Developing Countries: Debt Restructuring Amidst a Global Pandemic – The Organization for World Peace

In a statement given by the U.K.-based Jubilee Debt Campaign, developing countries are paying more to service their debt at the highest rate in the past two decades. Sovereign debts have been exacerbated by the coronavirus pandemic, thus limiting the ability of developing nations 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 concentrate their resources on fighting the pandemic and safeguarding the livelihoods of millions of the most vulnerable people. Implemented in May 2020, more than $10.3 billion in relief and aid has been distributed to more than 40 eligible countries. The DSSI temporarily suspended the debt payments of low-income countries (LICs) through December 2021 without a framework that addressed the ongoing health and debt crisis. Instead, the DSSI offered debt restructuring strategies. This is problematic because unsustainable sovereign debt compromises national economic growth and well-being by incentivizing debt repayment over the improvement of essential public services, education, and healthcare.

Responding to the high debt service standards, Heidi Chow, Jubilees Executive Director, pointed out that The debt crisis continues to engulf lower-income countries with no end in sight unless there is urgent action on debt relief. In a call to action directed at China and other G20 countries, World Bank President David Malpass reasserted the need for immediate debt relief for developing countries, warning that delays increase risks to their economies from higher interest rates, currency devaluation, and food insecurity. Malpass went on to announce that the poorest countries face $35 billion in debt service payments to official and private-sector creditors. Amidst the challenges of the pandemic and the financial burdens predating the current global crisis, national governments and supranational institutions should give precedence to the lives and livelihoods of people by developing debt restructuring strategies that cater to the individual needs of each nations economy and population.

In a study by the IMF, 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 this works when the debt is limited or temporary. If this strategy is not feasible, then the country with unsustainable debt must coordinate with creditors to renegotiate the terms of repayment this is called sovereign debt restructuring. Current strategies for the debt restructuring process include moving the debt from the private sector to public sector institutions. According to the chair of the U.N. Committee for Development Policy, an alternative solution to the debt crisis would include a greater provision of liquidity and soft multilateral financing, as well as a conjunctural (temporary) mechanism that would facilitate debt re-negotiations. Furthermore, any restructuring program must provide a grace period to allow the country to recover from the crisis before diverting any needed resources to repay loans and interest. This will allow time for the economy to regain its strength and make it possible to make payments on its debts without damaging its prospects or harming its population.

The DSSI did not cancel the debt, but instead delayed the payments and continued to accumulate interest. In the process of negotiating debt restructuring, two things must be taken into consideration: interest rates must be lowered and DSSI benefits must be extended to middle-income countries at risk of increasing poverty levels. Furthermore, while the Initiative was adopted by members of the Paris Club, China, and other creditors, it lost credence 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 program, only Chad, Zambia, and Ethiopia applied for debt restructuring under the G20 framework. The Common Framework of the DSSI was intended to deal with insolvency and liquidity problems, along with the implementation of an International Monetary Fund (IMF) supported reform program. Restructuring methods have fallen short of the desired impact with LICs like Ethiopia being downgraded. Beca0use the credit ratings decrease, the cost of borrowing from international investors increases. This ultimately prevents governments from qualifying for future loans/grants and investing in national healthcare infrastructure.

The DSSI framework ended at the end of 2021, and the G20 has failed to implement debt restructuring reforms that would aid vulnerable nations in combating the looming global debt crisis. We need a strategy for sustainable economic recovery to ensure the quality of life and security in at-risk states. High debt levels can hinder a governments ability to provide 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 requesting grants from a wide range of donors to extend grant-based debt relief to the most vulnerable countries until 2022. Looking back on the past year, the statement on Debt Relief for a Green and Inclusive Recovery Initiative calls for bilateral, multilateral, and private sector debt relief similar to the Highly Indebted Poor Countries Initiative. Essentially, it would provide debt relief, a new allocation of the IMFs Special Drawing Rights, and an increase in multilateral and regional development bank financing and capital. These measures are vital in efforts to finance health, social protections, and climate transitions for developing countries in need. The prioritization of debt repayment over funding for essential public services reflects the value of capital markets over people.

Developing countries are vulnerable to external intervention in domestic governance because of the incentives to accept economic conditionality and cater to the interests of more powerful states and their creditors. Debt defaults and economic collapse are imminent unless G20 creditors collaborate and implement an improved debt restructuring strategy and suspend debt service during the negotiation period. Decision-making on a multilateral level requires clear communication, collaboration, and compromise between all involved parties. The well-being of the public cannot be compromised. While navigating the socio-economic challenges of debt recovery during a global pandemic, the protection of national public interests and proper standards of living should be prioritized. There must be a coordinated effort between supranational institutions, like the IMF and World Bank, and private creditors in protecting national public interests. One of the main dilemmas of creating a framework for restructuring debt is taking into consideration that each country and region has different economic environments and needs. The volatility of the current global socio-political stage has created an opportunity to reimagine and restart economies with a different framework that values inclusivity, climate action, and development goals at the core of the recovery effort.

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Developing Countries: Debt Restructuring Amidst a Global Pandemic - The Organization for World Peace