It is the duty of the international community to avoid a debt crisis in developing countries.
The only way to truly beat the Covid-19 pandemic is to beat it globally. This means that, in the words of the UN Secretary-General António Guterres’, “we are only as strong as our weakest health system.”
In many developing countries, public spending and the ability to purchase equipment is severely restricted. Sixty-four developing countries spend more on servicing debts than on public health, while, for 45 developing nations, the cost of debt servicing is higher than social protection spending and income support to the poorest – and 24 developing countries spend more on debt servicing than on public education.
This means, for instance, that Bangladesh spends 15 percent of its revenue in servicing its external debt, while only allocating four percent to health. Kenya spends 22 percent of its budget on debt servicing, while social protection in anti-poverty programmes spending stands at just nine percent of GDP. In these countries, servicing debts has made dealing with the novel coronavirus crisis much more difficult.
Without money, health systems in developing countries are desperately struggling to contain the virus and effectively treat patients, while those affected by economic recession are at risk of falling into hunger and poverty. Inaction also means delaying economic recovery and prolonging the recession.
In order to give developing countries the best possible chance, the G20 countries, the IMF and the UN all acknowledge that deep and broad debt cancellation is essential for all of 2020. This would free up $42.7 bn of debt payments in low-income countries alone.
In April, G20 finance ministers agreed to a temporary suspension of debt payments to bilateral creditors for a 9-month period from May-December 2020 for 77 low-income developing countries. The IMF also agreed to a debt cancellation of $230 million to 25 low-income developing countries.
Though a good first step, this agreement, known as the Debt Service Suspension Initiative (DSSI), should be exactly that – a first step. Crucially, the agreement fails to mandate any action from private creditors (e.g., commercial banks, bond holders, and investment funds) or multi-lateral development banks, such as the World Bank.
To date, 41 out of 73 of the poorest countries have applied through the DSSI to suspend their bilateral dept repayments this year. This could save countries up to $9 billion. Despite this, all 73 countries must still pay up to £33.7 billion this year – $2.8 billion per month. This figure is double the amount that Uganda, Malawi and Zambia combined spend on their annual health budget.
However, no country, to our knowledge, has applied to the voluntary process designed by a private creditor association to suspend private sector debt payments, showing that the process is unclear and inadequate despite such a great need.
Debt cancellation is thus the fastest way to free up much-needed funds so that developing countries can address the needs of their populations during this pandemic.
Failure to include private and multi-lateral creditors in the DSSI means that, rather than being spent addressing the urgent needs of populations, these funds are being directed into the pockets of some of the richest investors in the world.
In a new joint report, Passing the Buck on Debt Relief: How the Failure of the Private Sector to Cancel Debts is Fuelling a Crisis Across the Developing World, Christian Aid, Oxfam, Global Justice Now and Jubilee Debt Campaign are calling on G20 countries to:
- Demand that private sector creditors and multi-lateral development banks immediately match the terms of the debt suspension offered by the DSSI under a binding and compulsory scheme.
- The agreed suspension needs to be extended until the end of 2022 and transformed into a future cancellation commitment.
- Pledge to pass legislation to remove the ability of hold-out bondholders to sue developing countries in courts for repayment on any debts they refuse to cancel. This is particularly important in England and New York, under whose law the vast majority of international debts are owed.
- Establish an agreement which covers credit rating agencies and their regulatory bodies guaranteeing that under the current dramatic circumstances, so that developing countries applying for a debt suspension or seeking debt cancellation would not see terms of future credit worsened.
- Ensure a fair and transparent process for restructuring and further debt stock cancellation inclusive of all debt types and with the binding participation of all types of creditors, such as a global debt workout mechanism.
It is the duty of the international community to avoid adding a debt crisis to dozens of developing countries that are already dealing with health, humanitarian, hunger and economic crises. Preventing a global disaster demands widespread and concerted debt relief and significantly more financing.