To avoid a devastating debt crisis across the developing world sparked by Covid-19, debtor countries will have to stand together and negotiate hard with creditors to agree necessary debt standstills, restructurings and debt cancellation. Promising signs are emerging that African countries are beginning to provide this necessary leadership.
This week, G20 leaders agreed to suspend debt repayments for 76 of the world’s poorest countries until the end of the year, and the IMF cancelled debt repayments for a smaller group of 25 countries for up to two years.
The money freed up – $20 billion in the case of the G20 and $213 million for the IMF – will provide some of the necessary finance for those countries to boost health systems, but it is a tiny fraction of what they will need overall to cope with the crisis and the economic fallout.
Developing countries have been hit hard, not just by the Covid-19 health crisis and the economic fallout resulting from the measures they are taking to combat it, but also by a wave of external shocks (PDF). Large scale capital flight is sucking private finance out of their countries, the value of their currencies is falling, and the price of commodities – on which many of the poorest countries depend for exports – have slumped.
Larger debt standstills are needed now
A serious plan for the developing world should involve a widespread debt standstill, backed by a massive injection of new finance, followed by the restructuring and cancellation of unsustainable debts. Creating as much spending room in developing countries for the kinds of major government programmes to keep economies afloat that have been implemented by developed countries should be a priority. The G20 is right that the best immediate way to achieve this is through debt standstills, as these allow countries to immediately divert money from repaying creditors to healthcare and other priorities.
However, the IMF’s approach of cancelling repayments – rather than just delaying them as the G20 has done – is better, but a much more comprehensive plan is needed, involving all creditors and all developing countries. The UN has estimated (PDF) that $415 billion is due in debt repayments in 2020: this is the scale of debt standstill that is really needed this year.
Widespread debt standstills are crucial because unlike rich nations, developing countries are unable to use the power of their hard currencies to engage in versions of ‘printing money’ like quantitative easing or monetary financing. Sadly, the US seems set on blocking the only other alternative – which I called for a month ago – a largescale creation of Special Drawing Rights (SDRs), the world’s reserve asset.
Another option is a major boost to international aid. This also seems unlikely at present, but should still be pushed for, in particular to protect the poorest and most vulnerable, and to help those countries that are worst hit, and those which will gain less from debt standstills because they have lower debts.
Debt cancellation will be needed in the future
A widespread developing country debt crisis is likely, and a new system will be needed to avoid the lengthy, difficult and damaging processes that characterised previous debt episodes. Even before this Covid-19 crisis began, nearly half of all lower-income economies were judged by the IMF to be at high risk of ‘debt distress’ (being unable to meet payments due on their debts). The sheer scale of the crisis will push many developing countries into severe debt problems. And even if widespread debt standstills can be agreed, a large number will not emerge unless some of their debt is cancelled. The last widespread debt cancellation programme in developing countries was a long and damaging affair; the mechanisms for resolving debt problems that emerged in the 1980s were not finalised until 2006.
In 2015, the UN General Assembly agreed on the principles upon which debt restructuring should take place, but principles that are not embedded in institutions, mechanisms and processes are not likely to be implemented. It’s now time to put in place the UN’s companion proposal to create an independent institution to balance the interests of debtors and creditors, as well as rapidly and fairly restructure debt to prevent debt crises from causing long-lasting damage.
African countries lead the way
All of these outcomes will depend on the ability of debtor countries to coordinate, collaborate and stand together. African countries are beginning to show this necessary leadership. In February, representatives from 18 sub-Saharan African countries met at a conference in Kampala, Uganda, co-hosted by ODI, to discuss how to better coordinate and collaborate on debt issues. The report of the conference shows how they are grappling with critical issues: how to negotiate effectively with creditors; how to examine the fine print so they get fair terms and conditions; and how to deal with the wave of unsolicited – and often fraudulent or highly suspect – proposals that some creditors make to them in times of crisis.
In March, African finance ministers (PDF) were quick to put on the table concrete proposals for how $100 billion could be freed up immediately through debt standstills and other measures for the continent to spend on combatting the pandemic. African leaders have also collaborated with other world leaders to demand a stronger international effort, including comprehensive debt standstills and SDR creation.
If the world is to avoid a wave of debt crisis that will be particularly damaging to the poorest countries, a comprehensive programme of debt standstills, emergency finance and ultimately debt cancellation will be needed. African leaders are leading the way with sensible proposals: it’s time for the international community to follow their lead.