Why Debt Relief should be part of the Covid Response

This blog was launched slap bang in the middle of the 2008 global financial crisis. Its early months were dominated by discussions of its impact on poor countries and communities. So yesterday I had a plus ca change moment when I read a cluster of excellent pieces discussing the need for urgent debt relief for poor countries struggling to cope with the Covid Crunch. Here’s a summary and links.

According to the Guardian:

‘On Monday the heads of the World Bank and the International Monetary Fund expressed support for debt relief to help countries strengthen their health systems in readiness.

During a conference call for G20 ministers on Monday, the IMF’s leader, Kristalina Georgieva, pointed to the replenishing of funds used in a debt relief and aid mechanism during the 2014 Ebola epidemic that struck three African countries.

The ministers also requested that principal payments – the actual debt payment, as opposed to interest charges – be waived for fragile states, where people are deeply vulnerable to a pandemic.’

Here we go again. Credit: Paul Miller

David Malpass, the head of the World Bank rather spoiled the party by reverting to some bad-old-days demands for market conditionalities in exchange for debt relief:

‘He went on to say that countries should implement free-market economic policies, such as removing regulations and subsidies.’

That’s a bit rich given the wholesale nationalisation of everything going on in many rich countries. More on that from Eurodad.

For those who want to see the numbers crunched, head over to the Eurodad website, for a stats-tastic summary of its assessment of the costs and implications of an immediate debt moratorium for 69 countries classified as Lower Income Economies.

‘A moratorium on public external debt service could free up to US$50.4 billion over the next two years. The estimations highlight the potential of a debt moratorium as a mechanism to release significant existing domestic of resources to redeploy in the fight against COVID-19.’ (see table)

Scott Morris at the Center for Global Development got a bit more granular, setting out ‘5 Principles on the Uses and Misuses of Debt Relief’:

‘The first overriding principle is that any debt relief initiative should serve the goal of maximizing financing for LICs now. This has not been the goal of past debt relief efforts, which either attempted to deal with long term solvency issues (debt “overhangs” in countries that were a drag on growth and development) or short-term payment issues related to specific loans and projects.

Second, debt relief can be useful if it frees up fiscal space, particularly by targeting creditors who otherwise won’t be forthcoming with any new or scaled up financing. World Bank president David Malpass has called on G20 bilateral creditors to offer a moratorium on payments and to consider debt forgiveness in the months ahead. Who are we talking about here? These days, China’s policy banks (China Development Bank and China Exim Bank) are the largest among bilateral creditors to LICs. But the category also includes development finance institutions and export credit agencies in Europe, Japan, and the United States. These countries are unlikely to look to their external lenders for a major scale up as they focus on the pandemic in their own economies. With that in mind, the simple measure they could take is to pause on payments due now and consider outright forgiveness as Malpass has suggested.

Make that 2020

Third, debt relief should not impair the institutions that will be forthcoming with scaled up financing. Unlike the bilateral creditors, the multilateral development banks (MDB) are already on the frontlines of crisis response. In the same statement, Malpass announced expanded lending for developing countries. Introducing the prospect for MDB (or even IMF) debt relief in the current context would complicate efforts to scale up their new financing to deal with the crisis. It would also be a needless distraction for donor countries, who would be called upon to “compensate” the MDBs for the forgone revenue from the debt write downs. Donors resources would be better employed toward direct crisis response, particularly health measures that will depend on grant money.

[pretty sure Eurodad would disagree with that one – let’s see if they respond in the comments]

Fourth, debt relief should not be encumbered by conditionality. Again, the goal is to maximize spending now. Past debt relief efforts have been tied to IMF programs (with IMF conditionality). And here David Malpass gets it wrong by invoking “structural conditionality” as an element for World Bank crisis response. There may be a case for imposing conditions to deal with longer term structural issues in some countries, but that case is weak during a global crisis. If G20 bilateral creditors can be convinced to offer a moratorium on debt service and even consider debt forgiveness, they should do so with no strings attached.

Finally, when it comes to debt relief in the current crisis, we’re not necessarily all in this together. Past debt relief efforts have appropriately sought to sweep in all creditors to share the pain of debt forgiveness. Different types of creditors (government and private) can greatly encumber the process of achieving a sweeping agreement. All the more so today when many LICs have commercial creditors. It’s simply not worth the time and effort today to extract debt relief concessions from all creditors, particularly as with principle #3, it would be best to avoid seeking creditor relief from some types of creditors. As much as it might be desirable for commercial lenders to write down their loans, or simply offer a payment moratorium, there’s little to be gained by holding up other channels of debt relief as part of an extended negotiation. The most expedient path would be to focus on the G20 countries and their official lending activities as the target for debt relief.’

[again, over to Eurodad on that one]

We will be seeing a lot more on the economic impact of Covid-19 on poor countries, and the attempts to alleviate the pain. And if you want to track what individual governments are doing, ODI has set up a fiscal and monetary policy tracker, which shows that so far, the UK is at the top of the big spenders league table with a stimulus of 18.9% of GDP. Events, dear boy.

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Comments

3 Responses to “Why Debt Relief should be part of the Covid Response”
  1. Some thoughts from ActionAid: Rather than wait for the international machinery to come together, we are urging governments in developing countries to announce, unilaterally or preferably multilaterally, that they will be suspending all debt payments. The international and commercial institutions can then catch up, and given the circumstances it should be difficult for them to penalize governments for making life-saving moves, especially if they act in coordination. Suspended debt payments are among the best moves for countries who need the money NOW because the cash is already in the treasury, budgeted for. It can be spent now on life-saving measures.
    For governments that do not take that step, creditors should, asap. This includes the IFIs, because while your logic has some validity, again, the money is already in the countries.
    Even if governments do not act as they should and suspend debt payments immediately, commercial creditors and bondholders should still be expected to act. They hold a large chunk of developing country debt, and the interest rates are often higher than for other kinds. And there is no rule that any debt relief package has to have all components decided (because as you say, commercial interests’ agreement will take longer) before any take effect. We must stop assuming that the old rules are the same rules that apply in time of a pandemic.

  2. Duncan Green

    This from Mark Perera at Eurodad:
    Dear Duncan,
    Thanks for driving the conversation on this. We see the value in a standstill on debt payments precisely as an important and relatively swift mechanism to free up resources that governments already have at their disposal. The scale of the human and economic impact of the pandemic requires urgent and robust action to ensure countries have fiscal breathing space to act. As Scott Morris argues, cancellation of multilateral debt may pull donor resources away from financing urgent crisis response. However, at this time the discussion is not about debt relief. That will eventually come, and will be required in a number of countries and have systemic implications. The issue now is to provide as much financial support to countries affected by COVID-19. A moratorium on multilateral lending would do just that. We calculate the benefits of a moratorium on IMF, IDA and IBRD debt payments due in 2020 for LIEs to be around 3.8bn USD. To put this figure in context, that represents roughly 38% of the funds available for the IMF RCF and would increase by 24% the resources provided by a moratorium on official bilateral debts. The benefits are substantial and there is no downside to this policy. If these payments were to be postponed, the IMF, IDA and IBRD would experience a temporary shortfall on income, not a permanent loss. As such, a moratorium would not require immediate recapitalization by members. Even if the Boards consider it necessary to compensate the impact of a temporary loss of income, the cost would represent a drop in the ocean when considering the rescue packages being considered in response to the COVID-19 pandemic. G20 countries are ‘injecting over 5tn USD into the global economy’ – if they are serious in their commitment to do ‘whatever it takes’, supporting such an initial moratorium to be followed by debt relief should not necessarily imply an undermining of additional new grant resources being provided to finance the pandemic response.

    Regarding the role of private creditors, their involvement is a matter of both principle and necessity, especially in the case of frontier markets. From an ethical perspective, it would be completely unacceptable to provide emergency funding to LIEs to tackle the COVID-19 outbreak in a situation where it can potentially be used to cover debt repayments to private creditors. From a policy perspective, one of the guiding principles of IMF operations is to prevent its lending from promoting moral hazard. To lend resources in a situation in which the IMF can’t possibly ascertain debt sustainability means that all efforts should be directed towards minimizing the risk of moral hazard (i.e bailing out private creditors). Hence why a moratorium on private creditors should be part of the financing conditions offered by the IMF. As Lee Buchheit and Sean Hagan have argued, measures of this type should be accompanied by additional support to protect countries from vulture funds through measures such as revised CACs and stays on sovereign debt cases.

    Furthermore, we are calling for a moratorium in the immediate term to be linked to more fundamental debt relief in the longer term, once the acute crisis recedes. Debt relief in that context should adopt an approach that finally moves beyond a narrow focus on repayment capacity to one that considers human rights, public service needs (in particular health), gender, climate, and other development considerations at its core. In a post-COVID-19 world, it seems untenable to argue that these considerations can still be ignored.

    We’ve written a bit about that here, (https://eurodad.org/debt_moratorium_covid19).

    The Eurodad debt team

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