Global Corporations and Economy
What Can Be Done with the Debts of Poor Countries in the Context of the Global Crisis?
© 2020 Jerome Delay/AP
In connection with the coronavirus epidemic, the members of the world community are facing economic and social problems at home and are often fencing themselves off from the rest of the world. Fortunately, however, they haven’t forgotten about the most poor and vulnerable countries. On the contrary, they appear decisively united in their desire to help them.
The unprecedentedly dangerous situation has given rise to quick, effective and coordinated decisions on the part of the world's leading powers. However, these efforts, obscured by the stream of other, more "interesting" information, have gone almost unnoticed.
The coronavirus epidemic continues to wreak havoc around the world. It was clear from the beginning that people living in developing and poor countries would be most affected by the pandemic. The internal problems of these countries include low human resources in the public administration system, including health care, underdevelopment of general and medical infrastructure and personnel, a chronic deficit in financing social programmes, and substandard educational opportunities. For example, at the end of last year, Zambia had one doctor for every 10,000 people. In Mali, there were only three oxygen ventilators for every million inhabitants.
The widely-accepted concept in rich countries that maximum social distancing is the only correct strategy for dealing with a pandemic simply does not work in poor countries. With the introduction of restrictions or rigid social distancing, a huge mass of self-employed people immediately loses their only source of livelihood. According to estimates provided by the International Labour Organisation (ILO), two billion people employed in the informal economy in developing countries are at maximum risk of contracting the coronavirus. They simply have to continue to work in conditions of direct physical contact; to make matters worse, people often live in overcrowded indoor spaces, with minimal access to sanitary services.
Moreover, there are external problems associated with a sharp decline in foreign trade, especially exports to developed countries, significant capital outflows, falling commodity prices, massive returns of migrants and a significant reduction in remittances from abroad.
All these factors have contributed to the rapid spread of the disease, a sharp drop of economic activity, and, as a result, to mass unemployment. The shrinking economies of these countries could land half a billion more people in poverty, warns a new study by the United Nations Conference on Trade and Development (UNCTAD). As a result, masses of angry people deprived of their sources of livelihood could go to the streets. Riots and the threat to political and economic stability are becoming a reality for many countries.
A number of organisations, such as the well-known charity Oxfam and a confederation of 20 respected NGOs have called on world leaders to agree to a radical US $2.5 trillion economic rescue plan for poor nations to "keep poor countries and poor communities afloat". Oxfam said the new global economic plan should include at least $1 trillion in debt relief for developing countries, adding that the same amount should be placed in an international reserve that countries could use to develop their national health care systems. It is obvious that such extreme proposals are practically unrealisable, but even their existence clearly shows the scale and drama of the current, truly global crisis.
Ahead of the annual spring meetings of the International Monetary Fund (IMF) and the World Bank (WB) on April 14-17 this year, I was among 92 former presidents and prime ministers who signed an open letter to the G20 governments demanding immediate and coordinated international actions to mobilise the resources needed to combat the coronavirus crisis. We stressed that in connection with the unprecedented crisis, donor countries should immediately begin procedures to restructure developing countries' debts to bilateral and multilateral international creditors. The released funds should be directed towards the fight against the pandemic.
Given the unprecedented international pressure, which was joined by virtually all international financial institutions, the G20 governments agreed to "support the initiative to suspend public debt service payments for the poorest countries". Saudi Arabia's Finance Minister Mohammed al-Jadaan, chairing the summit, said that action to freeze both core payments and interest payments would free up additional funds for developing countries. As part of the Debt Service Suspension Initiative (DSSI), payments of about $ 12 billion due from May 1 to the end of this year have been postponed. Recipient countries will need to use these funds to improve their health care systems and fight the pandemic.
Donor countries also agreed to allocate additional funds in the amount of $50 billion through IMF procedures to fight the coronavirus through the emergency financing mechanism, and $14 billion through WB projects. Additional resources will also be provided through regional development banks such as the Asian and African Development Banks.
As announced by the International Institute of Finance, which represents 450 private banks, hedge funds and other non-governmental financial institutions worldwide, shortly after the decisions, private lenders are also joining international voluntary debt relief efforts. Refinancing through this instrument amounts to about US $8 billion. It was very important to do this, as donors are usually reluctant to agree to debt relief, due to the fact that recipients sometimes use borrowed funds to service debts before private lenders.
Kristalina Georgieva, Managing Director of the International Monetary Fund, welcomed the G20's "exceptionally swift" decision to reduce debt. Debt relief is in everyone's interest, she said, "as the global community should be as strong in the fight against the global pandemic as its weakest player".
Thus, for the first time in modern history, in a very complex and tense geopolitical environment, the leading world powers have taken a consensus decision on debt management. Indeed, among the signatories were, for example, the United States, China and Russia, which, as a rule, adhere to completely opposite views on global processes.
At the same time, after the April decision of the G20 leaders, the socio-economic situation with the coronavirus in the world has deteriorated significantly. Hopes for an early end to the pandemic have not materialised. The new statistics speak for themselves. Now in the world there are already more than 25 million people who have contracted the illness, and over 800 thousand have perished due to the terrible disease. This year, for the first time, after thirty years of continuous poverty reduction, it began to grow rapidly. The World Bank estimates that up to 100 million people are at risk of being in extreme poverty. The United Nations World Food Programme (WFP) predicts that by the end of this year, about 270 million people worldwide will experience hunger, more than double the approximately 130 million people last year. The International Labour Organisation (ILO) predicts that up to 340 million jobs could be lost by the end of the year.
Obviously, creditors have no choice but to extend the moratorium on debt payments to poor countries next year. On July 18, the IMF and the World Bank, at a special meeting with donors, called on the G20 to extend the debt restructuring programme, citing the "increasingly difficult" situation facing developing countries. The response from the G20 countries was positive. “We will consider a possible extension of the DSSI initiative in the second half of 2020, taking into account the evolving situation with the COVID-19 pandemic,” the G20 finance ministers and central bankers said in a July statement.
It is expected that in October this year, during the Annual Meetings of the IMF and the World Bank, representatives of the G20 countries will get a report from these institutions on the liquidity needs of countries eligible for debt relief. This should help the leaders of these countries decide on the next steps, probably at their summit scheduled for November this year.
China’s position at the beginning of the process of restructuring sovereign debts to developing countries was the most intriguing, as it is not a member of the so-called Paris Club of creditors. As you may know, this organisation develops and implements the principles of managing sovereign loans issued by its members, making sure that creditors act in accordance with the established rules. In the past, China acted outside the framework of the Paris Club, independently determining how and under what conditions the allocation of funds and the management of external loans should be carried out under the guarantees of the governments of the borrowing countries. This year, and for the first time in its history, China has fully disclosed, within the framework of generally accepted standards, its current relationship with borrowers.
Following an appeal by the WB Executive Council earlier this year that the bank wants to disclose more detailed data on the government debt of the respective countries, both lenders and borrowers provided all the necessary data. The recently-created WB database has yielded a real breakthrough on the path to the full transparency of relations between lenders and borrowers. Now we know how many debts each of the borrowers has, as well as when and to what extent these debts must be repaid.
This database provides a detailed breakdown of government-guaranteed debt levels in 73 low-income countries from 2014 to 2018, and projected sovereign debt service volumes from 2020 to 2024. These data showed that as of 2018 alone, out of a total debt of $514 billion, these countries owed $104 billion to Chinese creditors. The reported amount includes direct lending from the Chinese government, from "political banks" such as the China Development Bank, and loans from commercial lenders owned by the state. For example, the same countries owed $106 billion to the World Bank and $60 billion to private holders of sovereign bonds.
The new data directly confirmed the fact that China is by far the largest lender to low-income countries. It accounts for about 20% of the total external debt of 73 countries eligible to participate in the G20 initiative, and about 30% of their debt servicing this year. This is more than all Paris Club creditors, including the United States, Japan and all European countries, combined.
For a complete list of public debts to various creditors from all 122 developing countries, the available data are not yet complete. Estimates from various sources show that the total debt of these countries to China is about $400 billion, the debt to the World Bank is about $300 billion, aggregate debt to the Paris Club member governments totals about $180 billion, and debt owed the IMF totals about $60 billion US dollars.
Moreover, according to internal Chinese sources, these figures are even higher. Statistics from the People's Bank of China on the country's international investment as of the end of 2017 showed that the volume of international loans provided by China amounted to an "astronomical" amount: 637 billion US dollars.
Thus, it can be argued with complete certainty that at present China is playing not only a leading, but a dominant role in the system of providing and managing the sovereign debts of developing countries. It seems that China will continue its policy of being the dominant player in the global sovereign lending process in the future. On June 17, President Xi Jinping made a clear statement, "We call on Chinese financial institutions to respond to the G20 Debt Service Suspension Initiative (DSSI)".
Perhaps the day is not far off when China will join the Paris Club of Creditors. A situation in which the largest world creditor is outside the structures of the Paris Club is simply unnatural.
It is now clear that any action to manage the external debt of vulnerable countries must involve China.
We now live in an unprecedented time, and this time is giving rise to unprecedented global solutions. According ancient Chinese Taoist teachings, any crisis consists of the interaction of two polarities: the proper "crises", as well as the "opportunities" that flow into each other. A crisis today can be an opportunity tomorrow.
The current crisis has emphasised with particular clarity the need to unite the world community. It is possible that it is the pandemic that will push humanity onto the path to creating a more harmonious and just society. Further steps to alleviate the debt burden and, possibly, to abolish some of them, could be key steps to reducing socio-economic inequality in the world. The process of helping the most vulnerable communities recover from the horrific impact the pandemic can be a process that humankind will be proud of in the future. The lives of too many people are now "hanging by a hair".
The unprecedentedly dangerous situation has given rise to quick, effective and coordinated decisions on the part of the world's leading powers. However, these efforts, obscured by the stream of other, more "interesting" information, have gone almost unnoticed.
The coronavirus epidemic continues to wreak havoc around the world. It was clear from the beginning that people living in developing and poor countries would be most affected by the pandemic. The internal problems of these countries include low human resources in the public administration system, including health care, underdevelopment of general and medical infrastructure and personnel, a chronic deficit in financing social programmes, and substandard educational opportunities. For example, at the end of last year, Zambia had one doctor for every 10,000 people. In Mali, there were only three oxygen ventilators for every million inhabitants.
The widely-accepted concept in rich countries that maximum social distancing is the only correct strategy for dealing with a pandemic simply does not work in poor countries. With the introduction of restrictions or rigid social distancing, a huge mass of self-employed people immediately loses their only source of livelihood. According to estimates provided by the International Labour Organisation (ILO), two billion people employed in the informal economy in developing countries are at maximum risk of contracting the coronavirus. They simply have to continue to work in conditions of direct physical contact; to make matters worse, people often live in overcrowded indoor spaces, with minimal access to sanitary services.
Moreover, there are external problems associated with a sharp decline in foreign trade, especially exports to developed countries, significant capital outflows, falling commodity prices, massive returns of migrants and a significant reduction in remittances from abroad.
All these factors have contributed to the rapid spread of the disease, a sharp drop of economic activity, and, as a result, to mass unemployment. The shrinking economies of these countries could land half a billion more people in poverty, warns a new study by the United Nations Conference on Trade and Development (UNCTAD). As a result, masses of angry people deprived of their sources of livelihood could go to the streets. Riots and the threat to political and economic stability are becoming a reality for many countries.
A number of organisations, such as the well-known charity Oxfam and a confederation of 20 respected NGOs have called on world leaders to agree to a radical US $2.5 trillion economic rescue plan for poor nations to "keep poor countries and poor communities afloat". Oxfam said the new global economic plan should include at least $1 trillion in debt relief for developing countries, adding that the same amount should be placed in an international reserve that countries could use to develop their national health care systems. It is obvious that such extreme proposals are practically unrealisable, but even their existence clearly shows the scale and drama of the current, truly global crisis.
Ahead of the annual spring meetings of the International Monetary Fund (IMF) and the World Bank (WB) on April 14-17 this year, I was among 92 former presidents and prime ministers who signed an open letter to the G20 governments demanding immediate and coordinated international actions to mobilise the resources needed to combat the coronavirus crisis. We stressed that in connection with the unprecedented crisis, donor countries should immediately begin procedures to restructure developing countries' debts to bilateral and multilateral international creditors. The released funds should be directed towards the fight against the pandemic.
Given the unprecedented international pressure, which was joined by virtually all international financial institutions, the G20 governments agreed to "support the initiative to suspend public debt service payments for the poorest countries". Saudi Arabia's Finance Minister Mohammed al-Jadaan, chairing the summit, said that action to freeze both core payments and interest payments would free up additional funds for developing countries. As part of the Debt Service Suspension Initiative (DSSI), payments of about $ 12 billion due from May 1 to the end of this year have been postponed. Recipient countries will need to use these funds to improve their health care systems and fight the pandemic.
Donor countries also agreed to allocate additional funds in the amount of $50 billion through IMF procedures to fight the coronavirus through the emergency financing mechanism, and $14 billion through WB projects. Additional resources will also be provided through regional development banks such as the Asian and African Development Banks.
As announced by the International Institute of Finance, which represents 450 private banks, hedge funds and other non-governmental financial institutions worldwide, shortly after the decisions, private lenders are also joining international voluntary debt relief efforts. Refinancing through this instrument amounts to about US $8 billion. It was very important to do this, as donors are usually reluctant to agree to debt relief, due to the fact that recipients sometimes use borrowed funds to service debts before private lenders.
Kristalina Georgieva, Managing Director of the International Monetary Fund, welcomed the G20's "exceptionally swift" decision to reduce debt. Debt relief is in everyone's interest, she said, "as the global community should be as strong in the fight against the global pandemic as its weakest player".
Thus, for the first time in modern history, in a very complex and tense geopolitical environment, the leading world powers have taken a consensus decision on debt management. Indeed, among the signatories were, for example, the United States, China and Russia, which, as a rule, adhere to completely opposite views on global processes.
At the same time, after the April decision of the G20 leaders, the socio-economic situation with the coronavirus in the world has deteriorated significantly. Hopes for an early end to the pandemic have not materialised. The new statistics speak for themselves. Now in the world there are already more than 25 million people who have contracted the illness, and over 800 thousand have perished due to the terrible disease. This year, for the first time, after thirty years of continuous poverty reduction, it began to grow rapidly. The World Bank estimates that up to 100 million people are at risk of being in extreme poverty. The United Nations World Food Programme (WFP) predicts that by the end of this year, about 270 million people worldwide will experience hunger, more than double the approximately 130 million people last year. The International Labour Organisation (ILO) predicts that up to 340 million jobs could be lost by the end of the year.
Obviously, creditors have no choice but to extend the moratorium on debt payments to poor countries next year. On July 18, the IMF and the World Bank, at a special meeting with donors, called on the G20 to extend the debt restructuring programme, citing the "increasingly difficult" situation facing developing countries. The response from the G20 countries was positive. “We will consider a possible extension of the DSSI initiative in the second half of 2020, taking into account the evolving situation with the COVID-19 pandemic,” the G20 finance ministers and central bankers said in a July statement.
It is expected that in October this year, during the Annual Meetings of the IMF and the World Bank, representatives of the G20 countries will get a report from these institutions on the liquidity needs of countries eligible for debt relief. This should help the leaders of these countries decide on the next steps, probably at their summit scheduled for November this year.
China’s position at the beginning of the process of restructuring sovereign debts to developing countries was the most intriguing, as it is not a member of the so-called Paris Club of creditors. As you may know, this organisation develops and implements the principles of managing sovereign loans issued by its members, making sure that creditors act in accordance with the established rules. In the past, China acted outside the framework of the Paris Club, independently determining how and under what conditions the allocation of funds and the management of external loans should be carried out under the guarantees of the governments of the borrowing countries. This year, and for the first time in its history, China has fully disclosed, within the framework of generally accepted standards, its current relationship with borrowers.
Following an appeal by the WB Executive Council earlier this year that the bank wants to disclose more detailed data on the government debt of the respective countries, both lenders and borrowers provided all the necessary data. The recently-created WB database has yielded a real breakthrough on the path to the full transparency of relations between lenders and borrowers. Now we know how many debts each of the borrowers has, as well as when and to what extent these debts must be repaid.
This database provides a detailed breakdown of government-guaranteed debt levels in 73 low-income countries from 2014 to 2018, and projected sovereign debt service volumes from 2020 to 2024. These data showed that as of 2018 alone, out of a total debt of $514 billion, these countries owed $104 billion to Chinese creditors. The reported amount includes direct lending from the Chinese government, from "political banks" such as the China Development Bank, and loans from commercial lenders owned by the state. For example, the same countries owed $106 billion to the World Bank and $60 billion to private holders of sovereign bonds.
The new data directly confirmed the fact that China is by far the largest lender to low-income countries. It accounts for about 20% of the total external debt of 73 countries eligible to participate in the G20 initiative, and about 30% of their debt servicing this year. This is more than all Paris Club creditors, including the United States, Japan and all European countries, combined.
For a complete list of public debts to various creditors from all 122 developing countries, the available data are not yet complete. Estimates from various sources show that the total debt of these countries to China is about $400 billion, the debt to the World Bank is about $300 billion, aggregate debt to the Paris Club member governments totals about $180 billion, and debt owed the IMF totals about $60 billion US dollars.
Moreover, according to internal Chinese sources, these figures are even higher. Statistics from the People's Bank of China on the country's international investment as of the end of 2017 showed that the volume of international loans provided by China amounted to an "astronomical" amount: 637 billion US dollars.
Thus, it can be argued with complete certainty that at present China is playing not only a leading, but a dominant role in the system of providing and managing the sovereign debts of developing countries. It seems that China will continue its policy of being the dominant player in the global sovereign lending process in the future. On June 17, President Xi Jinping made a clear statement, "We call on Chinese financial institutions to respond to the G20 Debt Service Suspension Initiative (DSSI)".
Perhaps the day is not far off when China will join the Paris Club of Creditors. A situation in which the largest world creditor is outside the structures of the Paris Club is simply unnatural.
It is now clear that any action to manage the external debt of vulnerable countries must involve China.
We now live in an unprecedented time, and this time is giving rise to unprecedented global solutions. According ancient Chinese Taoist teachings, any crisis consists of the interaction of two polarities: the proper "crises", as well as the "opportunities" that flow into each other. A crisis today can be an opportunity tomorrow.
The current crisis has emphasised with particular clarity the need to unite the world community. It is possible that it is the pandemic that will push humanity onto the path to creating a more harmonious and just society. Further steps to alleviate the debt burden and, possibly, to abolish some of them, could be key steps to reducing socio-economic inequality in the world. The process of helping the most vulnerable communities recover from the horrific impact the pandemic can be a process that humankind will be proud of in the future. The lives of too many people are now "hanging by a hair".
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.
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