In April 2020, the G20 agreed to suspend debt payment requirements from the world’s poorest countries until the end of the calendar year. The aim of the move is to allow less developed countries more resources to fight the Covid-19 pandemic. However, some have said it is insufficient.
How has coronavirus affected the world’s poorest countries so far?
At the time of writing, the highest cumulative numbers of confirmed cases of Covid-19 were in the USA, Brazil, Russia, the UK, Spain and Italy. However, numbers of cases in some other parts of the world are rising. The World Health Organisation (WHO) has said it is particularly concerned about rising cases in low- and middle-income countries.
On 31 May 2020, the WHO released data showing that high numbers of new Covid-19 cases had been confirmed in parts of South America and Asia in the previous seven days. Relatively low numbers had been reported in Africa; however it is not known to what extent low rates of testing in some countries may be contributing to these low numbers. An article by the Brookings Institution argues that lack of testing and poor data about causes of death in developing countries may mean that the death toll from coronavirus in developing countries has been significantly underestimated.
Some developing countries have imposed restrictions on movement and gatherings, and all have been affected by the slowdown in global economic activity caused by the crisis. The UN summarises this economic impact:
“Most developing countries are already experiencing a significant shock. Entire sectors have come to a sudden stop, supply chains have collapsed, and commodity prices have fallen sharply, with oil prices for example hitting an 18-year low of $22 per barrel last month. The negative economic, social, and financial impacts will likely outlast the pandemic and hit hardest poor, developing and highly indebted countries”.
What has the G20 done to help poorer countries financially?
In their statement following the extraordinary leaders’ summit in April, the G20 finance ministers and central bank governors summarised their financial response to the pandemic. The measures aimed at supporting poorer countries included:
- delivering International Monetary Fund (IMF) support, including mobilising up to $1 trillion in loans;
- urgently implementing the support proposed by the World Bank Group and multilateral development banks, amounting to more than $200 billion;
- addressing debt vulnerabilities in low-income countries due to the pandemic; and
- enhancing coordination among international organisations to maximize their impact and optimize the use of resources.
“Addressing debt vulnerabilities” means that creditor countries will suspend the requirement for the poorest countries to make debt repayments and interest payments until the end of 2020. All countries eligible to borrow through the International Development Association and those defined by the United Nations as ‘least developed’ are eligible for the suspension. To take advantage of the suspension, beneficiary countries are required to commit to use the extra resources “to increase social, health or economic spending in response to the crisis”. The debts will continue to accrue interest throughout 2020.
The G20 called on private creditors to also suspend debt service payments on comparable terms, and on multi-lateral institutions to explore also suspending payments.
As of 29 May 2020, 36 of 77 eligible countries had applied for the scheme.
What has the reaction been?
The United Nations Development Programme welcomed the debt suspension initiative, saying it would “play a critical role in helping countries to prepare, respond and recover in the face of the Covid-19 pandemic, including to navigate its devastating social and economic impacts”. However, the UN argued that the initiative should be extended to all countries vulnerable to a debt crisis, including most low- and middle-income countries. The UN also argued for further mechanisms to ease debt burdens, because even before the pandemic some countries had unsustainably high debt and insufficient resources to meet the sustainable development goals. These mechanisms could include instruments such as debt-to-health swaps, which allow an indebted country to invest in health systems instead of repaying debt.
The international development charity Oxfam argued that debt payments for 2020 should be cancelled rather than suspended. It said that this should also apply to payments due to private creditors and multi-lateral institutions.
Some have argued for different additional interventions from multi-lateral institutions and developed countries. Several commentators, including economists Brad Setser of the Council on Foreign Relations and Adam Posen of the Peterson Institute for International Economics, contend that the IMF should do a large special drawing right allocation to increase the world’s reserves in response to the crisis.
On 10 June 2020, the Lord Bishop of Worcester is due to ask the Government “what steps they are taking to ensure that G20 countries cancel any debt owed to them by the poorest countries”.
- Homi Kharas, ‘What to do about the coming debt crisis in developing countries’, Brookings, 13 April 2020
- Maurice Obstfelt and Adam S Posen (eds), How the G20 Can Hasten Recovery from Covid-19, Peterson Institute for International Economics, April 2020
Image by the G20 from the G20 (Saudi Arabia) website.