Finance

Background

Covid-19 and debt: Going beyond debt suspension towards a systemic response to debt crises

28 September 2020 | Minutes

The COVID-19 pandemic has exacerbated existing debt vulnerabilities and triggered a new debt crisis. Despite the urgency of the situation, the multilateral response has been insufficient, and many challenges remain unaddressed. The session discussed policy alternatives to address the debt problem in developing countries.

Panellists:

Moderator: Iolanda Fresnillo, Senior Policy Officer, Eurodad

Yungong Theophilus Jong, Policy analyst, Afrodad

H.E. Aubrey Webson, Ambassador of Antigua and Barbuda, AOSIS

Lidy Nacpil, Regional coordinator, APMDD

Jeronim Zettelmeyer, Deputy Director SPR, IMF

Lidy Nacpil

Developing country debt crises predates Covid-19

Consequences: debt and fiscal consolidation has resulted in erosion and privatisation of essential services.

These dynamics have been worsened by the pandemic. Questions about effectiveness of debt suspension remain. $12 billon in debt suspension vs. $200 billion in loans + IMF loans. These trends imply a deterioration of countries’ debt profile.

Ambassador Webson

SIDS countries have an important role in FFD discussion and have called for special response, including on debt issues.

SIDS are interested in exploring how civil society can support these efforts.

Referenced UN Heads of States meeting on 29 September. Debt crisis did not begin with pandemic. SIDSs are in very tire situation: most are middle income states. Current proposals/ interventions do not address underlying issues. Current arrangements will exacerbate issues. Countries will be forced to borrow more to resolve pressing problems.

Need for a differentiated approach, particularly for SIDS. Have proposed a SIDS compact to enable new arrangement. Many SIDS are facing a liquidity not balance of payments problem.

Jointly with CSOs must highlight need for debt forgiveness rather than suspension, which does not solve the problem. Heads of States meeting and FFD process allow SIDS to sit at the table and participate in an important process. Unique problem requires unique solutions.

Yungong Theophilus Jong

AFRODAD has launched a new report on consequences of Covid in Africa.

Problems are quite diverse within Africa and within Sub-Saharan Africa (SSA), however there are some common trends. Debt burden remains a pressing issue as debt payments extract resources from essential services. Countries forced to undertake additional debt. Many SSA countries are commodity export dependent.

Illicit financial flows remain a pressing issue, as it reduces potential for domestic resource mobilisation.

There is an issue regarding the transparency and strategic use of loans, where little democratic oversight takes place and loans do not necessarily serve productive purposes.

Jeronim Zettelmeyer

Was asked: Are existing tools (DSSI) sufficient? Does the system require a more systemic approach – debt workout mechanism?

Answered:

Agrees that a more systemic solution is required. The initial quick response has met most immediate needs, however increasingly insufficient. Emerging solvency problems. That does not imply a new debt workout mechanism. It implies debt relief. However, there is a need to determine eligibility.

There has been a call by CSOs and others to avoid case by case evaluation. However, this presents problems as some may miss on general categorisation. The problem remains the participation of other creditors including private creditors. States are reluctant to participate as they feel that they will be again dependent on private creditors and capital markets.

Fund prefers a case-by-case approach. Support may be dependent on debt restructure. Premise on getting ‘solvency situation’ right. Cost of restructure is very high: need to be clear on solvency vs. liquidity distinction.

On private sector participation – challenging, but it has has worked as can be seen with Argentina. However, a new problem as arisen: cooperation among official creditors (non-Paris Club members) – here is perhaps where the DSSI has been most relevant, that is, its relevance goes beyond the amount of debt suspended.

Lidy Nacpil

Response to IMF: Repayment remains central to the discussion. However, the pandemic requires a new approach. Assurances to creditors cannot be principal consideration.

States remain very concerned about their credit ratings, as they remain dependent on borrowing. Therefore, there is a need to review how economies are structured, including domestic resource mobilisation, focus on exports, etc.

Indeed, debt suspension efforts were quick, but very limited. Question of need, not ‘eligibility’ – an entire day of discussion is needed to explore qualifications/ eligibility.

Need arenas that are not creditor-dominated, and that include the voices of those most impacted – perhaps at auspices of the UN with similar national discussions on debt and debt servicing.

Yungong Theophilus Jong

One must move beyond debt restructure. Need to address deep structural issues of unequal North-South economic relations, as noted by Lidy.

Debt restructure no longer a question of whether it is required, rather how it must be done. A collective approach is needed. Currently all countries are being bundled together – those with responsible and ‘irresponsible’ loans. From that perspective a case-by-case approach may be preferable.

African needs a more robust debt management institutional framework. The absence of institutional reform would likely lead to re-occurrence of debt pressure. The new system, whatever it is, must be developed among equals, unlike the HIPC programme.

Private debt and non-Paris Club members – these dynamics require CSO attention.

Ambassador Webson

SIDS remain particularly vulnerable to climate emergency.

We need to ensure a Covid-19 response that also addresses climate vulnerability.

IMF has worked to ‘stretch’ present arrangements but still working with old paradigms. Anxieties about credit profile. SIDSs have begun to think about new credit analysis tools. Caribbean countries have begun discussing Development Fund – perhaps considered as a reparations fund. To be managed by the Caribbean states. The Maldives have proposed Tourism Fund to support tourism-dependent countries.

Debt service remains an important constraint. SIDS continue to face more extreme weather events, etc. Working on a debt-swap for climate. Could work through a climate-finance model. Would reduce the benefit of the debt to allow for the required investment in climate action.

Must also look at how the private debt could be integrated – purchased at a discounted rate.

Bilateral debt – could be considered along the same lines. Currently debt servicing competes for resources with climate action.

Multilateral agencies should be considering how to increase grant support. Climate crises has not gone away during Covid. The current paradigm has not worked and must be changed to avoid repetition of the current situation of debt distress.

Jeronim Zettelmeyer

Agreed with much of what had been said by other panellists. Domestic systems are obviously also responsible for the debt profiles. Governments tend to overborrow. Need to change incentive and accountability.

Disagreed with Lidy’s assertion that process is skewed toward creditor interests – this may be have been true prior to 1989 when the Fund began to lend to countries in arrears.

Benchmark for involvement is premised on economic, social and politically viable reforms. Must consider costs to the population. IMF has recently been accused of being overly debtor-friendly. Systems are not perfect.

Debt-climate swap is a good idea but not innovative – has been around since 1989. However, have not been a very strong instrument in reducing debt. Agrees that there should be transfers, not only loans, by developed states to developing states – payment from those that contribute more to climate change. However, should this be done through debt cancellation.

Multilateral cancellation – MDBs are not in a position to take losses while continuing to operate. Debt relief should begin with private sector, official creditors and only in an emergency, multilateral lenders.

The current system, despite its challenges, has worked well. Contracts do include a framework for restructure.  In the end, debt relief is available.

However, a new challenge has appeared, official creditor coordination. Coordination outside Paris Club is challenging. A G20 process is required to ensure that lending parameters are largely equivalent and transparent.

Questions from the audience:

Q; Credit rating agencies/ independent debt sustainability analysis body.

Q: Regarding the assertion that a standardised approach would lead to the inclusion of countries ‘not in need’ of relief into debt cancellation schemes – not data in literature, it seems.

Jeronim Zettelmeyer

HIPC – yes, indeed one can take a hybrid approach – normally Debt Sustainability Assessments only done for those that request relief.

Credit ratings agencies– not as central as often assumed. Private institutions that provide services to creditors. Therefore, they cannot be criticised for doing their jobs.

Despite credit ratings agencies, requests for suspensions would nonetheless result in consequences.

Independent body for DSA – fact that it is done by IMF makes the need for restructure more easily acceptable to all players – the fact that it is governed by creditors lends it legitimacy. An independent body could perhaps be more ‘accurate’ but may struggle for legitimacy.  That said, Fund needs external discipline from CSOs.

Ambassador Webson:

Interested in IMF responses. On DSA body, in the end, private sector will take their own decision on analysis that is likely to be quite similar to that of the Fund.

Will continue to advocate for a loss and damage arrangement.

Lidy Nacpil

Recalled that IMF and other actors rescued Banks and other financial institutions after the 2008 great financial crisis, but nothing similar has taken place in light of the pandemic.

Must also explore why so little debt support has been available.

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