The IMF projected the worst recession since the Great Depression – and warned that even this forecast might be too optimistic. While richer countries have been pumping record levels of cash into their economies to deal with the impacts of the coronavirus pandemic, developing countries have been knocking on the doors of the Bretton Woods Institutions (BWIs) requesting urgent financial support. The meetings were a moment for these institutions to reinvigorate multilateral cooperation and increase their legitimacy. In the end, geopolitical battles limited their ambition. We were hoping for bold solutions, but instead we got a number of sticking plasters. In order to tackle the looming crisis, we need to see bolder action and that needs to be soon. Going forward, the IMF and World Bank must learn the lessons from last week’s meetings by listening to the concerns of the world’s poorest countries.

For the global south, the economic stakes could not be higher. Beyond the public health emergency, they are seeing sharp declines in tourism and export revenue, remittances and collapsing commodity prices. All this is set against record capital flight: roughly US$ 100 billion has been pulled out of emerging economies since the start of the year. Debt levels and costs in the global south were already at unprecedented levels before Covid-19, impacting public service expenditure, and under-investment was rife in already vulnerable public healthcare systems. Financing conditions have deteriorated sharply since the start of the coronavirus outbreak, making borrowing and debt service ever more expensive. This severely limits the fiscal space available to many countries to step up necessary spending to help tackle the public health, social and economic impacts of the pandemic.

More action needed on debt relief

Given the constraints that many developing countries are facing, debt relief is a critical component of the response to the Covid-19 crises. This was widely reflected by calls from UN Conference on Trade and Development (UNCTAD), African Finance Ministers, the UN Secretary General and a coalition of more than 200 civil society organisations (CSOs) urging action before the Spring Meetings. It is significant to see that major shareholders of the BWIs, also gathered in the G20, were able to reach a deal in relation to debt relief. However, given the exceptional nature of this crisis, the response is clearly still inadequate.

Two major announcements were made last week. First, the IMF agreed to cancel payments it is owed over the next six months for 25 countries using its Catastrophe Containment and Relief Trust (CCRT), for which it had agreed reforms to widen eligibility in late March. While this is a welcome first step, the relief offered (US$ 213.4 million) equates to less than 1% of total low-income economy external debt in 2020, with International Development Association (IDA) countries – i.e. the world’s 76 poorest countries eligible for IDA’s concessional support – owing the IMF in total eight times as much as the relief offered this week.

Moreover, the International Monetary and Financial Committee (IMFC) – dominated by rich countries – echoed calls from the IMF Managing Director and the G24 – the group of major developing countries and emerging economies – to attract new donations to beef up the resources available to the CCRT. Despite a combined injection of US$ 285 million from the UK and Japan, and promises from other countries including China and the Netherlands, the Trust’s coffers (approx. US$ 600 million) risk being rapidly exhausted by demand. Its funding structure risks diverting scarce and still inadequate Official Development Assistance (ODA) flows to fund IMF relief away from directly supporting countries’ crisis response. Developing countries are effectively paying for debt relief themselves.

Second, despite multilateral tensions and a failure to reach agreement in March on the BWIs’ proposal of a debt moratorium, the G20 did manage to respond last week to the urgent need for developing country debt relief. A suspension of debt payments owed to bilateral official creditors was offered to up to 77 of the world’s poorest countries until the end of 2020. While this was a significant step, and one that will support the immediate Covid-19 response with around US$ 12 billion worth of debt payments suspended, the breathing space it provides countries may be short-lived.

By agreeing only to postpone payments, debt crisis risks are being stored up for the future – countries have up to four years after the suspension to repay. Furthermore, the suspension will be done on a basis to ensure it costs creditors nothing. Borrowing countries will face bigger repayments when the suspension period ends, and may need to borrow more to be able to repay, at a time when financial conditions will remain constrained and commercial credit will be costly. Moreover, huge existing repayment obligations fall due in this period for low- and middle-income countries, estimated at US$ 4482 billion between 2022 and 2024.

Importantly, the G20 did signal the need for multilateral development banks and private creditors to offer similar relief to countries in need. However, no steps were taken to compel or enforce participation, such as temporary legal standstills on creditor litigation against countries missing 2020 debt payments. The risk is that freed-up resources will simply be diverted away from Covid-19 response to pay off these creditors. The short suspension period may also discourage countries from redeploying all resources to their emergency response. A large-scale multilateral process to bring debt levels down to sustainable levels is urgently needed. As the G24 noted, efforts need to be made by the BWIs to prevent widespread debt crises. The G24 communique also addressed the role of credit rating agencies in furthering capital flight from countries navigating the impacts of the crisis, and asked the BWIs to ‘echo their call to Credit Rating Agencies to avoid downgrading countries that are restructuring their debts to manage the impact of the pandemic’.

IMF financing: all options should be on the table to further boost capacity

With the IMF reporting that 100 countries had already approached it for emergency support, urgent efforts have been made to boost its lending resources over recent weeks. The IMFC and G20 communiques simply reflected these developments and did not announce new measures. They welcomed the IMF’s increased USS 1 trillion lending capacity, and increase in ceilings (from US$ 50 to US$ 100 billion) and country borrowing limits for its emergency financing instruments (the Rapid Facility Instruments (RFI) and Rapid Credit Facility (RCF). The IMF also set up a new short-term liquidity line to give revolving access only to countries with ‘strong policies and fundamentals’ to resources of up to 145 per cent of their quota. Yet these measures may still not be enough to meet all developing countries’ needs. More resources will be needed to meet the liquidity constraints facing low- and middle-income countries. A particular concern is the risk of a rapid depletion of concessional-financing resources under the Poverty Reduction and Growth Trust (PRGT) – dependent upon donor contributions.

The magnitude of the Covid-19 crisis also requires a scaling up of the length, volume and scope of countries that are eligible for IMF debt cancellation. To do this, there were (and still are) some options on the table. As a general principle, using the IMF’s own resources to boost the CCRT, rather than relying on scarce ODA budgets, is critical. The G20 and IMFC failed to take any progressive action on this front, despite pressure from civil society.

Among the solutions being put forward, there are calls for the IMF to sell off some of its gold reserves, valued to be around US$ 160 billion, and estimated to have increased in value by US$ 20 billion since the start of the Covid-19 outbreak. Gold sales were used in 1999 to support debt relief under the Initiative for the heavily indebted poor countries (HIPC), and is a recognised measure ‘to boost the IMF’s concessional lending capacity to Low Income Countries’.

The option also remains for the IMF to consider a new and large issuance of Special Drawing Rights (SDRs), as was done to the tune of approximately US$ 250 billion after the global financial crisis. These can be created at the stroke of the IMF’s pen, and increase member reserves at the Fund according to their quotas. A mechanism could then be established for richer countries to donate SDRs to the CCRT and PRGT to increase the resources available to support poorer nations. However, the US remains opposed to this, and no agreement could be reached. Nevertheless, the G20 and IMFC kept the options open for further discussion, including looking at how to redistribute existing, unused SDRs.

World Bank Group response falls short of ambition

The Development Committee – the World Bank’s Ministerial-level steering group – endorsed the World Bank’s response package and re-stated the role of the institution. The Committee also asked the WBG to ‘help governments deploy resources toward public health interventions, nutrition, education, essential services, and social protection against the immediate adverse effects of the shocks’. This is a welcome focus – the current crisis shows the critical need for strong public systems, particularly health, education and social protection, with adequate financial and human resources that allow an efficient and equitable response.

However, the response of the institution still falls short on ambition. The WBG US$ 160 billion response in 15 months is primarily based on reprogramming and frontloading of resources. These are relevant measures, but they may be insufficient to cater to both immediate and future funding needs, as pre-existing development challenges are exacerbated in the current context. Acute development needs risk being postponed unless there is additional funding. One straightforward option would be to open an emergency window for IDA countries and get donors’ support. But this option is not free of challenges, as it is important to avoid the institution starting a fundraising race, competing for ODA resources that can be used elsewhere.

A closer look at the WBG response indicates that there is still room for the Bank to be more creative. More than half of the WBG response package will be channelled through the International Finance Corporation (IFC), and the bulk of this will go to ‘client financial institutions’. This raises concerns about the balance between public and private support in the WBG package and requires strong accountability and transparency on the part of the IFC. The IFC should publicly disclose ultimate recipients and their uses of the money, ensuring that it helps preserve employment and does not become a bailout of private financial institutions. Moreover, the IFC response funding should not support commercial private health facilities that are inaccessible to lower-income and vulnerable populations.

In addition, it is critically important that World Bank financing does not further compound debt vulnerabilities, so front-loaded support should be provided as grant-financing. In line with this, concessional lending should be expanded to cover middle-income countries that are currently not eligible for grant financing. CSOs are calling for an immediate reconsideration of systems and criteria used to make states eligible for concessional lending.

As for relief on debts owed to the World Bank, the President noted the reluctance of the institution, arguing that a decision on this would risk its ‘AAA’ credit rating, and called for more donor contributions to facilitate any action – a position reflected in the G20 communique. This demonstrates an alarming unwillingness to act boldly and decisively to meet the scale of human need the world is currently witnessing.

Time is running out

These are unprecedented times, and the virtual nature of the Spring Meetings were a sign of this. Decision-makers from around the world gathered online to hammer out compromises that will buy some developing countries time to tackle the worsening crises at their doorsteps, but many more need urgent, and substantial financial support. As G20 nations grab headlines with stimulus packages totalling over US$ 5 trillion, throwing out previous economic orthodoxies to ‘do whatever it takes’, a similar sense of urgency needs to steer their approach to supporting developing countries, and cannot be shackled by geopolitical jockeying.

Emergency responses will need to be tied to longer term actions, addressing the structural issues that have driven debt vulnerabilities across developing countries. They will need to shift development finance agendas away from promoting market-friendly reforms and incentivising private investment, which have contributed to countries’ vulnerability to exogenous economic shocks. The BWIs will need to turn away from the dogma of austerity that has contributed to under-prepared and under-resourced public health systems. And long-standing power imbalances within these institutions will need to be addressed to ensure that the needs and rights of the two-thirds of the global population living in developing countries (excluding China) are considered fairly – at this time of crisis and beyond.