Abu Dhabi, UAESunday 1 November 2020

New global debt deal needed to help poorer countries avoid 'economic disaster' after pandemic

Developing countries face $3.4tn debt servicing bill over the next two years

An agreement to suspend debt repayments by bilateral creditors from G20 nations will give poorer nations about $20 billion of breathing space to help them fight the coronavirus pandemic. Getty Images
An agreement to suspend debt repayments by bilateral creditors from G20 nations will give poorer nations about $20 billion of breathing space to help them fight the coronavirus pandemic. Getty Images

A global debt deal is needed to prevent an “economic disaster" from taking place in developing world countries reeling from the fallout from the coronavirus pandemic, according to the United Nations’ trade and development body.

“The international community should urgently take more steps to relieve the mounting financial pressure that debt payments are exerting on developing countries as they get to grips with the economic shock of Covid-19,” Mukhisa Kituyi, the United Nations Council on Trade and Development's secretary-general said on Thursday.

Although G20 nations have already agreed a deal to suspend debt repayment from the world’s poorest countries for the remainder of 2020, many are facing a wall of debt service payments throughout the 2020s, with the amount due in the next two years alone standing at almost $3.4 trillion (Dh12.5tn), according to the UN agency.

Even before the Covid-19 outbreak, debt servicing was eating up a greater portion of poorer nations’ income in recent years. On average, 10.3 per cent of government revenue was used by developing countries to pay down external long-term public and publicly-guaranteed debt by the end of 2018, up from 6.5 per cent at the end of 2012.

However, for some of the poorest nations more than a quarter of revenue is being used to service debt.

Of the $3.4tn owed by the end of 2021, between $2tn to $2.3tn is owed by higher income developing economies, but $700 billion to $1.1tn is owed by low-income countries.

Though the suspension of the debt repayment initiative from G20 countries as bilateral creditors for most of this year provides breathing room on about $20 billion of debts, this is a fairly small amount of the overall sums owed, and is only a temporary suspension from May until the end of the year, according to UNCTAD. The figure is set to increase a further $8 billion if all private creditors take part and $12bn if multilateral creditors are included.

The agency called for a more comprehensive, longer term debt relief plan and set out three steps to achieve it. It said the creation of automatic, temporary standstills to provide crisis-stricken countries with breathing space to deal with both immediate challenges and facilitate economic recovery is needed. It called for setting up broader relief and restructuring programmes and suggested a $1tn write-off is needed to prevent economic disaster across the developing world.

The agency also recommended the establishment of an International Developing Country Debt Authority, which will create and oversee an international framework to guide future sovereign debt restructuring. Although capital markets have been useful, with the shift from bank lending to bond financing generally strengthening creditor rights, they have disrupted some multilateral debt relief efforts. Some vulture funds who have bought distressed debt drag the process through courts in the hope of earning a profit.

Such actions “highlighted the conflict between a purely private-law paradigm that seeks to enforce contracts at any cost and the logic of public law which is supposed to consider the wider economic and social consequences of legal actions”, according to Unctad.

“Courts have generally endorsed holdouts’ views, even at the expense of sovereign debt sustainability.”

On Wednesday, the executive board of the International Monetary Fund, which already cancelled $215m of debt owed by the 25 poorest countries due in the next six months, approved a new Short-term Liquidity Line (SLL) to provide emerging market and developing countries with “liquidity support for members facing potential short-term moderate balance of payments difficulties”.

Earlier this week, the IMF’s managing director Kristalina Georgieva described the outlook for the global economy as “dire”.

She reiterated that emerging market and developing countries had experienced "the sharpest portfolio flow reversal on record, of about $100bn” so far this year and that the fund was ready to deploy its full lending capacity to help.

“But more lending may not always be the best solution for every country," Ms Georgieva said.

"The crisis is adding to high debt burdens and many could find themselves on an unsustainable path," she said. "We therefore need to contemplate new approaches, working closely with other international institutions, as well as the private sector, to help countries steer through this crisis and emerge more resilient”.

Updated: April 23, 2020 05:26 PM

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