Where have we got to on Covid and debt relief?

April 30, 2020

     By Duncan Green     

Guest post by Ana Caistor Arendar, Head of Inequality Campaigns and Policy at Oxfam GB

Over the past weeks, we’ve seen some of the richest countries in the world struggle with the effects of Covid-19 and the health and economic emergency it has brought in its wake. But at least they have the resources to cushion the blows (should they choose to do so). Not so the Central African Republic, which has only three ventilators for the entire population, or Kenya with only 130 intensive care beds in the whole country. Poor countries face huge threats with few resources – the UN last week warned of “famines of biblical proportions”. 

Which brings us to debt. Even before the coronavirus hit, 64 countries were spending more on paying back their debts than on healthcare. That’s why there has been a growing movement of individuals, organisations and governments calling for urgent debt relief to give debtor governments immediate access to much needed funds to fight the virus and its brutal economic impacts.

In Ghana, cancelling external debt payments in 2020 would enable the government to give a cash grant of $20 dollars a month to each of the country’s 16 million children, disabled and elderly people for a period of six months.

Calls for debt relief geared up in a big way ahead of the G20 Finance Ministers and the IMF and World Bank Spring meetings. There was a strong statement by the African Union finance ministers (a move almost unprecedented given it risks breaking Paris Club rules on collusion of debtors), near unanimity in the international press on the need for debt relief (see here), over 750 thousand individuals and 200 organizations calling for debt relief, and even a plea from Pope Francis in his Easter message.

Pregnant women in Ghana
Photo Credit: Felicia Pufaa/Oxfam
A pregnant woman being supported from an improvised ambulance in Namoaligu in Upper East Region of Ghana.

Oxfam is joining the UN and others in calling for $1 trillion in debt relief. This would include the cancellation of the debt payments for 2020 for all the countries that need it, and further cancellation of the actual debts themselves where that is necessary. This is not just for the poorest countries; middle-income countries are also facing an economic tsunami.

What has been agreed so far?

The pressure in recent weeks has yielded some significant results. In a nutshell, suspension of debt payments by G20 creditors and cancellation of some IMF debt payments, for the poorest countries. But the details really matter, so buckle up for some debt nerdery:

The best way to understand what was agreed is to break it down into the three types of debt. Debt that is owed to governments (bilateral debt); debt that is owed to the IMF, World Bank and other multilateral creditors; and debt owed to private creditors like banks and hedge funds.

If we look at 2020 alone, the 76 poorest countries are due to pay $18.1bn in bilateral debt payments, $12.4bn to multilateral institutions, $10.1bn to external private creditors.

Bilateral debt: debt owed by developing country governments to other governments:

The G20 agreed to suspend debt repayment collection from 1 May until the end of 2020 for 77 countries (76 countries that belong to the IDA eligible list + Angola). These countries will have to make a formal request for suspension. Payment will be postponed and spread over three years, 2022 to 2024. There are some conditions as well including on debt transparency.

Our response: This is a suspension not a cancellation, meaning it’s highly likely this will lead to a new debt-crisis further down the line. Whilst 76 countries is a reasonable number, it is still not enough given that several middle income countries are facing severe debt challenges and budget shortfalls. To give an idea of how many countries are in desperate need of resources – over 100 countries have requested emergency financial support from the IMF. Many of those countries will be left out of the G20 deal.

Multilateral debt: debt owed by developing country governments to the IMF, World Bank or other multilateral institutions:

The IMF announced cancellation of debt payments for six months for 25 of the world’s poorest countries, paid for by donor aid.

Our response: Good start but it doesn’t go far enough. It needs to be rolled out to more countries and for longer than six months.  The IMF should also pay for it using its massive gold reserves rather than diverting vital donor aid.

The World Bank hasn’t committed to any debt relief of its own, arguing that it would damage its credit rating.

G20 Drop the debt

Our response: The credit rating argument is a feeble excuse for inaction. The World Bank must show leadership and cancel developing country debt payments, at the very least start with a suspension comparable to the G20 countries until the end of 2020 – an action with no impact on its books or rating.

Regional development banks: Nothing yet. Many are likely to take their lead from the World Bank, making it more urgent for the World Bank to act, and fast.

Private debt: debt owed to banks, bondholders and other private sector actors:

Nothing yet although a statement from the Institute of International Finance also encourages private creditor debt suspension and the G20 agreement “calls private actors” to follow a similar path (i.e. suspending debt payments for remainder of 2020). However, this is only expected to be voluntary.

Our response: this should be ensured through enforcement not await voluntary action.

What next?

Looking at the positives, those countries included in the agreements will be able to redirect resources they had previously budgeted for debt payments to health and other social priorities. The amount that the G20 agreement frees up for countries ranges from $12bn to $18bn, according to different estimations. This is one of the big problems with debt: little transparency, so little quality data.

This agreement also demonstrates that multilateralism is not dead! Many thought it impossible to get the G20 to come together on this – that they have done so, in a relatively speedy timeline, is no small thing.

Thinking optimistically, suspension leaves the door open for necessary discussions on cancellation further down the line (the agreement does indeed call for a review in the coming months).

At the meeting of G20 Foreign Ministers in July, we expect louder calls for cancellation and an expansion of the agreement to more middle income countries. Many of the latter are saddled with debt and will find themselves in deep distress if no debt relief measures are granted (e.g. Argentina or Lebanon).

Clearly the World Bank remains a big gap. The Jubilee Debt Campaign estimates that it holds twice as much developing country debt as the IMF (as almost all developing countries hold WB debt, whereas the IMF isn’t a creditor to all countries). China reacted strongly to the Bank’s failure to take action and will likely continue to do so in the coming weeks.

Meanwhile pressure on the IMF should grow. As of April 13 2020, IMF gold holdings had increased in value by $19.3 billion since the start of the pandemic. This increase alone is equivalent to more than all the debt payments (approximately $12.4 billion) owed this year by the poorest countries to multilateral institutions like the IMF and World Bank. 

Private debt is the weakest link of all. The UK plays a key role here. The Jubilee Debt Campaign estimates that African governments owe 90% of their government bonds under UK law. This means the UK parliament has the power to legislate to protect these countries from being sued for default or delays on debt payments during the suspension period. Something for which there is precedent and which Civil Society Organizations should explore.

In the medium term, there’s a need for an inclusive and well-structured debt relief initiative, including an independent body that can process claims from all actors.

Ultimately, bolder action is needed and quickly. Otherwise it’s inevitable that we will begin to see countries forced either to default or to spend vital dollars paying foreign creditors whilst their people are both sick and hungry.

April 30, 2020
Duncan Green