To Cope With Covid, the World’s Poor Need Debt Relief This economic crisis is even harder than usual for the worst-off. Concessions from creditors can ease recovery.
The Covid-19 pandemic has taken lives and disrupted livelihoods in every corner of the globe. It has knocked more economies into simultaneous recession than at any time since 1870. According to World Bank estimates, in its first year it may push up to 150 million people into extreme poverty, ending two decades of steady progress on poverty reduction.
The current crisis stands in contrast to the recession of 2009, when much of the damage fell on financial assets and advanced economies were hit harder than developing countries. This time the economic downturn is much broader and deeper, and it has had an outsize impact on the poorest countries and the poorest people within each country, adding to inequality. It has hit workers whose jobs are unsteady or undocumented, and many of the most vulnerable.
The World Bank Group has moved rapidly to deploy its full financial capacity. We are on track to commit a record $160 billion over 15 months, and 40% of this amount was committed in the first six months. Our funding helps developing countries tackle the health, economic and social impacts of the pandemic. But even with the World Bank Group delivering massive positive net flows, the poorest countries need much more help.
For the most impoverished countries, the crisis and associated economic shutdowns came at a moment of particular peril. In 2019 almost half of all low-income countries were assessed by the World Bank and the International Monetary Fund to be either in debt distress or at a high risk of it. With the pandemic, the debt burden has gotten much heavier due to the devastating contraction in output, remittances and family income across the developing world. If this mounting debt goes unaddressed, it could lead to a lost decade for the world’s poorest people.
To create a recipe for recovery and growth, five ingredients are urgently needed—a sustained debt-service suspension, deep debt-burden reduction, fuller creditor participation, a level playing field to resolve debt crises, and debt transparency to protect the people. On their part, the developing countries themselves also need to take steps to ensure transparent and sustainable national policies that support the poor.
A good first step, adopted by the Group of 20, is a debt-service suspension by official bilateral creditors, which took effect on May 1 after a call from IMF Director Kristalina Georgieva and me. It allowed the poorest countries to use scarce resources to fund their pandemic response instead of debt payments. Yet relief so far has been less than anticipated because not all creditors participated. Bondholders and other private creditors have generally continued to collect full repayments throughout the crisis while China’s participation was partial in scope. Recent steps taken by China to enhance its engagement hold promise.
Participants at this month’s G-20 summit are likely to urge more creditors to suspend debt payments. This is welcome, but the suspension provides only temporary debt relief, postponing payments but not reducing the ultimate debt burden. For people in the poorest countries, there’s no light at the end of the tunnel—only more government debt.
Kicking the can down the road should not be an option. G-20 creditors should seek timely and meaningful debt relief for distressed borrowers, through both lower interest rates and actual write-downs in some cases. The common framework reached by the G-20 should avoid repeating the “extend and pretend” approach that delayed recovery after previous debt crises. The most impoverished countries need permanent fiscal space to encourage new investment and create greener, more inclusive growth.
G-20 governments should instruct and create incentives for all their public bilateral creditors, and forcefully encourage the private creditors under their jurisdiction, to participate fully in debt relief efforts. For now, too many creditors in G-20 countries are continuing to take payments.
The rationale for reducing the debt of the poorest countries is clear, but there’s no existing bankruptcy process to allow speedy and equitable workouts. Instead the current playing field is tilted to favor creditors, including the vulture variety, over poorer borrowers. It leaves no viable escape from poverty for the people of the debtor countries.
Given the severity of the crisis, debt restructurings need to reduce the amount owed and should be reached with less litigation and more transparency regarding their terms. This may require legislation in the G-20’s major capitals to reconcile better their public intentions to support the poorest countries with laws that work against debt reduction.
The resistance to debt reduction and transparency is intense. Airtight nondisclosure agreements often protect contracts, leaving their terms secret. Transparency is the only way to balance the interests of the people with the interests of those signing the debt and investment contracts. G-20 countries should require their public creditor institutions to disclose all debt contracts and make refinancing agreements public.
Developing-country governments must play their part. They need to request debt relief from their creditors. Borrower governments should also refuse nondisclosure clauses and make all their debt dealings transparent, as well as their spending. They need to adopt national policies that are fiscally sustainable, and which actively benefit the poor.
These steps can help avoid a major setback for development and help people in poverty-stricken countries break out of the devastating economic cycle that sovereign debt crises bring.
Mr. Malpass is president of the World Bank Group.
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