– Failure to accelerate global efforts sufficiently to contain the contagion of COVID-19 has dramatically worsened the disaster in developing countries. Significantly insufficient funding for relief, recovery and reform efforts has also hampered progress, including sustainable development.
Uncertain and uneven recovery
After more than a year, “poor countries face serious setbacks on their development path, encumbered by soaring debts, high default risks and a limited ability to inject desperately needed liquidity,” observed participants at a recent United Nations conference. Forum.
Chief Economist of the International Monetary Fund (IMF), Gita Gopinath, estimates US $ 9 trillion into the economic benefits of an adequate acceleration of mass vaccination, affordable testing, tracing and treatment at a cost of $ 50 billion.
Global global projections mask disparities between and within countries. With apartheid vaccine and the constraints of developing countries, uneven containment and recovery from the pandemic exacerbated previous inequalities, pushing poor countries and populations further back.
Government responses have been severely constrained by macroeconomic policy space, in particular access to finance. “Unconventional” monetary policies since the 2008 global financial crisis, especially low interest rates, have contributed to this.
Thus, high income countries (HICs) have borrowed and spent much more on relief and recovery. While rich countries have been able to borrow and spend heavily, developing countries have very limited fiscal space due to reduced borrowing capacity.
Often, with poorer credit histories and ratings, developing countries typically face much higher interest rates on external borrowing. The burden of their external debt as a share of national income was already relatively higher before the pandemic. All of this prevented them from adopting more daring expansionist efforts.
Unsurprisingly, developed countries represented nearly 80% of all budget efforts. Compared to 16% of their national income, the least developed countries increased public expenditure by only 2.6% on average. Faced with funding constraints, many low income countries (LICs) have even cut spending!
Insufficient international support
Total resource flows to developing countries have declined as official development assistance (ODA) and foreign direct investment (FDI) have declined. IDE in Developing economies decreased by 12% in 2020: by 37% in Latin America and the Caribbean, 18% in Africa and 4% in Asia.
While donors reduce bilateral aid commitments by 36% in 2020, net ODA of 13 rich member countries of the OECD Development Assistance Committee (DAC) decreased by $ 4.7 billion – driven by a 10% reduction in the UK – because “DAC donors have prioritized their national responses to COVID at the expense of international aid”.
International support to developing countries at this time of great need has been woefully insufficient. Despite grateful that “suspending debt service is a powerful and swift measure that can bring real benefits to people in poor countries,” said the World Bank denial of debt service cancellation.
The Bank says this would have a negative impact on its credit rating, reducing its ability to borrow at low preferential rates for loans to middle income countries (MICs) and LICs on concessional terms. Unsurprisingly, debt cancellation was not considered by the Bank.
Since April 2020, the IMF’s Disaster Control and Relief Trust has granted a around US $ 500 million, or 0.2% of GDP for 28 heavily indebted LICs, its poorest and most vulnerable members. This relief has been extended twice – for six months each time – to cover all eligible debt service payments owed to the Fund, estimated at $ 238 million in the last lap.
The G20 Debt Service Suspension Initiative (DSSI) is even worse, only delaying repayments. Interest continues to accumulate to be repaid later. Despite two extensions, the lack of enthusiasm of borrowing countries for DSSI is hardly surprising. As private creditors did not join, DSSI only covered 2% of total debt service payments due in 2020.
Take advantage of the new SDRs
With the backing of the Biden administration, $ 650 billion in new IMF Special Drawing Rights (DTS) should be approved in august. But that’s barely half of a trillion SDR (worth $ 1.37 billion) The Financial Times deemed necessary.
SDR allocations are proportional to countries’ holdings and voting rights, mainly benefiting developed countries, in particular European countries. Allocations for the largest developed economies in the Group of Seven (G7) amount to $ 272 billion Africa only gets $ 33.6 billion! Nonetheless, the new SDRs should bring welcome relief to many countries.
Developed countries that do not need to use their new SDRs should transfer their new allocations to the 15 “eligible” multilateral financial institutions, including the IMF, the World Bank and regional development banks. These should be used to expand their loans to developing countries on preferential terms.
Calling for a massive recapitalization of multilateral development banks to increase official funding for poor countries tenfold, Jeffrey Sachs called for much more official funding, by “ recycling ” at least $ 100 billion of DTS HIC.
Financing options for developing countries
Most governments in developing countries heavily in debt to varying degrees before the pandemic. Much more debt abstention is urgently needed, and longer-term development finance is also needed.
While the PRI may have more borrowing options, there is an urgent need to enable them to minimize the burden of past public debt, domestic or foreign. Already, the financial community and the media frequently warn that their credit scores will be negatively affected if they borrow more.
World Bank chief economist Carmen Reinhart – once renowned for her aversion to high debt – is now urging countries to borrow to fight the economic impact of the pandemic. She rightly objected to putting “zombie loan resources“.
The increase in non-performing loans and financial fragility to allow unsustainable businesses to survive would slow recovery efforts. Instead, Reinhart emphasized the need to “quickly restructure and amortize bad debts“.
However, there is no single approach to financing the measures needed to contain the pandemic and for macroeconomic expansion. Meanwhile, financing conditions in poor countries are deteriorating as the pandemic lasts much longer than expected.
In the face of the economic downturn, most governments need to spend significantly more domestically to prevent temporary recessions from turning into depressions. Developing countries should not incur external debt except on preferential terms necessary to import essential products such as medicines and food.
International cooperation must ensure much more official foreign currency financing to complement innovative domestic financing of urgent spending needed for relief, recovery and reform.