Spring Meetings 2021: Yet another insufficient response to the Covid-19 crisis?
Eurodad's policy experts reflect on the 2021 IMF and WBG spring meetings, raising concerns of an insufficient response and the inability of the Bretton Woods Institutions to put global social equity at the heart of long-term plans to rebuild fairer post-pandemic.
Last week’s meetings come at a crucial moment as the pace of recovery of the richest part of the world and the rest of the world continue to diverge. Global poverty is on the rise for the first time in 20 years. There are serious doubts that Covid-19 vaccines will reach poor countries in the near future. Jobs are being decimated everywhere and inequality is on the rise. Unfortunately, the measures announced at this week’s G20 Finance Ministers and International Monetary Fund (IMF)-World Bank (WB) Spring Meetings once again failed to defuse – and will even further exacerbate – the crisis of inequalities that the world has rapidly sunk into.
Six month debt service suspension extension: A shamefully inadequate response
The G20’s Debt Service Suspension Initiative (DSSI), the limited scope of which has already been proved, has been extended by another six months without broadening its coverage to middle-income countries and without including multilateral creditors or addressing the ongoing private creditor holdout. The potential savings of this new DSSI extension is merely US$ 7.3 billion for the 45 participating countries that have requested the DSSI either in 2020 or 2021. This is 37.7 per cent of all payments due during this period for those 45 countries. This means that up to US$ 11.8 billion will be diverted during those six months to private (US$ 6 billion) and multilateral (US$ 5.7 billion) creditors. At a time when the already high debt burden of low- and middle-income countries has increased by a third in 2020, the failure to provide urgently needed debt relief or to promote a prompt return to financial markets will increase the external financial fragility of developing countries. In turn, it will require a growing transfer of resources from public borrowers to their external creditors over the coming decade.
Both the G20 Finance Ministers and the IMF and World Bank contend that this will be the last DSSI extension. However, without a real multilateral debt resolution framework on the table that provides fair, timely, transparent and comprehensive debt cancellation and restructuring to all countries in need, these are doomed to years of financial distress and increasing poverty.
While institutional hopes remain pinned on the Common Framework for debt treatments, approved last November, this new(ish) scheme is far from adequate to respond to the current challenges. The Common Framework does not ensure private sector participation, it ignores the need for multilateral debt relief and leaves out most middle-income countries in debt distress. So far, the only result of the Common Framework has been the sovereign rating downgrades from Credit Rating Agencies (CRAs) to those countries daring to ask for a debt restructuring with private sector participation. Instead of supporting further regulation of CRAs, or even the creation of a public credit rating agency, as the UN Independent expert on Debt and Human Rights suggests, the IMF Managing Director Kristalina Georgieva invited countries in debt distress to confront CRAs and “have the guts to step up early” to request debt restructuring.
The IMF has also announced an extension of debt service relief to 28 low-income countries through the Catastrophe Containment and Relief Trust (CCRT). If the cancellation of debt payments reaches the maximum potential promised by the IMF, that is, if the CCRT is fully replenished to a total of about US$ 964 million, the announced debt service relief will only cover one fifth of payments to the IMF by DSSI countries in 2021 and 2022.
As the G24 stated last Monday, the world needs to “increase multilateral efforts to improve the architecture for sovereign debt resolution to facilitate expeditious debt treatments”. Following the disappointing outcome of the UN High Level Event on “Debt Architecture and Liquidity” on 29 March, the G20, IMF and World Bank have failed once more to open the discussion on the much-needed reform of the international financial architecture and the establishment of a multilateral sovereign debt resolution framework. What is even worse, the IMF Managing Director appears to believe that the Common Framework, together with progress in Collective Action Clauses and State Contingent Clauses, are actually an adequate response to debt architecture reform needs, ignoring that borrowing countries in the global south are undemocratically excluded from the discussions and decision-making around this new framework and other debt management measures.
Special Drawing Rights agenda offers opportunity to push for reform
The announced general allocation of US$ 650 billion worth of the IMF’s Special Drawing Rights will translate into low-income countries receiving around US$ 7 billion and middle-income countries around US$ 204 billion. The relatively low amounts received by these countries is the result of the fundamental flaw of the financial system. SDRs are allocated in proportion to IMF members’ quota which means that SDRs are heavily skewed towards rich countries who get around 67 per cent of the allocation, while low-income countries only get around 1 per cent.
While proposals are being discussed around mechanisms that would compel rich countries to transfer their SDRs to poorer countries free of charge, such mechanisms do not exist at present. Reform of the allocation system has been at a standstill since the 1970s. As a result, this new allocation will be insufficient to compensate for the inequalities that underpin their distribution mechanism – and IMF governance at large.
Way more is needed to enable struggling developing countries to embark on an equitable Covid-19 recovery and a climate just transition. Ahead of the Spring Meetings, 250 organisations and academics asked the IMF and the G20 to support a larger allocation, in the range of US$ 3 trillion, to allow developing countries to deal with and recover from the Covid-19 crisis, and engage in a just ecological transition. While this week’s response is disappointing, the question of how rich countries’ unused SDRs could be reallocated to developing countries will be an opportunity to raise the need for reform of the global debt architecture and the Bretton Woods Institutions (IMF and World Bank) quota system, towards building a more democratic, just and equitable system.
‘Rebuilding better’, but better for whom?
Last week the WB President David Malpass mentioned that “the world faces major challenges, including Covid-19, climate change, rising poverty and inequality”, which is a welcome acknowledgement coming from the head of the lead institution in the field of development finance. However, the response of the Bank falls short of what is urgently needed. The Development Committee welcomed the ‘Green, Resilient and Inclusive Development’ (GRID) approach, which was promoted by the World Bank as a way of responding to the crisis. As Eurodad’s recent research illustrates, the Bank’s response to the crisis provides an entry point for a more expansive scope for problematic policy influence and structural reforms, including those linked to a more substantial role for the private sector in development. This includes the promotion of public-private partnerships (PPPs) for delivering infrastructure and social services, despite their high costs, fiscal risks and the negative equity implications that they can create.
Moreover, the International Finance Corporation (IFC) – the World Bank’s arm dedicated to supporting the private sector – has a prominent position at the different stages of the WBG’s Covid-19 response, which are relief, restructuring and resilient recovery. However, as our research shows, rather than supporting local private enterprises, some IFC projects have provided finance to large commercial banks, global chains of hotels, subsidiaries of international companies and international private health providers. This raises a red flag as there is a high risk that the IFC finance does not reach those most in need of support.
Ensuring concessional resources deliver positive development outcomes
Last week donors announced their commitment to work on an early replenishment of the International Development Association (IDA), which is the WBG’s arm that provides finance to low-income countries. This is a welcome step, but we stress that a strong policy framework has to be put in place to ensure that these resources deliver positive development outcomes. Developing countries, including middle-income countries, are in desperate need of concessional resources to strengthen their public systems and to stimulate economic recovery, according to their national priorities. Efforts to reconstruct essential social needs such as health, education and water as business opportunities for global capital can exacerbate unequal access and weaken universal coverage.
World Bank Climate Change Action Plan: Alignment with Paris agreement means ending all support for fossil fuels
As an institution with a development mandate, the World Bank Group should ensure alignment with the long-term goals of the Paris Agreement, not only in rhetoric but also in action. The upcoming publication of the WBG’s new Climate Change Action Plan for 2021-2025 is an important test in this regard. As more than 150 civil society organisations (CSOs) and individuals stated in late March, it is imperative that the WBG releases an ambitious plan. This requires that the WBG immediately adopts a ‘whole-of-institution’ commitment to end all types of support for fossil fuels, both direct and indirect, as soon as possible. This has to come hand in hand with an increased support to deliver finance for just energy transition at scale. The vested interests of the private sector should not be prioritised over the needs of vulnerable communities.
US corporate tax announcements: Developing countries sidelined once again
Finally, the discussion about the future of the international corporate tax system was high on the agenda – not least as a result of the announcements from the US administration regarding their position on the issue. Unfortunately, as highlighted in Eurodad’s reaction to the recent US announcements, the voices, concerns and interests of developing countries once again seem to be sidelined in the Organisation for Economic Co-operation and Development (OECD)-led negotiations on new global corporate tax rules, and concerns over the increasing complexity of the tax system remain.
The corporate taxation agenda is strongly linked to the discussion about progressive tax systems. Effective corporate taxation, including measures to prevent large-scale international corporate tax avoidance, is an essential component of a progressive tax system. While we welcome the fact that the Managing Director of the IMF Kristalina Georgieva stressed the importance of progressive taxation, the real test will be whether everyone is ready to walk the talk. That goes for the IMF, which must ensure that its policy advice integrates strong support for progressive taxation, and it goes for governments – both at the national and international levels.
Rebuilding better means rebuilding in a fairer way
The pandemic does offer an opportunity to rebuild better but this means rebuilding in a fairer way. Global social equity needs to be at the heart of long-term plans in order to reset, reshape, rebuild and recover better. It seems clear that neither the G20 nor the Bretton Wood Institutions are up to the task, and they also lack democratic legitimacy. This is why CSOs have been calling, since the outbreak of the Covid-19 crisis, for a new Financing for Development Conference – Monterrey+20 – where the issue of global economic architecture reform can be placed firmly on the table.