Developing Countries, their Debts and COVID-19

Developing Countries, their Debts and COVID-19

Posted by Farrukh Shah

Monday, June 22, 2020

International Recent

Developing Countries, their Debts and COVID-19

 

Developing Countries are struggling to keep their economy on track of growth and hence it is very difficult to pay back the debts.

The economies are struggling to keep the pace and due to it there is massive increase in job losses. The situation is headed towards World War II levels.

As the COVID-19 pandemic wreaks havoc on the global economy, poorer countries who will be hardest hit by the virus will also face a debt crisis.

 

UN

 

Without aggressive policy action, the COVID-19 pandemic could turn into a protracted debt crisis for many developing countries. Debt risks in developing countries were already high prior to the pandemic. These risks are now materializing. High debt servicing hamstrings developing countries’ immediate response to COVID-19 and rule out needed investment in the United Nations Sustainable Development Goals (SDGs). A debt crisis would dramatically set back sustainable development.

The global community has responded. Partial debt service suspensions were offered to 76 low-income developing countries eligible to the World Bank’s International Development Association (IDA) — which includes all least developed countries (LDCs) and 13 small island developing States (SIDS). The IMF also offered further debt service relief to 25 of the poorest countries.

But actions taken so far will not suffice to avoid defaults. Multilateral and commercial debt are excluded from debt service suspension for all countries, and many middle-income countries at risk are entirely excluded from the initiative. Debt relief  — which many developing countries will eventually need if they are to recover and progress toward the SDGs  — is not on the table.

World Bank

With the encouragement of the WBG, IMF and others, G20 economies are allowing the world’s poorest countries to suspend repayment of official bilateral credit on May 1. This initiative will do much to safeguard the lives and livelihoods of millions of the most vulnerable people.

The G7 has also indicated that it would suspend debt obligations of the poorest countries.

 

How the World Bank is Helping

 

As countries around the world work to contain the spread and impact of coronavirus (COVID-19) the World Bank Group (WBG) is taking broad, fast action to help developing countries strengthen their pandemic response and health care systems:

The World Bank Group and other Bretton Woods institutions are ramping up financial support to IDA countries to enable them to overcome the crisis. As always, we first assess the country’s overall financial picture, including the debt profile and repayment implications.

The WBG will deploy as much as $160 billion over the next 15 months, of which $50 billion will be in either grants or highly concessional terms from IDA, the World Bank’s fund for the poorest.

This support will be tailored to the health, economic and social shocks countries are facing. We are currently assisting more than 100 countries—home to 70 percent of the world’s population⁠—with COVID-19 responses.

In addition to ongoing health support, operations will emphasize social protection, poverty alleviation and policy-based financing.

We provide grants—rather than loans—to most IDA countries at high risk of debt distress. For IDA countries—like those in Africa—the interest rates on World Bank lending is extremely low and the maturities and grace periods are long.

Half of IDA countries already receive at least half—if not all—of their IDA resources on grant terms, which carry no re-payments at all.

IDA automatically adjusts terms of assistance. IDA recognizes that debt sustainability is a key concern for many low-income countries.

For this reason, when countries face increasing difficulties in servicing their external debt, including because of a major crisis, IDA automatically adjusts the terms of its assistance so that countries can continue to access further funds and technical assistance without increasing their debt.

 IDA recycles all of the debt service payments it receives into new financial assistance for the poorest countries. These resources are needed to fund critical new COVID-19 health projects, bundling financing with expert technical assistance. Continued operation of IDA on its existing terms will best allow IDA to meet client needs during the current crisis.