Weathering the storm?

By Bodo Ellmers, Global Policy Forum

Over 80 countries have applied for IMF emergency loans to avoid bankruptcy. The recently agreed debt relief is not enough.

Developing countries have been hit hard by the economic fallout of the coronavirus crisis. Commodity prices have collapsed, and with them their export revenues. Since mass unemployment has spread in the global north, remittances from migrant workers have also been falling. Quarantines and travel restrictions have made tourism nonexistant. Capital flight from developing countries since the beginning of the corona crisis has been faster and greater than during the great financial crisis of 2008. In March alone, an estimated $ 100 billion left the Global South towards ostensibly safer havens.

The financing needs of developing countries are enormous, both to tackle the corona crisis and to address the economic consequences. While rich countries are countering the crisis with huge rescue packages, many of the classic policy options of these packages are not available to poor countries. Their fiscal space is limited due to unsustainable levels of debt and, in a context of poverty and underdevelopment, they can levy little additional taxes. And while the central banks of rich countries with strong currencies used monetary policy measures at an unprecedented scale, an expansionary monetary policy in developing countries would go hand in hand with a devaluation of their currencies, making it more difficult to finance critical imports and service foreign debt.

A rescue package for the Global South

The United Nations has therefore called for a massive $ 2.5 trillion rescue package for the global south. According to the United Nations Conference on Trade and Development (UNCTAD), the package should consist of three components:

• US $500 billion in grants should fund a Marshall plan for the health sector in poor countries. UNCTAD believes that this plan should be funded by grants from rich countries, as they have failed to meet their development aid commitments in the past decades. It is therefore a payment of arrears.


• An additional $1 trillion in funding should go o developing countries through special drawing rights – the IMF’s international reserve asset. This is comparable to an increase in the money supply that the European Central Bank (ECB) has undertaken for Europe. The IMF takes on the role of the central bank of the Global South.


• Another $1 trillion dollars could be released indirectly through debt relief. This is not a transfer to poor countries, but the waiving of future transfers from poor countries. This measure would create fiscal scope to rebuild their economies.

Debt relief on the global agenda

External debt burdens weigh enormously on developing countries: In times of easy money and low interest rates in Europe and the USA, investors have looked for investment opportunities in the global south. This has driven debt stocks in developing countries to unprecedented levels. State bankruptcies, like the one of Argentina last year, were already a sign of the new crisis. According to the International Monetary Fund, almost half of the low-income countries fall into the category of countries at high risk of debt distress, and this classification is based on data from before the corona crisis. The corona shock has now made the big debt bubble burst: In record time, over 80 countries have applied for emergency loans to the IMF in order to avoid state bankruptcies. Hence the enormous pressure on the international community and its institutions, from IMF to G7 and G20, to decide on debt relief.

The IMF as ice-breaker

The IMF itself acted as the ice-breaker. On April 13, it decided to waive the installments for a group of 25 countries for the rest of the year. But this decision means that just US $215 million in payments have been cancelled, so it is more a symbolic act. There is likely no positive net effect for developing countries at all. The IMF expects its richer member states to compensate for lost debt repayments, which they do through grants paid to an IMF trust fund, funded from their development aid budgets. So it is a zero-sum game in which poor countries lose in development aid what they gain in debt relief. An alternative would be for the IMF to finance such debt relief itself, by selling a part of its significant gold reserves.

The G20 package: Far from what is needed

The G20 followed suit on April 15, after heated negotiations between the two geopolitical antagonists, the United States and China. The G20’s decision is to suspend debt payments of the poorest developing countries for the rest of the year, if they request. This would release about $14 billion in liquidity that would otherwise have gone into debt servicing. The G20 decision gives poor countries some breathing space, but it is not real debt relief, because the countries are required to pay the installments that they did not pay this year over the following three years. If they can: It can be assumed that the coronavirus crisis will drive many highly indebted poor countries into actual bankruptcy. If so, they can only get out of this with a real debt cancellation, a mere debt suspension won´t solve the issue.

In addition, the package is not completely free of conditions. Countries that benefit from this must have an ongoing IMF program. These programs are highly controversial because they usually contain conditions for "fiscal consolidation", as austerity policy is euphemistically called at the IMF. Such conditions, imposed by the IMF, have in the past slashed capacity of health systems in many countries, making them more vulnerable to the corona pandemic. Bringing the IMF and its programs into play here means that the fox is guarding the henhouse.

Furthermore, countries must commit to not taking out new loans at market rates during the deferral of payments. In view of their high debt burden, this makes sense, but it also means that their possibilities for counter-cyclical fiscal policy are limited. Naturally, the rescue packages in the global north are initially financed by new debt issuance, too.

Lastly, the G20 deal is limited to bilateral debt. The USA has prevailed here, because China is by far the largest bilateral creditor to the global south. In order to effectively free up funds, short-term debt moratoriums and long-term debt relief would also have to extend to multilateral loans – such as those of the US-dominated World Bank – and particularly to loans from private banks and government bonds from poor countries. The latter are largely held by large investment funds in the United States and Europe. Foreign currency bonds issued by developing countries have extremely high interest rates, which can amount to ten percent annually. These weigh heaviest on the budgets of poor countries and should be addressed as a priority.

The current measures of the IMF and G20 are first steps, but still miles away from the volume of debt relief that the UN considers necessary in the coronavirus crisis. Two things will be decisive in the next few weeks. Firstly, the move from debt suspension to actual debt relief, because problems cannot be solved if they are only shifted into the future. Second, that private creditors are also involved, through comprehensive debt restructurings. Speculators have made a lot of money in recent years if they refused to invest in sovereign bonds from the US and Europe, and instead chose high-yield and high-risk bonds from poor countries. Now the time has come to accept write-offs.

Priority of human rights over debt service

However, the G20 cannot decree restructurings of private debt. Their role would be to provide legal and political backing for poor countries that want to restructure their private debt stocks in the corona crisis. In any event, this is justified in this crisis. In its Guiding Principles on Debt and Human Rights, the UN Human Rights Council stated that states must prioritize human rights-related expenditures – such as for education and health services – over debt servicing when funds run out. No state has the right to violate the human rights of its people in order to honor the financial claims of creditors, even if that means stopping debt service. In the corona crisis, many states will have to make a choice here.

Source: Global Policy Forum (GPF).