Bretton Woods Committee | Fri, Oct 30, 2020
by Frank Vogl
The October 2020 annual meetings of the World Bank and the International Monetary Fund were like none others.
Never before in my memory of these annual meetings – my first was in 1974 – have the warnings from the leaders of the Bank and Fund been so grave. IMF Managing Director Kristalina Georgieva and World Bank President David Malpass used every opportunity to hammer home a brutal message: due to the impact of the pandemic the world faces both a staggering humanitarian crisis and the prospect of an international debt crisis likely to embrace dozens of countries.
As Malpass put it succinctly: “The (COVID-19) crisis has knocked more economies into simultaneous recession than at any time since 1870, and it could lead to a lost decade characterized by weak growth, a collapse in many health and education systems, and a new round of sovereign-debt crises.”
On the humanitarian front, the Bank estimates that just this year the number of people to have been plunged into extreme poverty, living below $2 per day, will total between 110 and 150 million. Poverty across the great majority of the middle- and low-income countries is rising rapidly for the first time since 1998, and women and children are hardest hit.
For example, the Bank estimates that due to the outbreak more than 1.6 billion children in developing countries have been out of school, implying a potential loss of as much as $10 trillion in lifetime earnings for these students. Gender-based violence is on the rise. Child mortality rates are also likely to rise significantly.
Both the Bank and the Fund are striving to respond. The bank has already agreed more than $16 billion of emergency projects. The Fund has pushed out over $200 billion in emergency relief financing to over 80 countries.
These actions are essential and far more Bank and Fund financing will be made available to assist so many countries whose economies are badly battered, whose export earnings have been sharply depleted, and whose domestic budget strains are acute.
These Fund and Bank actions are, however, band-aids. They are not cures. And some of this medicine may, in time, make the patients even worse off.
Debt is being piled upon existing mountains of debt. The G-20 finance ministers in their meetings in April and in October accepted the arguments of both the Bank and the Fund that emergency support measures are needed to assist the 73 poorest nations. But their response in the so-called “Debt Service Suspension Initiative (DSSI)” is both half-hearted and unlikely to make much of a real difference.
They told these countries they can defer their debt-service and repayments until June 2021. So far very few of the countries have taken up the offer with an actual volume of such deferments so far amounting to no more than $5 billion.
These countries had approximately $635 billion of outstanding international debts to governmental creditors as of the end of 2019 – with China being the largest creditor possibly accounting now for some 60 percent of this total. China’s discussions on possible restructuring of its loans are, as of now, mostly non-transparent.
Then, as of end-2019, these countries had a further $100 billion of obligations to international private creditors, with 65 percent owed to bondholders, and the remaining 35 percent owed to commercial banks and other private entities, including commodity trading companies, according to the Bank’s 2020 World Debt Tables.
The poorest countries increased their debts to international private lenders five-fold in the last decade. Now, many of them fear their credit-ratings with private creditors will be damaged if they accept the G-20 repayment deferral terms on official debt.
The G-20, in another element in its faulty plan, called upon the Institute of International Finance (IIF) to convince private creditors to join with the official ones and provide payment deferrals – but finding effective mechanisms to win such cooperation from vast numbers of hedge funds, private equity firms, pension funds and other investors, is improbable.
Meanwhile, the very poorest countries are by no means the only ones in debt distress. Lebanon is in default and in a political crisis. Argentina defaulted for the ninth time a few months ago, and now sees its economy being further battered by the coronavirus to the point where it may have to restructure its debts yet again. Venezuela – facing the worst economic and humanitarian crisis in its history has become an international outcast due to the politics of its leaders.
We are likely to see an increasing number of sovereign debt defaults. The prospects of effective restructurings providing the debtor nations with the scale of relief they need are most uncertain.
Excluding China, the total outstanding stock of international debt owed by the middle- and low-income countries exceeded $6 trillion at the end of last year, with fully $3.6 trillion held by just ten countries.
Many of the middle-income sovereign debtors are going to have to pray hard that the virus disappears and that the 2021 economy revives strongly. The IMF is forecasting a fairly good economic revival, but this is based on a heavy dose of wishful thinking. Prospects that there will not be a third wave of the pandemic (we are already seeing the second wave in the U.S. and Western Europe), are unclear. Prospects of a vaccine being universally widely available are equally unclear (and the last likely to receive the vaccine will be the swelling ranks of the world’s extremely poor people).
And then, for all of the middle- and low-income countries the crucial factor on how the humanitarian crisis is managed and how external debt-servicing is handled, depends above all on the economic management skills of their governments. Some will rise to the occasion, many will not.
In many cases, the emergency IMF and other financial inflows now are going largely right out of the door to service the vast external debts that these countries have. In numerous cases there is a distinct prospect that senior politicians and officials will divert some of the funds into their own pockets and be open to kick-back schemes that damage the domestic economies. We are already seeing multiple instances of corruption in many countries, for example, in public procurement contracting related to the supply of PPE and other essential medical needs to counter the pandemic.
In many countries, the pandemic has provided governments with the opportunities to announce “emergency measures” that constrain the ability of civil society organizations and independent journalists from monitoring the uses of public funds. My own organization, the Partnership for Transparency Fund, is funding in-country civil society organizations as they manage pilot projects in India, Uganda, the Gambia, Ghana and Argentina, to ensure that citizens in greatest need receive the healthcare support that their governments and the international community have promised – it’s an uphill struggle.
The IMF and World Bank annual meetings concluded with a clear message: the international community – official agencies and the private sector – need to respond to the humanitarian and debt crises on an unprecedented scale and to develop plans right now for the enormous challenges ahead.
New, robust debt restructuring approaches will be needed. Investors will need to be far more alert to the sovereign bond market risks and set aside their short-term “reach for yield” approaches. Far more resources will need to be mobilized to enable the Bank and Fund to expand their programs.
And, an unprecedented amount of bilateral official aid is going to be needed – and provided on terms that guards against fraud and corruption, which will demand that in-country civil society groups must be central partners.