In a statement by the UK-based Jubilee Debt Campaign, developing countries are paying more to service their debt at the highest rate in two decades. Sovereign debts have been exacerbated by the coronavirus pandemic, limiting the ability of developing countries to manage the economic and social effects of the current crisis.
Efforts to mitigate the effects of the pandemic and the resulting global economic crisis include the Debt Service Suspension Initiative (DSSI). According to the World Bank, the DSSI has helped countries focus their resources on fighting the pandemic and safeguarding the livelihoods of millions of the most vulnerable people. Implemented in May 2020, over $10.3 billion in relief and aid has been distributed to over 40 eligible countries. The DSSI has temporarily suspended debt payments for low-income countries (LICs) until December 2021 without a framework that addresses the ongoing health and debt crisis. Instead, the DSSI proposed debt restructuring strategies. This is problematic because unsustainable sovereign debt undermines economic growth and national welfare by incentivizing debt repayment rather than improving essential public services, education and health care.
Responding to the high standards of debt service, Heidi Chow, Executive Director of Jubilee, pointed out that “the debt crisis continues to engulf low-income countries with no end in sight unless there is a urgent action for debt relief”. In a call for action to China and other G20 countries, World Bank President David Malpass reiterated the need for immediate debt relief for developing countries, warning that delays are mounting. risks to their economies from rising interest rates, currency devaluation and food insecurity. Malpass went on to announce that the poorest countries face $35 billion in debt service payments to public and private sector creditors. Amid the challenges of the pandemic and financial burdens predating the current global crisis, national governments and supranational institutions should prioritize people’s lives and livelihoods by developing debt restructuring strategies that respond to the individual needs of each nation’s economy and population.
In an IMF study, if a country is no longer able to service its debt, the government can undertake economic reforms and fiscal adjustments while asking the IMF for a loan to cover the deficit – it works when the debt is limited or temporary. If this strategy is not feasible, then the country whose debt is unsustainable must coordinate with creditors to renegotiate repayment terms – this is called sovereign debt restructuring. Current strategies for the debt restructuring process include transferring debt from the private sector to public sector institutions. According to the Chairman of the UN Committee for Development Policy, an alternative solution to the debt crisis would include greater liquidity provision and flexible multilateral financing, as well as a (temporary) contingency mechanism that would facilitate debt renegotiations. debt. In addition, any restructuring program should include a grace period to allow the country to recover from the crisis before diverting the resources needed to repay loans and interest. This will allow time for the economy to regain its strength and allow its debts to be paid off without harming its prospects or harming its people.
The DSSI did not cancel the debt, but rather delayed payments and continued to accrue interest. In the process of negotiating debt restructuring, two things must be considered: interest rates must be lowered and the benefits of the DSSI must be extended to middle-income countries that are at risk of increasing poverty levels. . Moreover, while the Initiative was adopted by Paris Club members, China and other creditors, it lost credibility when other private creditors did not adopt it and debtor countries did not use it to avoid negative sovereign credit ratings. Of the 73 countries that could have benefited from the programme, only Chad, Zambia and Ethiopia have requested debt restructuring within the framework of the G20. The common DSSI framework aimed to address insolvency and liquidity issues, as well as the implementation of a reform program supported by the International Monetary Fund (IMF). Restructuring methods have not had the desired impact, with LICs like Ethiopia being downgraded. Because credit ratings decline, the cost of borrowing from international investors increases. This ultimately prevents governments from qualifying for future loans/grants and investing in national health infrastructure.
The DSSI framework ended at the end of 2021 and the G20 failed to implement debt restructuring reforms that would help vulnerable countries tackle the looming global debt crisis. We need a sustainable economic recovery strategy to ensure quality of life and security in states at risk. High levels of debt can hamper a government’s ability to provide the social services necessary for the well-being of citizens and can divert resources and energy from implementing long-term development strategies. According to the IMF, a fundraising campaign is currently asking for grants from a wide range of donors to extend debt relief in the form of grants to the most vulnerable countries until 2022. The Recovery Initiative calls for a bilateral, multilateral and private sector debt relief similar to the Heavily Indebted Poor Countries Initiative. Essentially, it would provide debt relief, a new allocation of special drawing rights from the IMF, and increased funding and capital for multilateral and regional development banks. These measures are essential in efforts to finance health, social protections and climate transitions for developing countries in need. The priority given to paying down debt over funding essential public services reflects the value of capital markets relative to people.
Developing countries are vulnerable to external intervention in national governance because of the incentives to accept economic conditionality and respond to the interests of more powerful states and their creditors. Defaults and economic collapse are imminent unless G20 creditors collaborate and implement an improved debt restructuring strategy and suspend debt servicing during the negotiation period. Decision-making at the multilateral level requires clear communication, collaboration and compromise between all parties involved. The welfare of the public cannot be compromised. While navigating the socio-economic challenges of debt collection during a global pandemic, the protection of national public interests and an adequate standard of living must take priority. There must be a coordinated effort between supranational institutions, such as the IMF and World Bank, and private creditors to protect national public interests. One of the main dilemmas in creating a framework for debt restructuring is to take into consideration that each country and region has different economic environments and needs. The volatility of the current global sociopolitical scene has created an opportunity to reimagine and restart economies with a different framework that values inclusivity, climate action and development goals at the heart of the recovery effort.