Since the beginning of the pandemic, financial institutions including the planet Bank Group and therefore the International monetary fund (IMF) – along side UN entities, regional organizations and country groups like the G20 – are examining the tools available to stabilize markets, prevent job losses and preserve hard-fought development gains.
At a joint high-level meeting of the IMF and therefore the International Bank for Reconstruction and Development on Mobilizing with Africa on Friday, UN Secretary-General António Guterres commended the bodies’ swift actions to support member countries, while emphasizing that more work are going to be needed.
“We know this virus will spread like wildfire and there are not any firewalls,” he said. “Alleviating crushing debt is completely crucial.”
The UN chief noted that in Africa, households and businesses were suffering liquidity challenges even before the virus gained a toehold on the continent. As countries work to stop millions from plunging into poverty, already unacceptable levels of inequalities are growing, fragility is increasing and commodity prices are declining.
Debt and pandemic: a ‘perfect storm’
The current health and economic emergencies sparked by COVID-19 have emerged against the backdrop of high indebtedness for several developing nations – including middle-income countries – round the globe.
Since the 2008 financial crisis, public external debt in many developing countries has spiked. Low interest rates and high liquidity boosted many countries’ access to commercial lending. By January 2020, the debt of 44 per cent of least developed and other low-income developing countries was already considered at high risk or in distress.
The COVID-19-induced contraction has disastrous consequences. Global financial markets are coming to a standstill as investors race to tug funds out of emerging-markets and other high-risk sectors. The pandemic is straining national budgets as countries struggle to satisfy health needs, answer rising unemployment and support their economies.
UN experts warn that Africa could also be in its first recession in 25 years, while Latin America and therefore the Caribbean is facing the worst recession in its history. Similar decelerations are being seen in Asia and therefore the Arab Region.
Shaping proactive responses
Against that backdrop, the UN is advocating for a comprehensive COVID-19 response package amounting to a double-digit percentage of worldwide GDP.
It is also urging international financial institutions to try to to everything possible to stop a devastating debt crisis with disorderly defaults, stressing that debt relief must play a central role within the global response to the pandemic.
Speaking at the joint IMF/World Bank meeting, the Secretary-General welcomed initial steps by the G20, including the suspension of debt service payments for all International Development Association nations.
He also involved more resources for the IMF – including through the issuance of special drawing rights – also as enhanced support for the planet Bank and other global financial institutions and bilateral mechanisms.
Three-phase plan to tackle debt
The Organization has suggests a three-step strategy aimed toward preventing heavily indebted countries from suffering the worst impacts of the COVID-19 emergency.
First, it involves an across-the-board “debt standstill” for developing countries with no access to financial markets. Second, it requests more comprehensive options for debt sustainability with instruments, like debt swaps, and a debt mechanism for the Sustainable Development Goals.
Third, the plan involves tackling structural issues within the international debt architecture, to stop defaults.
The framework is made on a foundation of shared responsibility among debtors and creditors, also because the understanding that debt restructuring should be timely, orderly, effective, fair and negotiated in straightness .
“In all our efforts, we must specialise in the foremost vulnerable and ensuring that the rights of all people are protected,” the UN Chief said.