The new global pandemic has widely exposed the debt vulnerability of many developing countries. In 2018, the public debt of low- and middle-income countries accounted for 51% of GDP. An increase of 5 percentage points from 2013. At the same time, in 2016, non-concessional debt accounted for an average of 55% of the debt of low-income countries.
In April of 2020, the World Bank and the International Monetary Fund jointly proposed the “Debt Relief Suspension Initiative”, which was supported by the G20, the richest group of countries in the world. World Bank President Malpass expressed gratification. He pointed out that a key goal of this initiative is to enable low-income countries to concentrate resources to effectively respond to crises.
The World Bank’s International Development Association specializes in providing loans to low-income countries, which account for one-quarter of the world’s population, and two-thirds of the world’s population living in extreme poverty.
For low-income countries, the impact of the new crown pandemic is catastrophic. The health systems of these countries cannot cope with a large-scale epidemic. At the same time, they lack resources to deal with the impact of domestic lockdown measures and trade and supply chain disruptions. The pandemic has even made the prospects for these countries to achieve sustainable development goals by 2030 slim.
Before the outbreak of the pandemic, 50% of the countries that borrowed from the World Bank’s International Development Association were already at high risk of debt distress or had fallen into debt distress. Most countries with a high or medium risk of debt distress are fragile and conflict-affected countries, countries that rely on commodity exports, and small countries.
According to the “Debt Relief Suspension Initiative”, the G20 has requested that from May 1st, all official bilateral creditor countries suspend their comprehensive Debt Relief requirements for the International Development Association countries that request comprehensive Debt relief extensions.
At present, all IDA countries and all least developed countries that repay debts to the International Monetary Fund and the World Bank can request a moratorium on debt repayment. There are 73 countries in total. Preliminary estimates show that in 2020 alone, the total official bilateral comprehensive debt relief service of these countries will be close to 14 billion U.S. dollars.
In principle, all these countries can request a moratorium on comprehensive debt relief repayment, but each beneficiary country must commit to three points: first, use the released resources to increase social, health, or economic spending to deal with the crisis; second, maintain transparency. Disclosure of all public sector debt information; third, no new non-concessional comprehensive debts may be signed during the suspension period.
The World Bank, the IMF, and the G20 call on private-sector creditors to participate in this initiative on equal terms, instead of “free-riding”-using funds released by the official debt freeze to realize their own claims.
In terms of debt relief, the International Monetary Fund passed its “Disaster Control and Disaster Reduction Trust” as early as mid-April for 25 member countries immediately provided $500 million in grant-based comprehensive debt relief. The IMF hopes to expand the scale of the “Disaster Control and Disaster Mitigation Trust” to US$1.4 billion to extend the duration of debt relief.
The World Bank will also use up to 160 billion U.S. dollars to support countries within 15 months from May this year, of which 50 billion U.S. dollars will be provided to low-income countries in the form of grants or highly concessional loans.
But World Bank President Malpass disagreed with the UN’s request to extend the suspension of debt repayment to multilateral development banks, saying that “this will endanger the world’s poorest countries.”
The currently announced suspension period for debt relief is 6 months. In this regard, Li Yuefen, an independent expert on foreign comprehensive debt and human rights in the United Nations, who took office in early May of this year, called for the freeze period to be extended to at least the middle of next year, because “the evolution of this pandemic seems unpredictable and new outbreaks may occur. The impact of the pandemic on the economy, unemployment, inequality, and poverty will continue beyond 2020.”