For many low-income countries, the Covid-19 crisis has further damaged already struggling economies. 52 countries are currently experiencing a debt crisis, where the size of debt payments undermines the government’s ability to protect the basic economic and social rights of its citizens. A further 100 plus countries are considered at risk. 2020 saw a huge flight of overseas capital from developing economies.
Since May 2020 the Debt Service Suspension Initiative (DSSI), initiated by the rich G20 countries, with the World Bank and IMF, has postponed debt repayments for some of the poorest countries during the pandemic. Many indebted countries are however choosing not to take part, for fear of this impacting on their sovereign credit rating and therefore the costs of future debt.
There are now widespread calls for a more comprehensive package of debt relief for the poorest and most indebted countries. One possibility is that this could be funded by earmarking the rise in the value of gold reserves over recent years. Innovative proposals have also been put forward to combine debt relief with environmental action, where countries agree to ‘swap’ debt relief for quantifiable commitments to reduce deforestation or enhance conservation.
Eurodad (the European Network on Debt and Development) criticises the G20’s Covid debt relief package (the DSSI) for its limited impact and failure to get multilateral and private lenders to participate.
Looking back at previous debt relief programmes, the Overseas Development Institute argues that imposing strict spending conditions on debt postponement, is too complex to monitor and erodes trust between countries, and proposes a more flexible approach.
The Jubilee Debt Campaign outlines how the IMF could fund debt relief for the world’s poorest countries from the significant recent rise in the value of the IMF’s gold reserves.
Carbon Brief explain how China and other countries with high levels of overseas investment could help low-income nations tackle environmental degradation and climate change through ‘debt-for-nature’ swaps.
The Heinrich Böll Foundation shows how debt-for-climate swaps could be a ‘triple-win’ instrument, tackling the climate crisis through the protection of precious terrestrial and marine ecosystems, while also contributing to debt relief and economic recovery.
Special Drawing Rights
It is now widely expected that the International Monetary Fund (IMF) will create $650 billion in new international money to help low-income countries recover out of the pandemic. So-called ‘Special Drawing Rights’ or SDRs (which countries can draw on from the IMF) could help support both vaccination and health care programmes and infrastructure investment – particularly in green projects and ‘nature-based solutions’ – in the global South.
Under current IMF rules SDRs mainly go to richer countries (including China), so this programme will require them to ‘donate’ their allocations back to the IMF to reallocate to poorer ones, particularly in Africa. Many people are now arguing that this redistribution should be written into the IMF’s rules to ensure it is permanent. Others are calling for a larger SDR issuance as part of stronger support for a global green and resilient recovery.
Explaining how the current allocation rules for SDRs provide very little for Africa, Hannah Wanjie Ryder and Gyude Moore propose that at least 25% of the new SDRs should be put into a special fund controlled by low-income countries and allocated on the basis of need (paywalled).
Lara Merling of the International Trade Union Confederation called upon the IMF to issue special drawing rights to “stave off a debt crisis in developing countries as well as ensure countries are able to afford items of vital importance such as personal protective equipment, vaccines, medicine, and food”.
The Center for Global Development explains how SDR rules could be changed so that the funds can be more effectively targeted to where they are most needed for development.
Eurodad argues that the proposed $650 billion issuance of SDRs is too small to properly support low-income and indebted countries, and argues for a $3 trillion package.
The decision by the UK government at the end of 2020 to go back on its commitment to spend 0.7% of GDP on overseas development assistance – reducing it to 0.5% – has been widely criticised. First achieved in 2013, the UN target was embodied in UK law in 2015.
Of the 43 richer nations counted by the OECD as providing overseas development assistance (ODA) – defined as aid specifically aimed at reducing poverty in low-income countries – only five now provide 0.7% of GDP or more. The World Bank estimates that the Covid-19 crisis pushed around 120 million people around the world into extreme poverty, with almost all governments pushed into higher debt and their development plans severely retarded.
While many are calling for aid to low-income countries to be increased, others argue that the concept of aid from rich to poor nations is outdated, not least because the majority of the world’s poor no longer live in the lowest-income countries. Proponents of the concept of ‘Global Public Investment’ are attempting to forge a new multilateral approach to investing in the Sustainable Development Goals (SDGs) and ending poverty, opening up decision making to include the poor. Calls for a Global Green New Deal also embody this idea.
The UN’s 2020 Financing for Sustainable Development Report warns that global investment is insufficient to meet the Sustainable Development Goals and calls for a globally coordinated response to the Covid-19 crisis, focused on the countries most in need.
The International Expert Working Group on Global Public Investment (GPI) proposes five ‘paradigm shifts’ away from traditional top-down aid, including more representative decision making and rethinking international public finance as ‘an empowering multilateralism of a common fiscal endeavour’.
Overseas Development Institute research fellow Nilima Gulrajani examines how the Covid-19 pandemic challenges traditional notions of ‘aid’ and argues that Global Public Investment could embed a more reciprocal approach to development cooperation.
The UN trade and development organisation UNCTAD has called for a Global Green New Deal to further economic recovery and development towards the Sustainable Development Goals, with a coordinated global investment programme including both public and private finance.
Through the C40 climate leadership group, mayors of nearly 100 of the world’s leading cities have called for the resources and powers they need to drive a ‘green and just recovery’ from Covid-19 which could deliver transformative economic, health and climate benefits for urban populations.