The world was witnessing a massive buildup of debt, even before the pandemic began. World Bank described it as the largest, fastest and most broad based amounting to 230 percentage of the Global GDP. Debt in the emerging and developing countries were at a record level of US$ 55 trillion in 2018 with global humanitarian and civil society organisations for a debt cancellation.
The onset of COVID 19 pandemic has deepened the crisis as countries were forced to spend additional resources on fighting the pandemic. The pandemic also pushed the global economy to a stand still disrupting supply chains, trade and a fall in commodity prices. The pandemic resulted in the worst recession since the great depression with the world output falling by a -3 % with developed countries seeing a -6% growth and this is expected to fall further. It is estimated that the cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars.
Global poverty has infact increased erasing the limited gains in the previous periods. It is estimated that more than 100 million to 200 million people will fall into poverty, the numbers being pushed by Nigeria, India and Democratic Republic of Congo where one third of the global poor lives. However other estimates by UN’s International Labour Organization (ILO) estimates about 400 million workers from India’s informal sector are likely to be pushed deeper into poverty due to the pandemic.
The poor and highly indebted countries are at the receiving end of the crisis. The fall in the commodity prices and severe strain to economy led to Nigerian president calling upon the international financial institutions to cancel debt obligation with an outright debt cancellation. Nearly half of Nigeria’s outstanding external debt is with multilateral lenders, led by the World Bank Group with $10.1 billion. Beijing-based Export-Import Bank of China is the second-biggest creditor with loans totaling $3.2 billion, while Eurobonds account for $10.86 billion or 39% of external debt.
The World Bank Group and IMF in March 2020 gave a call to all official bilateral creditors to suspend debt payments from IDA countries to help with the liquidity needs of countries who are facing the pandemic. In April, G 20 countries pledged to suspend debt service on all official bilateral credits due between May 1 and December 31, 2020, in low-income countries. About 42 countries have requested help under the plan leading to $5.3 billion in repayments.
However, as the virus continues to spread and the economies goes into deeper crisis, there is no indication that the G 20 countries will extend the plan beyond December and plan completely fails to cancel debt. The G20 Debt Service Suspension Initiative allows up to 73 countries to apply to suspend debt payments to other governments from May to December 2020. However, the missed payments then come due between 2022 and 2024.
The campaigners on debt relief has demanded a cancellation of debt payments and not mere suspension for a very limited period along with multilateral development agencies and private lenders to be part of the plan. The G 20 plan only suspends $5.3 billion while the same 73 countries are supposed to pay private and multilateral lenders $19.9 billion over the same time period. This would mean that the G 20 plan instead of fighting pandemic will only help World Bank and other private lenders get their due. Eurodad, a campaign organisation in a report said, the initiative is just postponing the issue rather than canceling the debt as the countries are scheduled to pay USD 115 billion in 2022-2024. The initiative also excludes many low and middle income countries whose external public debt service is projected to reach US$ 273 billion in 2020. This means that the G20 offer only covers 3.65% of all the debt service payments to be made in 2020 by developing countries.
The demand to cancel debt was supported by over 300 lawmakers from around the world who under the initiative of Senator Bernie Sanders and Ilham Omar wrote a letter to IMF and World Bank to cancel the debt of the poorest countries. In the letter, parliamentarians from two dozen countries on all six continents, asked for debt service obligations of the poorest countries be cancelled outright, instead of simply suspended, as agreed by the Group of 20 countries in April. The lawmakers also urged the IMF World Bank President to support creation of trillions of dollars of new Special Drawing Rights. SDR allocation is akin to a central bank “printing” new money and does not trigger big costs, but has been opposed by the United States, the IMF’s largest shareholder.
United Nations on its stand has called for a full standstill on servicing of all bilateral, multilateral and commercial debt for all developing countries that request it, including middle- income countries. It has proposed to establish a central credit facility for countries requesting assistance, managed by an international financial institution, to coordinate a standstill.
World Bank however reacted strongly against the demands to extend the moratorium to debt repayment to MDBs and its president says it will be harmful to world’s poorest countries as they depend on financial markets. The demands for debt cancellation without themselves being part of it is farcical on the part of World Bank and a ploy to divert the demands for debt cancellation. There needs to be a global permanent mechanism, under the United Nations, for the systematic, comprehensive and enforceable restructuring of sovereign debt.
The countries do not have much options left, it is either pay the external debt more than what they invest in their health or to default for the sake of the people they represent. A good government would default on these obligations, and indeed a generally coordinated default on bank and IMF loans is long overdue, after first being proposed by Tanzanian president Julius Nyerere and Cuban leader Fidel Castro.