A world apart: How rich countries can strengthen the COVID safety net

A woman receives the AstraZeneca / Oxford vaccine as part of the COVAX coronavirus disease (COVID-19) program at Eka Kotebe General Hospital in Addis Ababa, Ethiopia on March 13, 2021. Photo via Tiksa Negeri / REUTERS .

By allowing the International Monetary Fund (IMF) to provide substantial amounts of foreign exchange reserves to its 190 member countries, the international community has made significant progress in combating the impact of COVID-19. But more needs to be done to help low-income countries that remain burdened by the economic and human costs of the pandemic.

This month, senior government officials meeting virtually under the auspices of the IMF and the World Bank authorized the issuance of $ 650 billion in IMF Special Drawing Rights (SDRs), a reserve asset that will be redeemable for hard currencies. In addition, the Group of Twenty (G20) governments have agreed to extend until the end of this year a moratorium on debt service payments by the poorest countries on loans from G20 lenders. This moratorium has already released $ 5.7 billion for 43 countries since it came into effect a year ago, with an additional $ 7.3 billion postponed possible by the end of June, according to the president of the World Bank , David Malpass.

However, these measures will not be enough. Low-income countries have been hit by the same recession that advanced and emerging economies experienced in 2020, but the IMF predicts that their rebound will be much slower. Thus, the tens of millions of people in low-income countries who have fallen back into extreme poverty as a result of the pandemic have little hope of improvement in the coming year. Additional actions are needed in several areas:

  • No rich country has stepped in to offer new country-to-country assistance to help poor countries counter the effects of the pandemic on public health and the economy. This contrasts sharply with the willingness of the Group of Seven (G7) countries to provide bilateral aid to African countries at the height of the 2008 global financial crisis.
  • The G20 has made little concrete progress in implementing its framework for restructuring the debts of countries whose loan obligations have become unsustainable during the pandemic.
  • So far, the G20 has not responded to the failure of private sector creditors – who hold a significant portion of low-income country debt – to join in its debt relief and restructuring initiatives. debt.
  • A large part of the globe is unlikely to gain meaningful access to COVID vaccines before 2022, or even 2023, which means the virus and its variants could continue to spread, mostly affecting low-income countries.

These interrelated issues, if left unresolved, could cause a long delay in resuming growth in developing countries to levels that could offset the human impact of the crisis, leading to an increased burden of poverty. the debt. The IMF has offered a brighter economic outlook for 2021 than many would have hoped a year ago, with global growth now expected to reach 6% this year, largely due to the resurgence of the US economy. But the fund has issued a stern warning that the debts of countries that have achieved emerging market status could become a heavy burden if the pandemic continues. “The future presents daunting challenges,” wrote IMF chief economist Gita Gopinath. “The pandemic has not yet been overcome and cases of the virus are accelerating in many countries. Recoveries also diverge dangerously from country to country and within countries. “

Agreement to issue SDRs can help, although many bureaucratic hurdles remain. This summer, the IMF will make available to low-income countries the equivalent of about $ 21 billion in SDRs in reserves – an allocation out of a total of $ 650 billion that represents their weight in the global economy. . But the assets will not be immediately available as currency. First, fund members will need to agree on procedures for each country to use its allocations by exchanging them for other currencies. Second, members will need to agree on how richer countries can redistribute their own SDR allocations to low-income countries. In the absence of significant bilateral aid from rich countries – in the form of grants or low-interest loans – the transfer of SDRs could be crucial in helping low-income countries respond to the pandemic . U.S. Treasury Secretary Janet Yellen said the United States looks forward to discussing ways to deploy SDRs to support low-income countries.

Another major obstacle is debt restructuring. Three African countries – Chad, Ethiopia and Zambia – have called for restructuring their debt burden under a common framework for debt treatments approved by the G20 last year, and others countries are expected to follow. But this process was blocked by procedural issues such as the composition of creditors committees that would negotiate with debtor governments. Governments involved in the Common Framework negotiations still don’t know how much money and what influence China – the largest bilateral creditor of low-income countries, with hundreds of billions of dollars in loans – is willing to make. engage in restructuring.

There are also differences in the role of private sector lenders, which range from Eurobond holders in Ethiopia, Zambia and other countries to commodity and mining giant Glencore, which owns the most. much of Chad’s debt. Private sector lenders have refused to participate in the G20 debt service moratorium in the absence of country-by-country negotiations, and their role in debt restructuring remains unclear.

While the role of the private sector deserved several mentions in statements released this month by G20 finance ministers and the IMF, there was little evidence at respective meetings that governments were prepared to take a harder line. against financiers. However, officials suggested that private sector participation in the common framework will be an integral and inevitable part of the G20’s overall strategy to deal with debt distress. It is probably only a matter of time before the formal sector deploys the carrots (and sticks) needed to bring a recalcitrant private sector into the restructuring process. Over the past year, senior officials have spoken of making it compulsory for private bondholders to participate in any sovereign debt restructuring. Private sector fears over the common framework forcing them to disclose proprietary information have also been dismissed as officials believe the public and private interest is best served by greater transparency on all debts owed by low-income countries. , but officials are prepared to be flexible about how certain categories of debt data are made public.

Finally, there is the issue of “vaccination, vaccination, vaccination”, as Swedish Finance Minister Magdalena Andersson said at an IMF press conference. So far, only a small percentage of COVID vaccines have been made available to developing countries. Pandemic tools for low-income countries, including the COVAX Facility for Vaccine Delivery, face a $ 19 billion funding gap, even after the Biden administration, the World Bank and other donors contributed $ 14.1 billion. India’s commitment to provide millions of vaccines to other countries has been halted as it battles a serious resurgence of the virus, and questions have arisen over the effectiveness of China’s Sinovac vaccine, which has been supplied to countries from Indonesia to Turkey and Brazil. . By some estimates, dozens of countries in the South will not receive adequate vaccine supplies until 2023.

While the IMF has made significant strides in finding ways to help low-income countries during the pandemic, many others – especially creditor governments and private lenders – have failed to respond adequately. This means the developing world faces a deepening crisis just as some countries start to gain the upper hand against COVID-19. These divergent fortunes do not bode well for a global recovery.

Jeremy Mark is a senior researcher at the Center for Geoeconomics of the Atlantic Council. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on twitter @ JedMark888.

Vasuki Shastry, formerly at the IMF, Monetary Authority of Singapore and Standard Chartered Bank, is the author of the book Has Asia lost it? Dynamic past, turbulent future. Follow him on twitter @vshastry.

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