Since May 1st, the poorest countries have had their debts suspended. This decision was taken by the G20 and represents a global approach to the consequences of the corona crisis which may be particularly serious for the poorest countries. UK based charity organizations estimate that the delay will involve payments of US$12 bn, in all, 77 countries are due to benefit from the agreement. We asked several international experts to comment on this decision.
What are your comments regarding this decision?
expert in public finance and administration
“The G20 Action plan (G20AP) is a prompt reaction by the most influential international creditors to the developing pandemic. It is a powerful, although time-bound and strictly conditioned, measure aimed at two main goals. The first is to facilitate the response by the IDA and least developed countries to the unpredicted COVID-19 pandemic in order to create fiscal space to finance the costs of interventions in the health, economic and social sectors and the second is to organize IFIs, bilateral, and perhaps even private, creditors to act appropriately and allow debt suspension and future borrowing. The G20 AP emphasizes that this is only the first step towards the resolution of pandemic’s problems and its implementation which will be monitored and further measures proposed. Countries that use debt suspension are obliged to have a relevant IMF/WB arrangement which acts as an assurance to future creditors that economic and fiscal policies are under control and regularly monitored by IMF/WB. The role of the IMF/WB is crucial to the program’s implementation and the OECD will coordinate the actions of official bilateral creditors to support countries programs. China, as bilateral lender, will participate in this plan.”
“The G-20 initiative will allow the least developed countries in the world to free up their financial resources to be used to mitigate the effects of the crisis, thereby avoiding those same countries having to possibly rely on illegal funding channels. In fact, we should not forget that a large number of those beneficiary countries are exposed to a high-risk of money laundering, terrorist financing and a high-level of corruption. Therefore, and an escalation of the financial crisis in those countries due to the global spread of the Covid-19 could be an incentive for those vulnerable governments to make arrangements with opaque corporate structures and international organizations available to grant significant loans.”
What will be the impact of this debt suspension for developing countries?
“It really depends on how the extra money is spent. If the money is spent on helping individuals, households and firms affected by the COVID crisis – by providing social protection and poverty alleviation, financing for affected businesses and strengthening health infrastructure and testing capacity – the debt suspension policy can increase the resilience of developing countries in the face of the pandemic. However, poor countries also to tend have poor institutional capacity and corruption is rampant. If the money ends up in the pockets of governments and politicians instead, as often happens under similar circumstances, then the consequences will be disastrous.”
“Most developing countries have obtained funds from many external sources such as bilateral, multilateral and institutional investors and the majority of them are at credit risk category with some unable to meet their external debt obligation in a timely way. With the decrease of foreign currency inflow owing to the epidemic, there is no doubt that these countries will find it difficult to service their debts. Therefore, the G20 decision will provide a massive cushion for these countries to divert funds to the urgent need of people’s wellbeing. Also, there is a risk that the savings on these debts’ deferments could be diverted to finance unfeasible investment projects or to implement projects for the deliberate interest of on individuals. Any such moves will aggravate the external debt level of these countries unless those investments provide early cash inflow. These countries have also introduced economic stimulus packages to tackle the health emergency and support economic activities. Significantly, the authorities of these countries are increasing public health spending to provide immediate relief to the most vulnerable and have instigated policy initiatives to support liquidity and credit conditions and to safeguard financial stability. Hence, the G20’s decision may support these propositions for the IDA borrowing countries for the defined period.”
Will those countries be able to pay their debts after Covid-19? If not, what do you think will happen next?
expert in public finance and administration
“The ability to repay debts will not depend on the actions undertaken by the least developed countries, but more on the shifts in the geopolitical and economic world order which they can’t influence but have to follow. If there are any debt arrears, this will happen in a strictly controlled manner due to the joint work of the IMF/WB to prevent such developments. This is possible due to the rules of use of the G20 financial instrument. We are witnessing that the relevance of the WHO is undermined and it faces formidable challenges to reform and adjust to new post COVID-19 realities. The least developed countries have several specific problems. They are already struggling with poverty, high unemployment especially of youth and, post COVID-19, the situation is not going to get any better. Unemployment affects mostly the informal sectors and many will lose their livelihoods. A new development paradigm must be put in place and financed with disease prevention and social services being redesigned and put forward for financing. This signals that economics and social problems in the least developed countries are worsening and this unique situation must lead to a revision of development priorities and the creation of strong long-term programs of donor aid and assistance for their resolution. This revision will lead to a change in priorities within national policies and the allocation of budget funds among sectors. More funds must go towards education, employment, social care and poverty alleviation. A new model of employment and income distribution must be created.”
“Income losses caused by the epidemic are expected to exceed US$220 billion in developing countries. These losses will reverberate across societies, impacting education, human rights and, in the most severe cases, basic food security and nutrition. However, with governments struggling to meet rising medical care expenses, their financial capacity is also likely to be severely limited. With the misfortunes created by the epidemic, it is difficult to foresee that the state of affairs in these countries will become comfortable within a short period time which means these poor countries will continue to face issues regarding food security, interest rates, fiscal consolidation, exchange rates and foreign reserve issues for the next few years. Although the G20 decision will assist these nations to cope with debt repayment issues for a short time, it may not be a panacea to them for all problems indefinitely. Most countries may face similar economic circumstances after the end of the deferment period and may be forced to request similar debt repayment deferment for further years and external financiers may be required to take difficult decisions on the funding extended to these countries, including debt annulment.”
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