Viewpoint by William N Kring
The writer is the Assistant Director for the Global Development Policy Center at Boston University. This article first appeared on EastAsiaForum on September 7, 2021.
BOSTON (IDN) — As the more lethal and contagious Delta variant of COVID-19 rips across the globe, the prospects of multilateral efforts to combat the virus, tackle the looming global debt crisis and mount a sustainable economic recovery are dim. Nowhere is the insufficiency of the multilateral response more apparent than on the issue of debt relief.
Before the crisis, 46 countries were spending more of their resources on debt service payments than on health care. As the COVID-19 pandemic began to wreak havoc on the global economy, the G20 responded by announcing the Debt Service Suspension Initiative (DSSI) during World Bank and IMF meetings in April 2020. The DSSI allowed low-income countries (LICs) to temporarily suspend their debt payments through to December 2020, a measure that has since been extended through to December 2021.
The DSSI has been criticised for failing to compel all creditors to participate. Of 73 eligible LICs, only 45 beneficiary countries have sought to suspend debt payments to official bilateral creditors. Since only a limited scope of debt service is covered, deferred debt service through July 2021 totalled only US$4.6 billion.
In April 2021, the G20 also developed a ‘Common Framework for Debt Treatment beyond Debt Service Suspension Initiative (DSSI)’ to facilitate negotiations over debt restructuring for LICs. While the measures adopted by the G20 are unprecedented, only Chad, Ethiopia and Zambia have applied for the framework and restructuring measures have not gone nearly far enough. LICs that apply for the framework are likely to be downgraded, as Ethiopia recently experienced.
Despite these shortcomings, the communique released following the July 2021 G20 Finance Ministers and Central Bank Governors meeting failed to improve G20 debt relief measures. This is especially concerning because of the increasing threat that the Delta variant poses to the global recovery, the slow global rollout of the vaccine and the risks posed by a divergent, two-tiered recovery from the pandemic.
Three key shortcomings of the DSSI and the Common Framework must urgently be addressed by the G20.
First, the DSSI and Common Framework only apply to bilateral government lenders and do not meaningfully compel participation by all creditors. Consequently, a Eurodad study found only 16.8 per cent of debt payments have been suspended. If countries facing debt distress are to have sufficient fiscal space to combat COVID-19 and mount a sustainable economic recovery, all creditors must be compelled to participate. The DSSI should not free up fiscal space for low-income countries battling COVID-19 to make payments to private creditors. This only temporarily sustains private creditors refusing to come to the negotiating table.
Second, the DSSI should be expanded to cover any country teetering on the edge of insolvency, even if they are middle-income countries (MICs). Over the past 18 months, MICs have struggled from a lack of fiscal and monetary space to combat the virus and support economic recovery. A recent study by the United Nations Development Programme (UNDP) estimates that between 2021–2025, a minimum of US$598 billion of external public debt service payments are due to be paid across 72 countries. MICs account for 94 per cent of these payments.
Indeed, 23 of the countries the UNDP classifies as vulnerable are not eligible under the DSSI or Common Framework and thus US$387 billion of debt service is at risk. Extending access to MICs is especially important considering that 80 per cent of individuals pushed into extreme poverty due to the COVID-19 pandemic reside in MICs.
Finally, the G20 must substantially reform the Common Framework to ensure that all actors come to the table and play a role in permanent debt relief. Without parallel action by each actor, debtor countries will simply take debt relief to pay off other creditors, with no real increase in fiscal space to attack the virus and mount a recovery.
Some regions are better prepared to weather the challenge of COVID-19 than others. East Asia was better prepared to tackle the virus and lend support to neighbours in need of financial resources. Over the last two decades, East Asia has worked to ‘self-insure’ its economies through the build-up of foreign exchange reserves, the use of capital flow management measures, the creation of the Chiang Mai Initiative for Multilateralization and bilateral swaps from the People’s Bank of China and Bank of Japan. Most other countries around the world lack access to such resources, leaving them dependent on multilateral action for relief.
Amid the most pressing global crisis in generations, efforts by the G20 to tackle debt sustainability are laudable. Still, these unprecedented measures are not enough and the situation could get worse. As advanced economies and China continue to see their economies recover and COVID-19 subside, accelerated economic growth could lead to interest rate hikes, triggering capital outflows and exchange rate depreciation in both LICs and MICs. This could balloon external debt and further exacerbate what is already a divergent recovery between the advanced economies and China, and the rest of the world.
As the premier forum for international economic cooperation, the G20 must work to implement a bolder debt relief plan to help both LICs and MICs overcome the COVID-19 pandemic, debt distress and pursue more equitable and sustainable economic growth objectives. [IDN-InDepthNews — 16 September 2021]
Photo: G20 Finance Ministers and Central Bank Governors gathered in Venice for their third official meeting under the Italian G20 Presidency on July 9-10, 2021.
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