Debt relief must deliver on ambitions
The IMF and WB are calling on the G20 to support debt relief for impoverished countries in the face of the Covid-19 outbreak. But the institutions must break with the past to ensure debt relief fulfils its purpose.
The Covid-19 pandemic is an exceptional crisis and potentially implies devastating legacy impacts for many impoverished countries. Global policy responses to deal with the economic fallout must therefore break with precedent and also ensure a reinforcement of longer-term development priorities. The call for a moratorium on official bilateral debt by the Bretton Woods Institutions is welcome, and could be a significant measure in securing fiscal breathing space for countries battling against the consequences of the Covid-19 outbreak.
But for some countries, such a standstill may not be enough to ensure that they can weather the public health crisis without suffering debt distress. Consequently, they will require emergency financing. Emergency funding from the World Bank (WB) and IMF, however, should not be accompanied by pushing loans and market-friendly economic reforms onto countries in need, as World Bank President David Malpass has intimated. The pandemic cannot be used to further an economic orthodoxy based on privatisation, deregulation and liberalisation that has contributed to the underpreparedness of countries to deal with the Covid-19 outbreak, left them more vulnerable to exogenous shocks and may further weaken their capacity to meet the Agenda 2030, as well as the challenges of the climate emergency and commitments on gender equality and women’s rights .
Emergency financing from the IMF and WB, and subsequent full programs provided in the wake of the Covid-19 outbreak, should therefore be delivered in the form of grants and free of economic policy conditionality.
Existing programs should also be reviewed in the light of the Covid-19 outbreak, to discard austerity-focused conditionalities that further hamper states' capacities to deal with the crisis.
Furthermore, the purpose of a suspension of debt payments accompanied by fresh financial support should be to give recipient countries fiscal space to deal with the current needs of their populations in the face of the pandemic, not simply to address liquidity concerns. The IMF and WB must work together with official creditors to substantially increase fresh, additional ODA grants and meet their commitments within the framework of the Addis Ababa Action Agenda.
In turn, to help ensure that emergency finance is used to support public health and social protection measures in response to the Covid-19 crisis, rather than being diverted to repay creditors, the IMF and World Bank must require a reprofiling of external public debt held by private creditors, as a prerequisite. Should private creditors fail to endorse a timely reprofiling, countries should be able to suspend payments to uncooperative creditors.
Automatic reprofiling of this sort would draw on provisions in the IMF's revised exceptional access framework, linked to situations in which assessing debt sustainability with confidence is difficult. The current volatile and uncertain economic outlook means ascertaining the probability of debt sustainability in the context of negotiating IMF lending is seriously undermined.
The IMF and World Bank should duly abstain from conducting debt sustainability analyses (DSAs) as a precondition to emergency financing, given the large degree of uncertainty.
DSAs to determine the necessity for more fundamental restructuring should be undertaken once the crisis recedes. Moreover, the scale of the social and human cost of the Covid-19 pandemic demonstrates the need for an approach to these assessments that finally moves beyond their 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.
The IMF and WB should draw on work by the UNHRC and UNCTAD to ensure that DSAs, when undertaken, support the securing of debt relief and restructuring that is consistent with Agenda 2030 financing needs and human rights obligations.
Dealing with outstanding multilateral debt should not be neglected as policymakers agree on Covid-19 responses, and efforts should continue both to extend official bilateral debt moratoriums to outstanding IMF and World Bank loans, and to strengthen the resources of the IMF's Catastrophe Containment and Relief Trust (CCRT). This should be accompanied by an easing of eligibility criteria to ensure the usefulness of the CCRT as a standing debt relief mechanism.
Beyond the emergency measures taken in this acute crisis moment, systematic debt relief options will need to be put in place to address on a longer-term basis, the debt vulnerabilities of developing countries. This will be essential to reinforce their resilience to navigate a sustained global economic downturn, ensure sustained policy responses to the pandemic, and support the financing of Agenda 2030 and climate goals. To deliver durable and equitable outcomes, debt relief will need to involve all creditor groups, including multilateral, official bilateral, and private lenders. In this regard, the IMF and World Bank must push forward work towards the establishment of a comprehensive, fair and transparent international framework to deal with sovereign debt restructuring.
Box - Cost estimate of the IMF and World Bank proposal for a suspension on debt payments
A suspension on debt payments for 2020 on external official bilateral loans to the public sector, as proposed by the IMF and World Bank, would release US$15.4 billion in 2020*. If the moratorium were to cover both multilateral institutions, an additional US$3.8 billion could be secured by developing countries. Including external private creditors of the public sector, this figure could be further increased by US$5.9 billion. A moratorium on external public sector debt, covering all official and private loans, would secure a total of US$25.5 billion in 2020.
* Estimate for 69 countries. Announcement by IFIs covers a total of 76 countries. Not included in this analysis are 5 so-called blend countries (which can access both concessional and non-concessional lending) and 2 inactive countries. The countries not included in the assessment are Fiji, Kosovo, Mongolia, Nigeria, Pakistan (blend countries) and Eritrea, Syria (inactive countries).