Dealing with the debt challenge

'For the most impoverished countries, the crisis and associated economic shutdowns came at a moment of particular peril. In 2019 almost half of all low-income countries were assessed by the World Bank and the International Monetary Fund to be either in debt distress or at a high risk of it. With the pandemic, the debt burden has gotten much heavier due to the devastating contraction in output, remittances and family income across the developing world. If this mounting debt goes unaddressed, it could lead to a lost decade for the world's poorest people.' - 'To cope with Covid, the world's poor need debt relief' by David Malpass, President of the World Bank Group

Developing countries' debt exceeded this year by around six per cent to 49 percent, according to the International Monetary Fund (IMF). Although a big jump in its own right, the debt had already been rising quite fast since 2012 - from 29 per cent to 43 percent till last year. The fact that G20 group decided to extend the deadline for their Debt Service Suspension Initiative (DSSI) till next year's July will bring greater fiscal space for poor countries - around $31 billion remain deferred, for instance, which otherwise have to be paid during May till December this year.

While DSSI has been meaningful in the short run, although a lot more debt relief is needed even in this period, given the huge extent of fiscal and welfare spending needed in the wake of the pandemic. Josh Zumbrun, for instance, in his Wall Street Journal (WSJ) article 'Poor nations get 6-month extension on suspended debt payments' pointed towards the lack of participation by private creditors as a main stumbling block for the DSSI's effort to have any meaningful significance in the following words: 'Only official bilateral debt, meaning debt held directly by other governments, is eligible for the [DSSI] program. Most debt from the world's poor countries, however, is held by private investors.'

This lukewarm performance of DSSI naturally came under criticism: Oxfam International's debt policy lead, Jaime Atienza, for instance highlighted: 'With the economic chaos caused by Covid-19 threatening to set the fight against poverty back decades, extending the Debt Service Suspension Initiative was the bare minimum the G-20 could do'. Similarly, David McNair from the ONE Campaign pointed out: 'It didn't go far enough, private creditors have done little to support the world's poorest countries. G-20 countries need to get them on board to support the debt service standstill, but time is running out.'

On the other hand, according to the same WSJ article, the G-20 has urged private-sector creditors to participate, but there has been little interest. Countries have been largely unwilling to ask for debt suspension from private creditors because such a move would potentially damage their credit ratings. "We are disappointed by the absence of progress of private creditors' participation," the G-20 said. Yet this remains a poor defence when the G20 countries have remained short of providing any 'alternative' to developing countries, in terms of enabling developing countries to not worry about their credit ratings, by providing greater financial resources to developing countries both by themselves, and also through engaging multilateral donor agencies. A larger debt moratorium/relief by G20 and multilateral agencies, would have also contributed to lessening of worry of developing countries; which is yet to happen even after many months of living through the pandemic onslaught.

Moreover, as an article 'A good but incomplete start to debt relief' by Paola Subacchi' points out the extension in DSSI by G20 countries just pushes 'the debt-repayment can down the road, leaving the deferred payments to be repaid in full between 2022 and 2024. Debtor countries thus will have to make up the difference with larger repayments, and might even need to borrow more to service their frozen debt, in addition to any other debt taken on during the COVID-19 crisis. The 46 countries that have applied for debt suspension so far eventually will have to cover $5.3 billion of postponed payments, on top of $71.54 billion of pre-existing commitments; and any other debt contracted since the COVID-19 outbreak will be added to the burden.'

Given the gravity of the pandemic in terms of both being a public health crisis, in addition to being an economic, it is important to try some out of the box solution for dealing with the brewing debt crisis. Practicing some modern monetary theory may provide some meaningful cushion from the high level of debt on poor countries. A significant proportion of debt owed by developing countries is US dollar denominated, and it may make sense for the Federal Reserve to own this debt of the 73 low-income countries, and pay this by 'printing dollars' at the scheduled times of payments for each debt. Such a step may bring no disturbance to the global financial system and macroeconomic fundamentals, since the money will be printed out of thin air, and there will be no double injection as payments will still be made from one single source. Perhaps, the European Central Bank, and the People's Bank of China can take the same route. According to the same article by Paola Subacchi, after all 'China holds about 63% of overall debt owed to G20 member states.'

Another major source of debt to developing countries is by the IMF and the World Bank. In this regard, a recent WSJ article 'The World Bank should lead in debt relief' highlighted the following: 'Between now and the end of 2021, the world's poorest countries will owe $18.2 billion to the multilateral banks including the World Bank and IMF. As president of the World Bank, Mr. Malpass rightly advocates that the G-20 must do more on debt relief, but the World Bank has yet to take any steps to suspend debt-service payments. By the World Bank's own estimates, the pandemic could result in 150 million more people falling into extreme poverty.'

While the World Bank should look to reschedule more debt and for longer time periods, the IMF should in addition to this, provide greater support to recipient countries by bringing in larger supply of SDRs (Special Drawing Rights). Moreover, an article 'Campaigners urge IMF to sell gold to provide debt relief' by Larry Elliot in the Guardian points out: 'The IMF holds 90.5m ounces of gold, or 2,814 metric tonnes, worth about $175bn at current prices. A sharp rise in the price of the precious metal means that since the start of 2020 the value of the IMF's gold reserves has increased in value by $38bn. The JDC [Jubilee Debt Campaign] said selling less than 7% of the IMF's gold would generate a $12bn profit, which is enough to cancel the debts owed by the 73 poorest countries until the end of 2021 and still leave the Washington-based organisation with $26bn more gold than it held at the start of the year.'

In addition, as Paola Subacchi points out the following: 'So far, the international community has relied on a contractual approach to prevent and resolve sovereign-debt problems. But this method often involves deep asymmetries between the treatment of debtors and creditors, resulting in an inequitable distribution of losses among different types of creditors. We need a multilateral agency specifically tasked with coordinating creditors, sharing information, and reducing the scope for information arbitrage.'

According to IMF's estimates, in the wake of the pandemic, the global economy is likely to lose around $12 trillion during 2020-21, while the World Bank points towards dire consequences of this lost economic activity, which has resulted in pushing millions of people before the poverty line. And while the chief economists of both these Bretton Wood institutions rightly call for 'fiscal stimulation', a much better debt relief effort is urgently required.

(The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund) He tweets@omerjaved7

Copyright Business Recorder, 2020