By enabling the International Monetary Fund (IMF) to provide substantial amounts of foreign-exchange reserves to its 190 member countries, the international community has delivered important progress in combating the impact of COVID-19. But much more is needed to assist low-income countries that remain burdened by the pandemic’s economic and human costs.
This month, senior government officials who gathered virtually under the auspices of the IMF and World Bank authorized the issuance of $650 billion of the IMF’s Special Drawing Rights (SDRs), a reserve asset that will be exchangeable for hard currency. In addition, the Group of Twenty (G20) governments agreed to extend until the end of this year a moratorium on debt-service payments by the poorest countries on loans from G20 lenders. That moratorium already has freed up $5.7 billion for forty-three countries since it went into effect a year ago, with another $7.3 billion of deferral possible by the end of June, according to World Bank President David Malpass.
However, these measures will not be enough. Low-income countries were hit by the same recession that the advanced and emerging-market economies experienced in 2020, but the IMF projects that their rebound will be much slower. So the tens of millions of people in low-income countries who have fallen back into extreme poverty because of the pandemic have little hope for improvement in the coming year. More action is needed in several areas:
- No rich nations have stepped up to offer new country-to-country assistance to help poor nations counter the public-health and economic impacts of the pandemic. This presents a stark contrast to the willingness of 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 on implementing its framework for restructuring the debts of countries whose loan obligations have become unsustainable during the pandemic.
- The G20 so far has not responded to the failure of private-sector creditors—who hold a major portion of low-income country debt—to join its debt-relief and debt-restructuring initiatives.
- A broad swath of the globe has little prospect of gaining significant access to COVID vaccines before 2022, or even 2023, meaning that the virus and its variants could continue to spread, mostly affecting low-income countries.
These intertwined issues, if left unaddressed, could lead to a long delay in the resumption of growth across the developing world at levels that could offset the human impact of the crisis, meaning debt burdens will deepen. The IMF has offered a brighter economic outlook for 2021 than many would have expected a year ago, with global growth now expected to reach 6 percent this year, largely because of a resurgent US economy. But the fund issued a stark warning that the debts of countries that have achieved emerging-market status could become a serious burden if the pandemic continues. “The future presents daunting challenges,” wrote IMF Chief Economist Gita Gopinath. “The pandemic is yet to be defeated and virus cases are accelerating in many countries. Recoveries are also diverging dangerously across and within countries.”
The agreement to issue SDRs can help, although many bureaucratic obstacles remain. This summer the IMF will make available the equivalent of about $21 billion in SDRs to low-income countries as reserves—an allocation from the total $650 billion that represents their weighting in the global economy. But the assets will not be immediately available as currency. First, the fund’s membership will have to agree on the procedures for each country to make use of its allocations by exchanging them for other currencies. Second, the members will have to agree on how wealthier countries may redistribute their own SDR allocations to low-income countries. In the absence of significant bilateral assistance from wealthy countries—either grant aid or low-interest loans—the transfer of SDRs could be crucial to help low-income countries respond to the pandemic. US Treasury Secretary Janet Yellen has said that the United States looks forward to discussing ways to deploy SDRs to support low-income countries.
Debt restructuring remains another serious hurdle. Three African countries—Chad, Ethiopia, and Zambia—have asked to restructure their debt burdens under a Common Framework for Debt Treatments agreed to by the G20 last year, and more countries are expected to follow. But that process has remained stalled by procedural issues like the composition of creditor committees that would negotiate with the debtor governments. Governments involved in the negotiations over the Common Framework are still unsure how much money and influence China—the largest bilateral creditor to low-income countries, with hundreds of billions of dollars in loans—is prepared to commit to the restructuring.
There are also differences over the role of private-sector lenders, which range from Eurobond holders in Ethiopia, Zambia, and other countries to the commodities trading and mining giant Glencore, which holds the largest single portion of Chad’s debt. Private-sector lenders have declined 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 private sector’s role merited several mentions in the communiqués issued this month by the G20 finance ministers and IMF, there was little evidence at the respective meetings that the governments were prepared to take a harder line against the financiers. However, officials have suggested that private-sector participation in the Common Framework will be an integral and unavoidable part of the G20’s overall strategy in dealing with debt distress. It is likely only a matter of time before we see the official sector deploy the necessary carrots (and sticks) to bring a recalcitrant private sector into the restructuring process. Over the past year, senior officials have spoken of mandating the participation of private bondholders in any restructuring of sovereign debts. Private-sector misgivings about the Common Framework forcing them to disclose proprietary information have also been discounted because officials see the public and private interest best served through greater transparency on all debt owed by low-income countries, but officials are prepared to be flexible about how certain categories of debt data are released publicly.
Finally, there is the issue of “vaccination, vaccination, vaccination,” as Swedish Finance Minister Magdalena Andersson declared during an IMF press conference. Only a tiny percentage of COVID vaccines so far have been made available to developing countries. Pandemic-fighting tools for low-income countries, including the COVAX Facility to supply vaccines, face a $19 billion funding shortfall, even after the Biden administration, the World Bank, and other donors have chipped in $14.1 billion. India’s commitment to provide millions of shots to other countries has ground to a halt as it struggles with a severe resurgence of the virus, and questions have arisen about 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 across the Global South will not receive adequate supplies of vaccines until 2023.
While the IMF has made important progress in finding ways to assist low-income countries during the pandemic, many others—especially creditor governments and private lenders—have failed to respond adequately. That means the developing world faces a deepening crisis just as some countries begin to gain the upper hand against COVID-19. Those diverging fortunes do not bode well for a global recovery.
Jeremy Mark is a senior fellow with the Atlantic Council’s Geoeconomics Center. He previously worked for the IMF and the Asian Wall Street Journal. Follow him on Twitter @JedMark888.
Vasuki Shastry, formerly with 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.
Image: A woman receives the AstraZeneca/Oxford vaccine under the COVAX scheme against the coronavirus disease (COVID-19) at the Eka Kotebe General Hospital in Addis Ababa, Ethiopia, on March 13, 2021. Photo via Tiksa Negeri/REUTERS.