As the coronavirus began to spread across the globe in the first half of 2020, international aid organizations began sounding the alarm about the outsized impact the virus would likely have on poor countries — especially those that are already forced to dedicate significant amounts of their annual budgets to paying off sovereign debts.
Now, nearly a year into the pandemic, many of those warnings are coming true, and activists say efforts to relieve the debt burden on developing countries have been ineffectual at best, and a handout to private sector lenders at worst.
The Institute of International Finance (IIF) last month warned of a “debt tsunami” threatening the world economy, as governments and private businesses took on more than $15 trillion in additional obligations over the first 10 months of the year. In developing countries, the debt burden has increased by 26% in that time, the IIF found, while tax revenues declined sharply.
World Bank and International Monetary Fund data show that at least 35 countries are currently in or at high risk of “debt distress.” They include Ghana, Kenya, Afghanistan, Tajikistan, Haiti, Dominica, Tonga and Tuvalu. The problem is particularly acute in sub-Saharan Africa, where IMF data indicate that average debt has ballooned to 65.6% of gross domestic product, and debt service obligations average 32.3% of annual revenue.
The result has been a complex set of problems for the leaders of developing countries. With revenues lower, payments on existing debts take up an even larger share of annual spending, creating difficult choices when substantial public health investments are needed. And many countries have been unwilling to avail themselves of programs that would allow them to restructure their debts, out of fear that it would impact the way international lenders view their creditworthiness, making it harder to borrow in the future.
A prime example of the problem is apparent in Zambia. The African nation last month defaulted on a $42.5 million Eurobond payment. Experts fear that is only the first of what could be multiple sovereign debt defaults resulting from pressures of the coronavirus.
Earlier this year, the G-20 group of large industrialized nations approved a plan, known as the Debt Service Suspension Initiative (DSSI), that gave major international debt holders such as the International Monetary Fund permission to allow more than 70 highly indebted developing countries to defer payment on some of their debts through the end of the year. Last month, the program was extended through June 2021.
Advocates for reducing the debt burden of developing nations have decried the program as a half measure, because it does not require private lenders — banks, hedge funds and other major private sector creditors — to offer similar terms. Some pointed out that it amounted to a gift to private sector creditors by freeing up funds that could be used to pay them in full.
“The extension of the limited debt suspension scheme does little to tackle the profound debt and health crises impacting many of the poorest people in the world,” said Sarah-Jayne Clifton, director of Jubilee Debt Campaign, a London-based group advocating for debt forgiveness for developing nations.
“The G-20’s failure to include private and multilateral lenders in the scheme shows a disregard for the scale of the global South debt crisis and will mean over $3 billion in debt payments continue to leave the poorest countries every month. It is scandalous that private lenders are still making large profits out of poor countries at this time,” Clifton said in an email to VOA.
Separate from the extension of the Debt Service Suspension Initiative program, international creditors also announced that they had agreed on the parameters of a “common framework” for sovereign debt restructuring. It would create a clearinghouse of information about a country’s debt obligations and financial condition that would provide unprecedented transparency for creditors working with countries to restructure debts.
However, there is still no obligation for private creditors to offer any sort of forbearance to indebted countries, and debt relief advocates argue that only the outright elimination of large outstanding debts will truly help countries like Zambia get out from under their financial burdens.
“The G-20 Common Framework for Debt Treatments falls far short of what is needed to tackle the wave of debt crises in poorer countries,” said Tim Jones, head of policy at Jubilee Debt Campaign, in an email to VOA. “With many countries facing debt crises and Zambia recently defaulting, the G-20 need to stop kicking the can down the road and build a transparent and inclusive system for canceling debts to a sustainable level across private, bilateral and multilateral lenders.”
It is time, Jones said, for individual countries — specifically the United States and the United Kingdom — to act.
“The G-20 say private lenders should be included in debt restructurings, but do not offer debtor countries the tools to do that,” he said. “Almost all international debt contracts are owed under English or New York law. The U.K. and U.S. need to pass legislation to enable debts to private lenders to be restructured.”
However, the U.S. and the Britain are both suffering from coronavirus outbreaks that are an order of magnitude worse than those in much of the developing world along with simultaneous political strife — a chaotic presidential transition in the U.S. and the prospect of a “no-deal Brexit” in Britain. Under the circumstances, the chances of policymakers in either country turning their attention to the developing world in the near term appear slim at best.