A global debt crisis looms large — can you save the poor from getting poorer?
The COVID-19 global pandemic has had several adverse impacts on the global economy and its various facets; probably none more glaringly apparent than the debt crisis looming large over developing and emerging economies all over the world. With some countries preparing for the imminent crisis and others overburdened with sovereign debt and a lack of growth prospects, the world today stands in desperate need of cooperative action to restructure debt and mitigate losses.
According to the IMF, several emerging and developing economies will be in need of trillions of dollars’ worth of public aid assistance once their national resources fall short of combative action in the coming months. In collaboration with the World Bank and several other multilateral funding bodies, the IMF will be looking to “provide much-needed funding amid the pandemic as government revenues (have) collapsed alongside economic activity, while private capital flows (have come) to a sudden stop.” In addition to this, several G20 creditors have granted extended loan moratoriums to countries most in need, pushing private debt to grow as well.
The writing, however, is on the wall. Estimates place almost half of the world’s low-income countries to already be in ‘high debt distress’. It is not just the poorest countries who are at risk either. “Debt burdens among the 30 biggest emerging economies rose by 30 percentage points of gross domestic product between January and September to almost 250 per cent”, according to the Institute of International Finance.
Yet, the WEF claims that the pandemic shock has not yet morphed into a ‘full-blown middle-income emerging market debt crisis’, and remains limited chiefly to low-income countries. A part of the reason for this is the fact that global liquidity conditions have been rather favourable over the last few months (owing to increased central bank quantitative easing measures in advanced economies), thereby allowing many middle-income countries to borrow from global capital markets. “According to the IMF, emerging market governments issued $124 billion in hard currency debt during the first six months of 2020, with two-thirds of the borrowing coming in the second quarter.”
As it stands today, the global response to the looming threats has been rather unsystematic. Although coordinated action has currently been deficient, the Biden presidency in the United States might prove to be instrumental in reviving multilateral action in the coming year. This will be especially crucial, as many believe that the riskiest period may still lay ahead. A rather chilling excerpt from the IMF reads:
“Experience from the 1918 influenza pandemic suggests the possibility of an even more severe second wave, especially if it takes until mid-2021 (or later) for an effective vaccine to become widely available. Even in the best-case scenario, international travel will face roadblocks, and uncertainty among consumers and businesses is likely to remain high. World poverty has risen sharply, and many people will not be returning to work when the crisis passes. The political ramifications of the crisis in advanced economies are also still unfolding. The backlash against globalization, already rising before COVID-19, may intensify.”
Although several emerging economies have also accrued debt in their local currency, the accumulation of business-led sovereign debt is going to drive governments to massive bailouts for powerful national corporates (as has been the case with the United States and Europe). Additionally, central bank-led purchases of corporate bonds in order to support local firms has only added to the stress. Global debt relief advocates have, in this regard, championed several possible relief measures to deal with the looming crisis.
Advocates for Relief
Debt suspension, as a part of the debt service suspension initiative (DSSI) launched by the G20 in April 2020 has delivered about $5 billion in relief to 46 (out of 73) of the world’s poorest economies. The period has been extended till mid-2021 and could yet be expanded further. A recently launched DSSI framework has even considered expanding this to cover middle-income nations as well.
Yet, it will be prudent to remember that although the DSSI has eased public finances in part, the debts must eventually be paid back. Yet, a lack of uptake remains the chief concern: ‘so far, agreed relief is less than a tenth of this year’s increase in external borrowing needs’, according to the IMF. Critics believe this is owing to the fact that the framework fails to take account of debtor countries’ and private lenders’ concerns. “The language is good but there are major questions on implementation,” said Mark Sobel, US chair of Omfif, a central banking think-tank, and former US Treasury official. “Until they are resolved, we won’t believe we are on the right path.” (FT)
Relief measures from multilaterals and private investors may also prove to be crucial in tackling any ensuing debt crisis. Multilateral organisations such as the World Bank and the IMF are the biggest lenders to poor countries during times of need. In fact, 46% of their total public debts are from lending to the poorest countries. Commercial private lenders too hold about 19% of the DSSI countries’ debt stock and are owed almost $12 billion in repayments this year alone.
Several global leaders, NGOs and other bodies such as the United Nations have called upon such lenders to join moratoriums on repayments or even cancel some outstanding loans. So far, the IMF has supplied almost $102 billion to 82 countries, and even cancelled repayments from the poorest; whilst the World Bank has set aside $160 billion to lend over the next 15 months, with over $80 billion being allocated to other development banks for distribution.
Although this seems to be fruitful in the short run, the long run suitability of such a decision has been called into question. The Financial Times writes: “Multilaterals borrow cheaply in the capital markets because they are first in the queue ahead of other creditors and have the highest possible credit ratings. This lets them lend at ultra-low rates and finance grants. David Malpass, World Bank president, has said that a moratorium would ‘undercut’ its ‘dependable access to global capital markets’.” This would damage the creditworthiness of private investors in capital markets as well. Although many believe that debt relief should not be seen in negative light, credit rating agencies argue that this would go ‘against their duty to their clients’.
Role of SDRs: The International Monetary Fund allocates Special Drawing Rights to its 190 member countries, broadly in line with their share of the global economy. In 2009, the last allocation of about $250 billion was made post the global financial crisis. In this regard, it may prove prudent to rally behind the IMF in allocating more of its special drawing rights, which eligible countries may sell for liquidity. In spite of the World Bank, the UN and governments across the world supporting this, the proposal was vetoed by the Trump administration. Advocates of the above hope the Biden administration will look at things differently.