Coronavirus crisis fuels pressure to forgive poor countries’ debts | Voice of America

Dozens of heavily indebted poor countries around the world were already on the brink of economic disaster before the coronavirus pandemic struck earlier this year. Many faced mind-boggling foreign debt payments that consumed up to 40% or more of their governments’ annual revenues.

As the global economy slips into an abyss due to COVID-19, these payments could quickly grow even heavier, making it impossible for many fragile economies to adequately respond to the crisis while meeting their financial obligations.

In the months since the start of the pandemic, international lenders have taken steps to reduce or postpone the debt payments of many poor countries in the short term in order to free up funds for medical resources that will be needed to fight it. the virus that has infected so far. more than 3 million people and killed nearly 217,000 worldwide.

FILE – A member of the South Sudanese Ministry of Health’s rapid response team takes a sample from a man who had recently been in contact with a confirmed case of the COVID-19 coronavirus in Juba, South Sudan on the 13th April 2020.

But proponents of debt relief argue that the concessions are insufficient and, in some cases, could leave poor countries even worse off when the pandemic finally subsides by sharply increasing debt service to the world. future and creating additional instability.

The situation has given new urgency to calls by activist groups to reduce – or outright cancel – the payments the world’s poorest countries owe their creditors.

“This pandemic is an unprecedented shock that requires unprecedented responses,” said Tim Jones, policy manager of the Jubilee Debt Campaign, a London-based organization that advocates for debt cancellation for developing countries.

“We call for a mechanism to reduce debts at all levels to make the debt sustainable,” he said.

Warnings from relief agencies suggest that the consequences of the spread of the virus could be particularly severe for countries facing war, internal conflict or political instability. A new analysis by the International Rescue Committee has found that before the pandemic ends, between 500 million and 1 billion people could be infected in dozens of “conflict-affected and fragile countries”, resulting in between 1.7 million and 3.2 million deaths.

Deep debt

The vast majority of countries served by IRC share a heavy debt burden.

These countries include Lebanon, which spends around 41% of its income on debt servicing; El Salvador, which spends 38% of its income on debt servicing; and South Sudan, which spends 29%, according to the Jubilee Debt Campaign.

These are not necessarily the most indebted poor countries in the world – Sri Lanka pays 48% of its income to service debt, and Angola 43%, for example.

But according to IRC data, Lebanon, El Salvador and South Sudan are among the most at risk of severe coronavirus outbreaks due to complicating factors including conflict and political instability.

In March, Oxfam America, a global anti-poverty and economic justice organization, began advocating for a $ 160 billion debt cancellation program to fund preparedness in poor countries around the world. whole.

Achieving any sort of large-scale global debt cancellation would require an extraordinary level of coordination among three major creditors groups: intergovernmental organizations such as the World Bank and the International Monetary Fund; sovereign countries which have granted credits on a bilateral basis; and private lenders, often represented by large financial institutions or hedge funds.

In practice, it would be easier for individual governments to write off bilateral debt, said Anna Gelpern, a law professor at Georgetown. This would require policymakers to agree to write off the money that taxpayers presumably expected to have returned.

“It’s as complicated as each of their domestic policies,” she said.

China is currently the world’s largest creditor, with outstanding loans to other countries exceeding 6% of global GDP. A recent study published by the Harvard Business Review found that among the 50 most indebted developing countries, around 15% of total obligations were owed to China.

Gelpern, who is also a senior researcher at the Peterson Institute for International Economics, said things get very complicated when the discussion comes to asking international organizations like the IMF and the World Bank to consider canceling debt. The institutions are capitalized by a large number of countries, including the United States, and should convince their shareholders to accept the plan.

The deal would likely involve funding from member countries to make up for at least part of the losses, as organizations like the IMF and the World Bank rely on debt repayment from borrowers to fund new loans to others. countries and would have to severely restrict their activities if these revenues were not replaced.

FILE – Lebanese protesters throw stones at soldiers as anger over spiraling economic crisis has re-energized a months-old anti-government movement in defiance of a coronavirus lockdown in the northern port city of Tripoli of the country, April 28, 2020.

Persuading private borrowers to write off their debt could be the most difficult proposition of all. In many cases, bonds are held by institutions – investment funds, for example – that have a legal obligation to act in the best interests of their owners. Unilateral debt cancellation could expose fund managers to legal action from disgruntled investors.

Given the complications, little has been done to date to reduce the debt burden of poor countries.

Delay payments

Responding to a request from the IMF and the World Bank, the G-20 group of the world’s largest economies announced on April 15 that it would offer debtor countries the option of suspending loan payments for the remainder of the year. , which would free up around $ 12 billion to $ 14 billion for some 76 of the world’s poorest countries.

Following the G-20’s announcement, the International Institute of Finance announced that the 450 banks, finance companies and hedge funds it represents will provide similar relief, totaling around $ 8 billion.

However, the terms of the G-20 and IIR plans would require countries to make up for missed payments over a four-year period. This would increase, at least temporarily, their debt service-to-income ratios, even as they try to rebuild themselves from the pandemic.

IMF donations

The only significant move so far to actually reduce the debt of poor countries, rather than just delay payment, has come from the IMF, which offered 25 countries grants that would cover their debt payments to the fund for the next six. month.

Large-scale debt relief is not entirely unprecedented. As part of the United Nations Millennium Development Goals, the Group of Eight Major Industrialized Countries proposed in 2005 that the IMF, the World Bank’s International Development Agency and the African Development Fund create a program that would make some poor countries eligible for 100% cancellation. claims of agencies against them. Over the next few years, 36 countries, mostly in Africa, completed the program and obtained debt relief.

However, less than a decade later, many of those same countries are back at the top of the Jubilee Debt Campaign’s most indebted countries list.

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