“We must urgently address the growing COVID-19 debt problem in some emerging and developing countries to avoid an increase in global poverty and instability.”
The growing debt of many poor and middle-income countries is a cause for concern. While developed countries have been very hard hit by the COVID-19 pandemic, emerging and developing countries have much more fiscal room to cope with its consequences and have much more difficulty accessing financing. . Some of them have already stopped paying their external debt. If we are not able to quickly address the debt issue, global poverty and instability are likely to increase. It could even result in a new global financial crisis.
For our interview with Commission Member Jutta Urpilainen and development ministers on the issue of debt, we were joined by Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), Mr Werner Hoyer , President of the European Investment Bank (EIB), Ms Odile Renaud-Basso, new President of the European Bank for Reconstruction and Development (EBRD), and Mr Emmanuel Moulin, President of the Paris Club (the Club de Paris is responsible for coordination regarding the treatment of the debt of over-indebted countries). Mr Paolo Gentiloni, Commissioner for the Economy, who represents the EU at the G20 finance ministers’ meetings, also shed some light on the issue.
A very gloomy economic outlook at the global level
Kristalina Georgieva predicted a very bleak economic future for us globally: we now know with certainty that we are facing the worst recession since the Great Depression. According to IMF projections, global GDP is expected to contract by 4.4% in 2020. A partial recovery is expected in 2021, provided vaccine prospects materialize. But this recovery will be uneven, subject to setbacks, and it will be particularly difficult for developing countries.
“For the first time in decades, we are seeing a reversal in the decline in poverty, with 90 million people falling back into extreme poverty.”
The GDP of low-income developing countries (LIDDCs) is estimated to decline by more than 1% this year, while average growth in this group of countries exceeded 5.5% per year over the past two decades. This will result, for the first time in decades, in a reversal of the trend in declining poverty, with 90 million people falling back into extreme poverty. When it comes to fiscal support for the economy, advanced economies have mobilized resources equivalent to 20% of their GDP this year, including loans and guarantees, compared to 6% for emerging markets and only 2% for poor countries.
Throughout 2020, the IMF provided financial support to 82 countries, including 47 PDFRs. The Fund notably multiplied by 10 the average amount of its loans to Africa. However, according to IMF estimates, Africa will still face a financing gap of 345 billion dollars, including 295 billion for sub-Saharan Africa. We must fill this deficit with the support of institutions, but also create the conditions conducive to increased intervention by the private sector.
“Africa will face a financing gap of $345 billion, including $295 billion for sub-Saharan Africa.”
The IMF will strengthen its lending capacity. The EU has contributed €183 million to the IMF’s Disaster Assistance and Response Trust Fund (ARC), which provides debt relief to the 29 poorest and most vulnerable countries. However, the IMF is still counting on EU member states to commit more resources to the IMF’s Poverty Reduction and Growth Trust Fund. The IMF’s lending capacity for countries that need it most is limited. In such cases, capacity building is as important as financial support, and Kristalina Georgieva proposed that the EU should prioritize this. The EU and its associated development banks are committed to working closely with the IMF on this issue.
A respite for the poorest countries
Before the pandemic, debt levels in many low-income developing countries were already a concern. The G20 Debt Service Suspension Initiative (DSSI), launched last April, has given poorer countries some relief. The ISSD was originally planned to end at the end of the year. As of November, 46 countries have applied to participate, representing approximately $5.7 billion in payment deferrals this year.
“Last May, Argentina was once again in default of its external debt and, on November 13, it was Zambia’s turn, with an increased risk of spiraling defaults by sovereign borrowers, particularly in Africa.”
However, this is clearly insufficient and, to date, private sector participation has not been significant. Last May, Argentina again defaulted on its external debt and, on November 13, it was Zambia’s turn, with an increased risk of spiraling defaults by sovereign borrowers, particularly in Africa. . Which could ultimately lead to a new global financial crisis.
The G20 took additional measures
Therefore, the G20 took additional measures at the request, in particular, of the Union and its Member States. First, by extending the DSSI until June 2021, with the possibility of a further six-month extension – a move which, if necessary, would be decided upon at the next IMF spring meeting. Second, the G20 and the Paris Club agreed on a “common framework for dealing with debt beyond the DSSI”, thereby enabling the start of the debt restructuring process.
“China has accepted the new G20 principles on debt treatment, which is an important step forward. We are now counting on the same motivation and the same level of commitment from all partners in this area.”
In recent years, China has become a very important creditor for many developing countries, particularly in Africa. However, China is not a member of the Paris Club and, until now, it has hardly been proactive on the debt issue. However, it accepted the new G20 principles on debt treatment; this is a big step forward. We are now counting on the same motivation and the same level of commitment from all partners in this area.
The EU wants to go further on a global scale
However, we would like to go further: the EU advocates extending the G20 debt treatment framework to middle-income countries that need it. We also support a new general allocation of Special Drawing Rights (SDRs), an international monetary instrument issued by the IMF, to meet the needs generated by the crisis.
To increase Europe’s global weight on this crucial issue, we must also act more as a ‘Team Europe’, able to leverage the strengths of our Member States and the Union. EU member states cannot have real influence if they choose to go it alone. In Senegal, for example, the entire European team holds 9% of the external debt, which is equivalent to China’s share alone.
“While we must prioritize low-income countries, particularly in Africa, some middle-income countries that face serious challenges also deserve sustained attention.”
At our meeting, all Member States agreed that these issues are of high priority. Several of them insisted on the need to quickly move beyond the phase of granting “respite” through the debt service suspension initiative to carry out deeper restructuring in certain countries, and grant more financial support in many cases. While we must prioritize low-income countries, particularly in Africa, some middle-income countries that face serious challenges also deserve continued attention, especially in Latin America.
As I have often said previously, I am deeply convinced of the urgent need for a debt relief initiative at the multilateral level (mainly through the G20/Paris Club), accompanied by action concerted diplomatic and economic action to avoid a real debt crisis. But debt relief alone is not enough: it must be part of a renewed model of sustainable financing, particularly in Africa.
“Debt relief must be part of a renewed model of sustainable financing. The EU’s call for a global recovery initiative that links debt relief to investment is essential.”
To prevent the gap between the leading and lagging countries from widening, it is essential to ensure that the future is green and inclusive, and that everyone can ride the digital wave. The EU’s call for a global recovery initiative that links debt relief to investment is essential.
The debt problem will persist over time
The question of debt sustainability for many low- and middle-income countries is likely to remain on the agenda for months. Despite the significant internal difficulties we are experiencing, the way in which we deal with this issue, in close coordination with our Member States, will have a decisive influence on Europe’s future role in the world and, in particular, on its relations with Africa.
