Why Debt Relief should be part of the Covid Response

March 26, 2020

     By Duncan Green     

This blog was launched slap bang in the middle of the 2008 global financial crisis. Its early months were dominated by discussions of its impact on poor countries and communities. So yesterday I had a plus ca change moment when I read a cluster of excellent pieces discussing the need for urgent debt relief for poor countries struggling to cope with the Covid Crunch. Here’s a summary and links.

According to the Guardian:

‘On Monday the heads of the World Bank and the International Monetary Fund expressed support for debt relief to help countries strengthen their health systems in readiness.

During a conference call for G20 ministers on Monday, the IMF’s leader, Kristalina Georgieva, pointed to the replenishing of funds used in a debt relief and aid mechanism during the 2014 Ebola epidemic that struck three African countries.

The ministers also requested that principal payments – the actual debt payment, as opposed to interest charges – be waived for fragile states, where people are deeply vulnerable to a pandemic.’

David Malpass, the head of the World Bank rather spoiled the party by reverting to some bad-old-days demands for market conditionalities in exchange for debt relief:

‘He went on to say that countries should implement free-market economic policies, such as removing regulations and subsidies.’

That’s a bit rich given the wholesale nationalisation of everything going on in many rich countries. More on that from Eurodad.

For those who want to see the numbers crunched, head over to the Eurodad website, for a stats-tastic summary of its assessment of the costs and implications of an immediate debt moratorium for 69 countries classified as Lower Income Economies.

‘A moratorium on public external debt service could free up to US$50.4 billion over the next two years. The estimations highlight the potential of a debt moratorium as a mechanism to release significant existing domestic of resources to redeploy in the fight against COVID-19.’ (see table)

Scott Morris at the Center for Global Development got a bit more granular, setting out ‘5 Principles on the Uses and Misuses of Debt Relief’:

‘The first overriding principle is that any debt relief initiative should serve the goal of maximizing financing for LICs now. This has not been the goal of past debt relief efforts, which either attempted to deal with long term solvency issues (debt “overhangs” in countries that were a drag on growth and development) or short-term payment issues related to specific loans and projects.

Second, debt relief can be useful if it frees up fiscal space, particularly by targeting creditors who otherwise won’t be forthcoming with any new or scaled up financing. World Bank president David Malpass has called on G20 bilateral creditors to offer a moratorium on payments and to consider debt forgiveness in the months ahead. Who are we talking about here? These days, China’s policy banks (China Development Bank and China Exim Bank) are the largest among bilateral creditors to LICs. But the category also includes development finance institutions and export credit agencies in Europe, Japan, and the United States. These countries are unlikely to look to their external lenders for a major scale up as they focus on the pandemic in their own economies. With that in mind, the simple measure they could take is to pause on payments due now and consider outright forgiveness as Malpass has suggested.

Third, debt relief should not impair the institutions that will be forthcoming with scaled up financing. Unlike the bilateral creditors, the multilateral development banks (MDB) are already on the frontlines of crisis response. In the same statement, Malpass announced expanded lending for developing countries. Introducing the prospect for MDB (or even IMF) debt relief in the current context would complicate efforts to scale up their new financing to deal with the crisis. It would also be a needless distraction for donor countries, who would be called upon to “compensate” the MDBs for the forgone revenue from the debt write downs. Donors resources would be better employed toward direct crisis response, particularly health measures that will depend on grant money.

[pretty sure Eurodad would disagree with that one – let’s see if they respond in the comments]

Fourth, debt relief should not be encumbered by conditionality. Again, the goal is to maximize spending now. Past debt relief efforts have been tied to IMF programs (with IMF conditionality). And here David Malpass gets it wrong by invoking “structural conditionality” as an element for World Bank crisis response. There may be a case for imposing conditions to deal with longer term structural issues in some countries, but that case is weak during a global crisis. If G20 bilateral creditors can be convinced to offer a moratorium on debt service and even consider debt forgiveness, they should do so with no strings attached.

Finally, when it comes to debt relief in the current crisis, we’re not necessarily all in this together. Past debt relief efforts have appropriately sought to sweep in all creditors to share the pain of debt forgiveness. Different types of creditors (government and private) can greatly encumber the process of achieving a sweeping agreement. All the more so today when many LICs have commercial creditors. It’s simply not worth the time and effort today to extract debt relief concessions from all creditors, particularly as with principle #3, it would be best to avoid seeking creditor relief from some types of creditors. As much as it might be desirable for commercial lenders to write down their loans, or simply offer a payment moratorium, there’s little to be gained by holding up other channels of debt relief as part of an extended negotiation. The most expedient path would be to focus on the G20 countries and their official lending activities as the target for debt relief.’

[again, over to Eurodad on that one]

We will be seeing a lot more on the economic impact of Covid-19 on poor countries, and the attempts to alleviate the pain. And if you want to track what individual governments are doing, ODI has set up a fiscal and monetary policy tracker, which shows that so far, the UK is at the top of the big spenders league table with a stimulus of 18.9% of GDP. Events, dear boy.

March 26, 2020
Duncan Green