IMF Debt Relief: Implications for developing countries
On 13 April, the IMF announced an initiative to provide debt relief for a selected group of 25 countries.
The program deploys resources from the Catastrophe Containment and Relief Trust (CCRT) to cover scheduled IMF repayments from beneficiary countries over the next six months. At a time when developing countries are desperately seeking emergency financing and require an immediate cancellation over all external debt payments due in 2020, this is a welcome development but more is needed beyond the important symbolism of this measure. As discussed in a previous Eurodad report, it is vital for the IMF to adopt a leadership role and take the initiative by cancelling payments owed to it. By doing so, the IMF can promote an understanding amongst official and private creditors regarding the need for more substantial debt relief for vulnerable countries.
To understand the benefits and drawbacks of the initiative, it is useful to put it into context. The 25 beneficiary countries represent a diverse mix of risks of debt distress (Table 1). It includes three countries in debt distress and six countries considered to be at high risk, while the remaining are categorised as presenting moderate to low risks. Provision of debt relief across categories of at risk debt distress is the right approach, given the type of exogenous shock. A total of 12 countries are a part of the ongoing IMF programs, and owe US$ 3.011 billion to the multilateral organisation. The estimated public external debt service for these countries amounts to US$ 4.617 billion in 2020. From this figure, US$ 363 million corresponds to scheduled payments to the IMF for all of 20201.
Thus, while the provision of debt relief by the IMF is a step in the right direction, it is not without its problems. The provision of short-term debt relief for these countries will exhaust most of the US$ 500 million available at the CCRT. This limitation raises two issues. First, without additional funding, the capacity to provide further relief to these countries, or expand the coverage to all 76 International Development Association countries, is extremely limited. Second, given the large amount owed to the IMF by these countries, which is equivalent to eight times the debt relief they just received, the initiative has to be interpreted as a symbolic gesture to place additional pressure on G20 countries in order to agree on bilateral debt relief and additional mobilisation of Official Development Aid (ODA).
The IMF Managing Director Kristalina Georgieva has already issued a call to the international community to strengthen the funds it has available to provide debt relief under the CCRT, and this is bearing fruit. But the funding structure of the IMF debt relief initiative fosters in itself the deviation of scarce aid resources from donors. The reliance of the CCRT on donor funding means that the debt relief being provided does not represent an overall increase in ODA but rather a shift in its allocation. Calls for further donations to the IMF may end up reducing ODA being provided directly to countries experiencing a humanitarian crisis. It’s necessary for the IMF to explore different alternatives to boost the resources available to the CCRT, such as using its own existing reserves, which have doubled since 2009. Other options include sales of its gold reserves, or mechanism for G20 countries to donate Special Drawing Rights (SDRs)2 as part of an agreement on a new SDR issuance in the wake of the Covid-19 crisis.
Table 1 – IMF debt relief beneficiaries public external debt service and IMF loans & payments (2020)
| Country | Risk of debt distress |
External public debt service 2020 (US$ million) |
IMF credit (US$ million) |
|||
|---|---|---|---|---|---|---|
| Total debt service | Bilateral debt service | Private debt service | IMF payments & charges |
|||
| Afghanistan | High | 23 | 9 | 0 | 6 | - |
| Benin | Moderate | 165 | 124 | 5 | 19 | 182 |
| Burkina Faso | Moderate | 215 | 145 | 2 | 24 | 224 |
| Central African Republic |
High | 18 | 8 | 0 | 8 | 234 |
| Chad | High | 380 | 104 | 260 | 3 | 389 |
| Comoros | Moderate | 4 | 1 | 0 | 2 | - |
| Congo, Democratic Republic of |
Moderate | 551 | 70 | 8 | 30 | - |
| Gambia, The | In debt distress | 43 | 35 | 2 | 5 | - |
| Guinea | Moderate | 191 | 129 | 17 | 33 | 329 |
| Ginea-Bissau | Moderate | 5 | 0 | 0 | 3 | - |
| Haiti | High | 56 | 43 | 3 | 10 | - |
| Liberia | Moderate | 33 | 4 | 0 | 24 | 218 |
| Madagascar | Low | 968 | 578 | 84 | 9 | - |
| Malawi | Moderate | 91 | 58 | 0 | 15 | 239 |
| Mali | Moderate | 147 | 107 | 0 | 17 | 342 |
| Mozambique | In debt distress | 684 | 398 | 193 | 28 | - |
| Nepal | Low | 479 | 316 | 0 | 4 | - |
| Niger | Moderate | 374 | 323 | 0 | 15 | 273 |
| Rwanda | Low | 65 | 8 | 23 | 22 | - |
| São Tomé and Príncipe | In debt distress | 0 | 0 | - | 0 | 9 |
| Sierra Leone | High | 63 | 30 | 0 | 26 | 357 |
| Solomon Islands | Moderate | 6 | 5 | 0 | 0 | - |
| Tajikistan | High | 0 | 0 | - | 16 | - |
| Togo | Moderate | 56 | 41 | 8 | 7 | 215 |
| Yemen, Republic of | Moderate | 0 | 0 | - | 36 | - |
| Total | 4617 | 2937 | 606 | 363 | 3011 | |
Source: Eurodad (2020); IMF (2020)
It is important to note that without additional measures that ensure countries in need receive debt relief from other creditors, the risks of diverting resources from Covid-19 efforts towards debt payments are significant, as evidenced by the large debt service commitments to bilateral and private creditors. To avoid vital freed-up resources going to repay these creditors, the IMF must continue to work with Paris Club countries and China in order to secure a fast commitment for official debt service cancellation to be followed by a large debt relief initiative in 2021. In the case of private creditors, the US, UK and the EU must take the initiative and promote an agreement that provides legal protection to sovereign debtors receiving support from the IMF, such as through introduction of standstills on creditor litigation against debtor countries for missed payments in 2020. Without a recourse to legal actions to enforce payment on external debts, private creditors can be incentivised to arrange a debt re-profiling and eventually restructuring, which can lower the cost of the crisis for both creditors and debtors.
Last but not least, the uncertainty regarding the economic impact of Covid-19 calls for a cancellation of debt service for both 2020 and 2021, as well as an explicit demand for substantial debt relief for developing countries. While the IMF has correctly identified the need to prioritise emergency financing, the difficulties faced by these countries are structural in nature. Large debt burdens undermine the capacity of countries to guarantee the full realisation of all economic, social and cultural rights, including the right to health for their populations. A longer debt service cancellation lasting into 2021 would allow countries to prioritise the response to the crisis over the coming months.
The following year can then be used to organise a multilateral agreement for large scale debt relief and the creation of a multilateral debt workout mechanism. These mechanisms can be designed to address both the impact of the crisis and the financing requirements of the Agenda 2030. Given the large setback caused by Covid-19 in the achievements of the Sustainable Development Goals (SDGs), the need to link debt relief measures while increasing the availability of development finance is more pressing than ever.
1 This figure corresponds to all payments, including interests and charges, due to the IMF from the countries included in the debt relief initiative for the remainder of 2020. Jubilee Debt Campaign UK has an estimate for interest payments due to the IMF for the next 6 months.
2 A form of international reserve asset which can supplement individual country’s reserves, created by and used as units of account at the IMF. The are distributed in line with IMF member country quotas.