‘Draining out the Titanic with a bucket’ – New Eurodad report shows why G20 plan to tackle Covid-19 debt crisis in developing countries is failing
- Debt suspension offered by G20 only covers 3.65% of all the debt service payments to be made in 2020 by all developing countries
- G20 leaders urged to massively scale up debt relief and work on longer-term global reforms to resolve debt crises or risk abandoning sustainable development and climate goals
The G20 initiative aimed at tackling the escalating debt crisis in developing countries following the Covid-19 outbreak is failing, according to a new report published today.
The Debt Service Suspension Initiative (DSSI) – which was announced by the G20 on April 15 – was intended to help developing countries with the overwhelming debt they owed to bilateral lenders as they struggle to finance their responses to the pandemic.
But a new DSSI ‘shadow report’ published by the European Network on Debt and Development (Eurodad) ahead of the G20 Finance Ministers meeting this weekend, shows that even if all eligible countries applied for debt suspension, only 27% of their 2020 debt payments would be covered.
The main problems with the DSSI are that:
- It is partial and does not apply to multilateral and private creditors. Without the G20 compelling all creditors to offer debt relief, money freed up under the DSSI may effectively be used to repay other debts and not to fund the response to the Covid-19 crisis.
- It is merely postponing repayment pressures instead of cancelling debts. DSSI-eligible countries are already scheduled to repay USD 115 billion of debt in 2022-2024, just when their suspended 2020 payments come due.
- It is not providing a safety net for all countries in desperate need of debt relief. Middle income countries, many of whom are currently at the epicentre of the pandemic, are left out. For 68 low- and middle-income countries excluded from the DSSI and for whom data is available, external public debt service is projected to reach US$ 273billion in 2020. This means that the G20 offer only covers 3.65% of all the debt service payments to be made in 2020 by developing countries
Report author Iolanda Fresnillo, Senior Policy and Advocacy Officer at the European Network on Debt and Development (Eurodad), said: “Public indebtedness in the global south was already at unprecedented levels before Covid-19, and the current crisis has exacerbated these pre-existing debt vulnerabilities.
“The inability of the G20, IFIs, private creditors and credit rating agencies to respond to the magnitude of the crisis is leading us to a situation in which countries will not get the support they really need until it is too late and defaults become inevitable. The costs of that failure will unfortunately be measured in the millions of jobs and livelihoods lost, not due to a deadly virus, but due to an unwillingness to address the unfair and inefficient nature of the global financial system.”
The report calls for a more long-term approach to the debt crisis facing the world, that includes a dedicated debt relief and cancellation process for all developing countries in the wake of the Covid-19 crisis. It also calls for moves towards the creation of a permanent mechanism, under the United Nations, for the systematic, comprehensive and enforceable restructuring of sovereign debt.
Fresnillo added: “It is vital that the G20 and all creditors work for a sustainable and inclusive recovery, while maintaining debt sustainability. This means overcoming current lender-led processes, establishing a framework for urgent debt cancellation and restructuring, and moving to a permanent, independent and multilateral process under UN auspices. This should consider not only capacity for payment but also development needs, human rights, gender equality and climate vulnerabilities.”
Additionally, the report also calls on the G20 governments and IFIs, meeting virtually this weekend at the G20 Finance Minister’s meeting, to agree on a number of immediate measures to answer the very urgent needs of the countries most affected by the pandemic and the unfurling debt crisis. This includes scaling up the current DSSI to permanent debt payment cancellation for up to four years and to all Global South countries in need, as well as securingthe participation of all creditors, including the World Bank, other multilateral development banks and private creditors.
Media contact: Julia Ravenscroft, Communications Manager at Eurodad: +32 486 356 814/ [email protected].
Notes to editors:
- Between 2010 and 2018, external debt payments as a percentage of government revenue grew by 83 per cent in low- and middle-income countries, from an average of 6.71 per cent in 2010 to an average of 12.56 per cent in 2018.
- The Debt Service Suspension Initiative (DSSI) potentially covers 77 countries. The final list of possible beneficiaries was reduced to 73, as four countries (Eritrea, Sudan, Syria and Zimbabwe) are excluded due to being in arrears with the IMF and/or World Bank.
- Of those, 40 countries had confirmed their participation in the DSSI at the time of writing. Among the 33 countries that had not to date requested participation in the initiative, 12 countries were at high risk of debt distress in May 2020, according to the World Bank and IMF joint debt sustainability analyses.
- The DSSI is currently estimated to offer a maximum of US$ 11.54 billion in temporary support, if all the possible beneficiary countries choose to participate, which represents only 27 per cent of all the debt payments of those countries in 2020.
- Multilateral development banks will be getting, from May to December 2020, US$ 9.47 billion in debt payments from the 68 DSSI beneficiary countries for which data is available, of which US$ 2.45 billion is owed to the World Bank. Private creditors will be receiving from those 68 countries US$ 11.54 billion in the same period.
- A total of 12 lower middle income countries, 18 Small Island Developing States and 48 upper middle income countries are excluded from the initiative, irrespective of their current vulnerability to debt distress or the impacts of the Covid-19 health and economic crises.
- As of July, developing countries account for 80 per cent of the more than 4,000 lives that Covid-19 is claiming on a daily basis. Prevalence of structural factors such as high poverty rates, widespread presence of informal labour and precarious social safety nets have diminished the effectiveness of containment measures. Around the world, 8 billion informal workers and 300 million recently unemployed people are faced everyday with the choice of hunger and deprivation or exposure to the pandemic.