Coronavirus economics: Debt-laden countries at risk, as financial markets screech to a halt

17 April 2020

Economists and finance experts are warning that countries with “high” or “distressed” public debt levels are at risk of severe economic shocks amid the COVID-19 pandemic and calling for restructuring plans based on the principle of solidarity.

Since the start of the pandemic, financial institutions including the World Bank Group and the International Monetary Fund (IMF) – along with UN entities, regional organizations and country groups such as the G20 – have been examining the tools available to stabilize markets, prevent job losses and preserve hard-fought development gains.

At a joint high-level meeting of the IMF and the World Bank on Mobilizing with Africa on Friday, UN Secretary-General António Guterres commended the bodies’ swift actions to support member countries, while emphasizing that more work will be needed.

“We know this virus will spread like wildfire and there are no firewalls,” he said.  “Alleviating crushing debt is absolutely crucial.”

The UN chief noted that in Africa, households and businesses were suffering liquidity challenges even before the virus gained a toehold on the continent.  As countries work to prevent millions from plunging into poverty, already unacceptable levels of inequalities are growing, fragility is increasing and commodity prices are declining.

Debt and pandemic: a ‘perfect storm’

The current health and economic emergencies sparked by COVID-19 have emerged against the backdrop of high indebtedness for many developing nations – including middle-income countries – around the globe.

Since the 2008 financial crisis, public external debt in many developing countries has spiked. Low interest rates and high liquidity boosted many countries’ access to commercial lending. By January 2020, the debt of 44 per cent of least developed and other low-income developing countries was already considered at high risk or in distress. 

The COVID-19-induced contraction is having disastrous consequences. Global financial markets are coming to a standstill as investors race to pull funds out of emerging-markets and other high-risk sec­tors.  The pandemic is straining national budgets as countries struggle to meet health needs, respond to rising unemployment and support their economies.

UN experts warn that Africa may be in its first recession in 25 years, while Latin America and the Caribbean is facing the worst recession in its history. Similar decelerations are being seen in Asia and the Arab Region.

Shaping proactive responses

Against that backdrop, the UN is advocating for a comprehensive COVID-19 response package amounting to a double-digit percentage of global GDP.

It is also urging international financial institutions to do everything possible to prevent a devastating debt crisis with disorderly defaults, stressing that debt relief must play a central role in the global response to the pandemic.

Speaking at the joint IMF/World Bank meeting, the Secretary-General welcomed initial steps by the G20, including the suspension of debt service payments for all International Development Association nations. 

He also called for more resources for the IMF – including through the issuance of special drawing rights – as well as enhanced support for the World Bank and other global financial institutions and bilateral mechanisms.

Three-phase plan to tackle debt

The Organization has put forward a three-step strategy aimed at preventing heavily indebted countries from suffering the worst impacts of the COVID-19 emergency.

First, it calls for an across-the-board “debt standstill” for developing countries with no access to financial markets.  Second, it requests more comprehensive options for debt sustainability with instruments, such as debt swaps, and a debt mechanism for the Sustainable Development Goals.

Third, the plan calls for tackling structural issues in the international debt architecture, to prevent defaults.

The framework is built on a foundation of shared responsibility among debtors and creditors, as well as the understanding that debt restructuring should be timely, orderly, effective, fair and negotiated in good faith. 

“In all our efforts, we must focus on the most vulnerable and ensuring that the rights of all people are protected,” the UN Chief said.

 

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