrowing and keep countries on sustainable paths. Countries should implement key debt management reforms, including the establishment of debt management offices along functional lines.

These offices will support the effort for debt sustainability, guide government borrowing, and improve debt reporting. These two issues would also strengthen debt transparency in the commonwealth.

It is clear that achieving debt sustainability requires collaboration and full participation by all stakeholders. However, urgent action is needed to help LMICs to cope with the crisis and to preserve hard won development gains and to sustain progress. Now is the time to be bold, to be proactive, and to share our vision for delivering a common future that is truly fair, sustainable, and inclusive.