Even before COVID-19 began its deadly spread across their borders, developing countries were absorbing severe economic shockwaves emanating from China and advanced economies. And now, in addition to falling commodity prices and falling export demand, they are facing a sharp drop in emigrant and expatriate remittances, the disappearance of tourism, outings. sudden and massive foreign capital and currency depreciation.
Almost overnight, dozens of low-income countries became unable to repay their debts to sovereign and commercial creditors.
Despite all the talk about a global economic recovery later this year, policymakers in developing countries increasingly fear a prolonged slowdown. And now they must prepare for the impact of a deadly disease while lacking both adequate health infrastructure and the financial firepower of advanced economies.
Without immediate international action, developing countries will therefore be faced with a huge humanitarian crisis. The Managing Director of the International Monetary Fund, Kristalina Georgieva, recently warned that 170 countries could experience negative per capita income growth in 2020. In the developing world, this will cause crushing hardship for people already struggling to meet their needs. of their family. In fact, given widespread lockdowns aimed at tackling the spread of the virus, many stand to lose far more than their jobs: it’s not alarmist to say they could starve.
Of course, the international community has taken important steps to buy time for developing countries. The IMF and World Bank recently announced debt service relief for the world’s poorest countries until the end of 2020, and are rapidly disbursing additional funding – mostly in the form of additional loans. G20 governments have followed suit by freezing repayments on bilateral loans owed this year and called on commercial creditors to follow suit – a result that could free up to $ 40 billion.
More importantly, China has joined the G20 initiative, having previously refused to join multilateral debt relief efforts. A few years ago, the Chinese government vetoed a proposed Paris Club membership by sovereign creditors. Last year, he was also reluctant to share data with the IMF regarding debt restructuring in Africa.
However, the moratorium only postpones the day of the accounts by a few months. If debt payments resume next year, low-income countries will still face a burden that is hampering their response to the crisis. One solution would therefore be for the G20 to extend its debt service freeze until at least 2021, potentially making more than $ 50 billion available next year.
But now is also the time to consider major debt relief – perhaps along the lines of the Heavily Indebted Poor Countries (HIPC) Initiative, the most recent multilateral debt relief program. This program – launched in the mid-1990s under the auspices of the IMF and the World Bank, and with the participation of the Paris Club – provided about $ 76 billion to 36 countries, boosted social spending in the poorest economies and helped spark a resurgence, especially in Africa.
Before the pandemic struck, sovereign creditors were determined to avoid another HIPC-type effort. But this crisis will inevitably force a reassessment, and an extension of the debt service moratorium should be the first step in that direction.
Private sector creditors have so far been reluctant to embark on a moratorium, but some over-indebted countries are already moving towards restructuring, including of their Eurobond obligations. And while commercial lenders insist that creditor governments should not impose a “top-down” solution, past debt relief models suggest a variety of options, including Brady-style debt swaps and a buyout financed by the Bank. the World Bank like the one undertaken during the HIPC program.
The IMF and the World Bank should lead the way for the next step in debt relief, as they did with the HIPC initiative. Admittedly, the two institutions face financial and legal obstacles, including the obligation to offset their debt relief with their own funds – either contributions from member countries or gold reserves. But an international consensus on the need for debt relief can overcome these obstacles.
China’s participation will be essential, as its loans to Africa alone currently total at least $ 152 billion. China has been extremely hesitant to restructure – let alone forgive – these loans, but has publicly embraced the debt moratorium. At the same time, the Chinese authorities’ continued insistence on bilateral debt negotiations and “market principles” suggests that rhetoric has yet to catch up with practice.
It is essential that Chinese leaders understand the economic and political danger of a developing country debt crisis. Now is the time for China to prove that its recent massive lending to poorer countries was not motivated by debt trap diplomacy, as some have claimed. And the best way to do this is through a multilateral solution that works for both borrowers and lenders.
The same goes for all creditors. Postponing the day of calculating debt on debt will only make the pain of developing countries worse. To help them respond effectively to the twin crisis of disease and recession, the international community must offer swift, bold and comprehensive assistance.
Josh Lipsky, former Senior Communications Advisor and Speechwriter on the Management Team of the International Monetary Fund, is Director of Programs and Policy for the Global Business and Economics Program at the Atlantic Council. Jeremy Mark is a former senior communications advisor and speechwriter on the management team of the International Monetary Fund.