Global Financial Institutions: Responses to Pandemic Debt Distress
By: Advocacy
Tags: Debt, Pandemic, Finance, Advocacy, UN

By Neval Mulaomerovic, UNA-NCA Advocacy Fellow

The IMF Board of Governors meeting gets underway in 2017 | Stephen Jaffe/IMF

Since the 2008 financial crisis, low-income and middle-income countries have received an increasingly large amount of loans from private investors and creditor countries. Creditors, such as China, promoted large-scale infrastructure investment and launched several development projects across Southeast Asia and Africa. This trend created a surge in debt among developing countries, with the world’s poorest nations burdened with $2.8 billion in monthly debt repayments.

As a result of the COVID-19 pandemic, the International Monetary Fund (IMF) projected a global recession even larger than that of 2008 that would last well into 2021. Global trade and tourism have plummeted and public debt has reached a new peak worldwide as countries scramble to reinforce their healthcare systems and rebuild their economies. Whereas high-income countries rely on government spending and credit from their central banks to replenish their economies, developing countries are forced to turn to outside lenders, contributing to already high debt levels. As a result, in December of 2019, over 40 percent of low-income countries were in or approaching a state of debt distress. Zambia is just one example, owing $183 million in loans from foreign countries and $256 million in loans from commercial banks.

The Group of Twenty (G20) officially responded to these mounting concerns by agreeing to suspend debt payments to foreign countries through the end of the year under the Debt Service Suspension Initiative (DSSI). However, the plan only extends to 73 of the world’s poorest countries and excludes middle-income countries who are also struggling to keep up with debt repayments. Argentina, Ecuador, and Lebanon are some such nations who have already defaulted on their debts this year. Moreover, this plan failed to include debt relief for payments to global financial institutions and private creditors. DSSI participants may save up to $9 billion in debt repayments, but would still face an additional $33.7 billion in payments owed to hedge funds, multilateral institutions, and commercial banks. As a result of these gaps in enforcement, only 43 countries out of the 73 who qualify for the program have applied. Kenya, for example, rejected the plan, which would have a minuscule effect on its total debt, out of fear that it may result in a credit rating downgrade and restrict its future access to private creditors.

International financial institutions have repeatedly warned of the repercussions of the economic crisis, with the World Bank estimating that by 2021, the pandemic could push an additional 150 million people worldwide into extreme poverty. However, the IMF and World Bank have been slow-moving in their response, partly due to a lack of coordination with the US. Despite being their largest shareholder, the US has distanced itself from both institutions during the Trump administration. David Malpass, appointed by President Trump as head of the World Bank, criticized the institutions as “corrupt in their lending practices.” Under Malpass’s leadership, the World Bank has adopted stricter terms and conditions for borrowing, requiring countries to deregulate government industries and prioritize the private sector in exchange for loans. The Trump administration has also refused to expand its contributions to the IMF’s reserves and rejected the IMF’s proposal for a new issue of Special Drawing Rights (SDRs) as a form of COVID-19 relief, arguing that the benefits would mainly flow to wealthy countries. SDRs, which serve as a supplementary foreign exchange reserve and alternative to volatile currencies, can be traded for freely usable currencies between IMF members. A new allocation of SDRs, which was supported by European and African leaders, would have distributed at least $500 billion worth of the IMF’s exchangeable synthetic currency.

This dysfunction has clouded the pandemic responses of global financial institutions. Though it has doubled its lending in 2020 compared to 2019, World Bank disbursements have increased by less than a third. The IMF’s response has been similarly sluggish, distributing only $280 billion in loans out of its $1 trillion lending capacity since the start of the pandemic.

The IMF loans which were distributed so far have garnered considerable criticism for recommending austerity measures to 76 out of 91 borrowing countries, primarily affecting Latin American and African countries. In Ecuador, the IMF granted a $6.5 billion loan resulting in cuts to fuel subsidies, which poor households disproportionately rely on. Despite the rapid collapse of Ecuador’s healthcare system, the IMF also encouraged the government to reverse recent increases in healthcare spending and end cash transfers to the unemployed. An additional 14 countries will freeze or lower public sector wages, which may decrease the number of available healthcare practitioners.

Moreover, the IMF is promoting austerity measures in countries such as Angola, Nigeria, and Malawi, which plan to implement regressive value-added taxes (VAT) on everyday products primarily consumed by lower classes. These nations are particularly vulnerable as sub-Saharan Africa’s economy is expected to contract 3% and an additional 40 million people in the region are predicted to be driven into poverty in 2020. In Nigeria alone, 82.9 million people live below the poverty line and struggle to keep up with rising food and electricity prices due to VATs. Research indicates that austerity measures sacrifice a stable demand and employment rate for short-term, reversible economic growth. In fact, a one percent increase in GDP is tied to a 0.6 percentage point increase in the long-term unemployment rate and a 1.5 percent increase in the Gini index, a measure of income inequality with an index of zero indicating perfect equality and an index of one indicating perfect inequality.

Climate activists have also found issues with the IMF’s lending policies for hypocrisy regarding green energy. IMF chief Kristalina Georgieva has repeatedly encouraged borrowing countries to direct funds toward green technology and adopt carbon taxes, both to address the effects of climate change and boost economic growth. However, the IMF’s recent policy advice to India, Indonesia, the Philippines, Mozambique, and South Africa all promoted the use of fossil fuels. The plan urged governments to increase spending on infrastructure projects using coal power plants and adopt tax incentives for new investments without distinguishing between renewable and nonrenewable projects.

Though the COVID-19 pandemic has incited new criticisms of the IMF and World Bank, this lack of trust between developing countries and global financial institutions is nothing new, with many viewing these institutions as self-serving and prioritizing the interests of creditors over poorer nations. Without coordinated international support, however, developing countries will find it increasingly challenging to manage their growing debt.