This weekend saw strikingly different assessments of how the global community must address the economic and humanitarian crises triggered by Covid-19. On 18 July, the UN Secretary General, Antonio Guterres, delivered a rousing call for a new global social contract, including more just power relations in international institutions to meet the needs of the global south. He emphasised the need for substantive debt relief and a shift in the global economic system to overcome persisting and widening inequalities.

At the same time, G20 Finance Ministers were meeting virtually to agree on next steps to deal with the global economic fallout from the pandemic. Yet behind the rhetoric in their final communiqué lies a dispiriting level of inaction. Florid text about using ‘all available policy tools to safeguard people’s lives’ masks an absence of any substantial moves to scale up the debt relief being offered to developing countries in the wake of the crisis. Instead, decisions are being pushed to the second half of the year, and faith is being put in financial markets to deliver a way out for the global south.

Inaction fuelled by complacency?

Many developing countries are still facing major financing difficulties, yet despite this, the G20 made no steps towards expanding coverage of its Debt Service Suspension Initiative (DSSI), agreed in April, to all countries in need. This agreement offers a temporary suspension of debt payments owed by 73 of the world’s poorest countries to other governments between May to December 2020. So far, according to the G20 around USD 5.3bn worth of debt payments from 42 countries has been suspended under the DSSI, amounting to 1.68% of all the debt service payments to be made in 2020 by low and middle income countries (excluding China).

Eurodad has been among the voices highlighting that the DSSI must be extended to all developing countries based on their debt vulnerabilities rather than simply their (pre-Covid19) income level, to adequately tackle the scale of need in the global south. And moreover, that it should be extended for up to four years – as requested by the African Union – with steps towards full debt cancellation. Yet Finance Ministers chose to remain largely silent on these issues, indicating only that a decision on extending the duration of the suspension would be taken later in 2020. Explicit action to secure a new issuance of IMF Special Drawing Rights as a means to alleviate liquidity difficulties for middle income countries in particular was also missing, with the issue relegated to a footnote in the communiqué.

No moves to compel debt relief from private creditors

One of the most striking aspects of the G20 communiqué is the weak and almost deferential language regarding private creditors’ participation in the Debt Service Suspension Initiative (DSSI) despite the fact that they are benefiting from developing country resources being freed up through bilateral relief. Between May and December 2020, the period in which the DSSI suspension is currently set to apply, the 68 potential beneficiary countries for which data is available are paying around USD 11.54 billion to private creditors. Rather than moving to compel these lenders to participate in the DSSI, the G20 has shifted the responsibility on to borrowing countries, by ‘strongly encourag[ing] private creditors’ to offer a suspension on comparable terms when requested by an eligible country, with no indication of how this might be enforced. Given that the most powerful countries in the world seem afraid of demanding debt relief from these private lenders, it is incredible that they expect these actors to comply favourably when the offer comes from countries facing severe liquidity pressures and with their backs against the wall. All the more so when some developing countries have, in fact, been reluctant to take up the offer of suspension of payments to official creditors under the DSSI for fear of how markets and credit rating agencies will react.

The G20 bravely ‘takes note’ of Terms of Reference for Voluntary Private Sector Participation drawn up by the Institute of International Finance (IIF), an industry lobby group, that would be a framework for creditors to offer a debt suspension on a case-by-case basis. While these terms of reference represent a degree of proactive engagement by private creditors, they still remain a framework for voluntary relief. And as Eurodad analysis has shown the terms being proposed actually imply an increase in debt burdens for developing countries, and may ultimately drive up the costs of an eventual debt restructuring – rather than offering terms equal to those of the DSSI. That the G20 is setting such store on this approach is a remarkable act of blind faith at a time when statements from the Managing Director of the IMF to the Pope and fellow faith leaders are underlining the critical importance of private creditors delivering debt relief urgently. None have done so to date, making it abundantly clear that the G20 now needs to reconsider its ‘softly, softly’ approach. This could entail pledging to pass domestic legislation preventing private lenders from suing a government for following the G20 DSSI and suspending debt payments, or support for countries using existing IMF rules to establish a binding debt standstill mechanism on private lenders.

Despite the crisis, ‘private finance first’ is still the order of the day

A further concerning aspect of the G20 communiqué is the apparent reliance on ‘business as usual’ with a continued drive to integrate developing countries further into international financial markets as a way out of the current crisis. The G20 is committed to ‘accelerat[ing] efforts to mobilize private sources of infrastructure financing’, on the basis of its continued push for infrastructure as an asset class. Eurodad has repeatedly stressed that this approach to infrastructure finance can result in even higher public sector debt and does not reach the countries and people most in need. In fact, increasing reliance on market-based approaches to development finance was a key driver of rising debt vulnerabilities across the global south prior to the Covid-19 crisis, and a key factor in why they have been so vulnerable to the global economic downturn we are currently witnessing. 

At this moment of crisis, the G20 has yet to acknowledge one of the most obvious risks of the worsening debt situation in developing countries, namely large-scale public-private partnerships (PPPs) to finance infrastructure and public services. Contrary to what is actually needed, as Daniela Gabor, from the University of the West of England, mentioned in a recent paper, “rising public debt across poor and emerging countries threatens to entrench the hegemony of the Wall Street Consensus, with its illusive promise that the state can deliver, via PPPs, on grandiose infrastructure projects to restart the economies post-pandemic while tightening the belt.” This is a very risky approach that can further exacerbate existing inequalities.

Unfortunately, the G20 remains focused on addressing the challenges facing private investors and pushing market-friendly ‘structural reforms’, rather than seeking a clearer picture of how countries’ financing needs to meet development and climate aims can be reconciled with long-term debt sustainability. These aims need to be at the centre of recovery efforts after the crisis, particularly when we consider how rising debt burdens and financing pressures have contributed to chronic underinvestment in public health systems across the developing world, and undermined capacity to address the Covid-19 pandemic.

More debt isn’t the answer to the crisis

Loan financing remains the primary mechanism by which emergency financial support is being provided to developing countries to address the Covid-19 crisis. Yet with increased debt vulnerabilities, fiscal pressures, and a global economic downturn, the capacity for many countries to absorb more loans is weakening. A report released last week by ONE points to the fact that the World Bank is struggling to push out emergency lending to developing countries, having committed USD 1.9 billion in new funding to DSSI countries, ‘of which it had disbursed only USD 250 million by the end of May’. Meanwhile, it had, by mid-July, received USD 1.7bn in debt repayments from these countries. 

The World Bank is still resisting calls to offer debt relief, yet if it is unable to disburse ‘conditionally free’ budget support in a speedy way, then it may be running out of excuses not to join the DSSI. Instead of addressing this, the G20 backtracked on previous language regarding the World Bank’s lack of participation in the DSSI. Finance ministers committed simply to supporting the institution in providing ‘net positive financial flows’ to DSSI countries during the suspension period. Developing countries need grants, not more debt, to recover from the Covid-19 crisis, however, only about a quarter of additional financial support from multilateral development banks to IDA-eligible countries is in the form of grants and highly concessional lending.

Debt cancellation and systemic reforms to debt resolution are essential

Countries desperately need fiscal space to meet the ongoing and urgent health, education and social protection expenditure needs, and substantial debt cancellation and restructuring will be necessary to avoid a wave of defaults and a fatal derailing of the SDGs and Paris Agreement in the global south. Discussions by G20 Finance Ministers in October must result in the scaling up of the DSSI, and an urgent shift in approaches to financing. But they must also result in action on agreeing a post-Covid-19 debt relief and sustainability initiative under UN auspices to bring developing country debts down to sustainable levels and which considers countries’ long-term financing needs to pursue the SDGs, climate goals, and human rights and gender equality commitments. The G20 must also play its role in fostering progress towards a permanent multilateral framework under the UN to support systematic, timely and fair restructuring of sovereign debt, in a process convening all creditors. 

The impacts of Covid-19 are exacerbating existing dramatic economic, social and gender inequalities, and the approach of the G20 risks making a bad situation worse. If the G20 does not want to see another ‘lost decade’ for development, then they must prepare for more ambitious and systemic solutions when they meet in the coming months.