In times of pandemic, debt relief efforts must go further | Coronavirus pandemic


In recent months, due to the devastating effect of the coronavirus pandemic on the global economy, the fiscal clock has been ticking faster than ever for many small, vulnerable states around the world.

With Joe Biden’s victory in the US presidential election, which increased the possibility of meaningful global cooperation on pressing issues disproportionately affecting vulnerable states like climate change, coupled with the development of several COVID-19 vaccines that could help bring the pandemic under control, these countries have recently started to see a faint glow at the end of the tunnel.

But the road to economic salvation is still strewn with pitfalls, and the coming winter months are still set to be long and dark for many countries whose economies are collapsing under the weight of the additional debt they have accumulated to meet. to the pandemic.

Against this backdrop, the recent G20 decision to extend until mid-next year the Debt Service Suspension Initiative (DSSI), which it introduced in April to help the world’s poorest countries to deal with the economic fallout from the COVID-19 crisis, was welcome.

But extending the DSSI alone cannot solve the huge pandemic-related fiscal challenges facing the poorest countries. Encouragingly, the G20 seems to recognize this and has also introduced a ‘Common Framework for Debt Treatment Beyond DSSI’, which aims to address the problem of unsustainable debts that many DSSI-eligible countries will continue to meet in the aftermath of the pandemic on a case-by-case basis.

While these G20 initiatives are undoubtedly important steps in the right direction, their scope is limited. For all the nations of the world to recover from this unprecedented public health emergency, the debt relief efforts of the world’s richest nations must go even further.

The problem of eligibility

The main factor limiting the success of these well-intentioned G20 initiatives to mitigate the economic impact of the pandemic is “eligibility”.

Currently, some 73 low-income countries around the world are eligible for DSSI. However, many small, middle-income countries, which are also suffering the economic consequences of the pandemic, are excluded from this initiative and its extension.

A recent Commonwealth Secretariat document showed that due to new fiscal pressures introduced by the COVID-19 pandemic, debt-to-GDP ratios of the 32 small Commonwealth member states could increase by an average of 27 percentage points by now. the end of 2021 – double the expected increase for other developing Commonwealth countries.

Despite the economic devastation they are experiencing, some of these small states are not eligible to participate in DSSI because after years of careful financial management and investment, they are now classified as ‘middle income’ countries, no. ‘not in need of financial assistance. assistance.

Of course, although they are in the middle income bracket, these countries are also grappling with the loss of income they have suffered due to the pandemic, and they could face an economic collapse if they do. do not receive the necessary assistance from the international community. And their economic struggles will inevitably have an effect on the global economy.

If the G20 is to avoid the very global disruptions that it sought to avoid through the DSSI and the Common Debt Framework, it must support more than the poorest countries. They must extend eligibility for G20 debt restructuring initiatives from the poorest countries to all nations in need of support.

Most economists agree that, regardless of a country’s income classification, debt relief is necessary when persistent debt overhang is accompanied by negative or sluggish growth. In other words, there is no economic justification for the G20’s refusal to extend eligibility for its debt restructuring and suspension programs to struggling middle-income countries. In fact, it is clear that offering support to more countries would accelerate the global economic recovery.

Widening the scope of these programs also makes political sense for G20 member states.

If small, vulnerable states do not receive debt relief, they will not be able to meet the most basic needs of their citizens. This could lead to new waves of migration, increasing the pressures already on the wealthy nations that are part of the G20. In addition, a lack of debt relief could lead some small middle-income countries to become dependent on international aid.

The need for debt cancellation

But simply expanding the eligibility criteria for COVID-19 debt restructuring and suspension programs will not be enough to get the global economy back on track, either. Given the scale of the economic disruption caused by the pandemic, some countries will need more than debt relief – they will need a good start.

Overall, it is well accepted that once the pandemic is over, the global economy will be very different from before. Countries are now spending on recovery, but once the dust settles, they will all find themselves in a much different economic landscape than before the pandemic.

As such, future income will be difficult to predict and this means that debt restructuring exercises under existing regimes or a new, expanded initiative could prolong, rather than resolve, some core solvency problems. States.

The G20 should therefore work with the IMF and the World Bank to help countries better understand their growth potential and, when projected incomes are very uncertain, plan for outright debt relief.

This way, heavily indebted and potentially insolvent countries will have the space and time to restructure their economies based on the opportunities presented by the post-COVID-19 landscape.

Commonwealth support

The Commonwealth is uniquely placed to assist the IMF and the World Bank in their debt relief efforts, given its already strong partnership with these institutions and its long-established and well-respected debt management program.

We can only tackle the debt sustainability issues created by the pandemic and prevent the potential effects of such crises, by expanding eligibility for existing debt relief programs and offering debt cancellations to most of them. countries in difficulty. These goals can be achieved through increased collaboration between the Commonwealth, global governance institutions and the G20.

After months of uncertainty and suffering, we now appear to be on the verge of winning the fight against COVID-19. Vaccines can help us defeat this deadly virus in the months to come, but if we don’t act now, its effects on vulnerable economies around the world will continue to devastate millions of people for years to come. This pandemic could be an opportunity to build a fairer and more prosperous world for all. But we must act now and address the systemic challenges facing small, vulnerable countries if we are all to enjoy the dawn of a post-COVID-19 world.

The opinions expressed in this article are those of the author and do not necessarily reflect the editorial position of Al Jazeera.


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