Emergency financing for Low-Income Economies to tackle Covid-19: Cost estimates for the impact of the crisis and emergency financing requirements

Emergency financing for Low-Income Economies to tackle Covid-19

02 April 2020

By Daniel Munevar,

This briefing is provided to inform development of policy responses to the Covid-19 crisis and in support of calls from wider civil society for debt cancellations for the world’s poorest countries in the face of the current crisis.

The Covid-19 crisis has the potential to devastate the lives and livelihoods of 1.2 billion people in the 69 low-income countries covered by this briefing. Protection of the most vulnerable populations will require the adoption of measures at an unprecedented scale. This analysis builds on previous research by Eurodad.1 It provides an initial estimate of the emergency financing requirements faced by 69 countries in 2020 as a result of the current crisis. Furthermore, it considers the implications of different policy proposals currently under consideration in terms of the scale, conditions and efficiency of the use of multilateral resources.

This analysis provides cost estimates for the impact of the crisis and emergency financing requirements for 69 Low Income Economies (LIEs2) in 2020 under three different scenarios:

1. In a baseline scenario, the impact of the crisis will force at least 45 LIEs to request US$ 93.8 billion in emergency financing to face the epidemic. Without a suspension of external debt payments, US$ 21.8 billion in emergency financing would be diverted away from Covid-19 response efforts towards creditors. For countries receiving support, provision of loan financing would increase public debt as a share of Gross Domestic Product (GDP) on average by 14.2 percentage points. This would represent an average increase of 36.6 per cent over current debt levels (see Table 1).

Table 1: Estimate of impact of Covid-19 crisis on 69 LIEs in 2020 - baseline scenario

Countries by risk of debt distress	# of countries	# of countries that require FX & budget support	Emergency financing	% of EF for Private Debt Service	% of EF for official debt service	Impact of EF on public debt (% of GDP)	Increase of public debt (%)
Countries by risk of debt distress	# of countries	(US$ billions)	Emergency financing	Average
In debt distress	9	6	26.1	9.5	10.0	31.5	28.8
High	24	17	26.6	24.0	39.6	12.1	54.2
Moderate	23	14	20.0	15.4	23.2	14.0	29.7
Low	13	8	211	30.6	42.4	6.3	16.7
Total	69	45	93.8	20.4	30.8	14.2	36.6

Source: Eurodad estimates based on IMF country DSA (latest available); IMF WEO (2019); World Bank WDI; World Bank IDS.

2. In an alternative scenario, based on the IMF and World Bank proposals for a suspension on official bilateral debt payments in 2020, the number of countries requiring emergency financing would drop to 41 and financing needs to US$ 82.8 billion. Continuation of debt payments on private and multilateral creditors and use of loan financing would have negative impacts on LIEs. An estimated US$ 9.4 billion of emergency funding would be diverted to debt repayments. Public debt as a share of GDP would increase on average by 14.2 percentage points. This would represent an increase of 37.6 per cent over current levels (see Table 2).

Table 2: Estimate of impact of Covid-19 on 69 LIEs in 2020 - alternative scenario (IMF and World Bank proposal)

Countries by risk of debt distress	# of countries	# of countries that require FX & budget support	Emergency financing	% of EF for Private Debt Service	% of EF for official debt service	Impact of EF on public debt (% of GDP)	Increase of public debt (%)
Countries by risk of debt distress	# of countries	(US$ billions)	Emergency financing	Average
In debt distress	9	6	24.8	10.4	1.3	29.6	27.6
High	24	15	23.7	22.6	12.2	11.9	58.2
Moderate	23	13	17.7	9.5	5.5	14.2	30.1
Low	13	7	16.6	36.6	10.1	5.8	15.8
Total	69	41	82.8	18.8	10.5	14.2	37.6

Source: Eurodad estimates based on IMF country DSA (latest available); IMF WEO (2019); World Bank WDI; World Bank IDS

3. In a progressive scenario that assumes a complete cancellation of external public and private debt service and full grant financing, the number of countries requiring emergency financing would drop to 29 and require US$ 73.2 billion to tackle the crisis. Under this scenario, all emergency financing would support the policy response to the crisis.

Table 3: Estimate of impact of Covid-19 crisis on 69 LIEs in 2020 - progressive scenario (civil society proposal)

Countries by risk of debt distress	# of countries	# of countries that require FX & budget support	Emergency financing
Countries by risk of debt distress	# of countries	# of countries that require FX & budget support	(US$ billions)
In debt distress	9	6	23.8
High	24	7	20.9
Moderate	23	10	15.5
Low	13	6	13.1
Total	69	29	73.2

Source: Eurodad estimates based on IMF country DSA (latest available); IMF WEO (2019); World Bank WDI; World Bank IDS

Figures 1, 2 and 3 illustrate the impacts of different policy proposals in terms costs, allocations of debt service and public debt levels.

Figure 1: Cost estimates of emergency financing under different scenarios and G7 fiscal measures (US$ billions)

Source: Eurodad estimates, IIF Covid-19 Global Policy Response Summary

Figure 2: Impact of external debt service on allocation of emergency financing for LIEs (US$ billions)

Source: Eurodad estimates

Figure 3: Impact of emergency loan financing on public debt levels in LIEs (% of GDP)

Source: Eurodad estimates

These estimates highlight the moral and economic value of an immediate cancellation of debt payments and provision of grant financing to LIEs to tackle the Covid-19 crisis. Bold and unprecedent actions will be required to protect the most vulnerable amongst us. The cost of delays and inadequate responses will be measured in human losses. Time is of the essence.

For detailed policy analysis, methodology and country by country figures please refer to the full report.

1 Eurodad, ‘A debt moratorium for Low Income Economies,’ 2020.

2 As defined by the International Monetary Fund (IMF), LIEs include 59 countries eligible for IFI concessional financing, 13 high-income small states and four countries that have graduated from concessionality eligibility since 2010. This analysis includes 69 countries where data was available. Announcement by IFIs covers a total of 76 countries. Not included are five so-called ‘blend countries’ (which can access both concessional and non-concessional lending) and two inactive countries. The countries not included in the assessment are Fiji, Kosovo, Mongolia, Nigeria, Pakistan (blend countries) and Eritrea, Syria (inactive countries).