Sussex Sustainability Research Programme

COVID-19 and the debt crisis: Where is the elephant in the room?

Three things have defined the response by the G20, the IMF and World Bank to the debt crisis in developing countries: more loans, a debt service relief to the IMF and the rescheduling of bilateral debts.

More loans

The IMF temporarily scaled up two facilities that countries can apply to without the need for a fully conditional programme: the Rapid Credit Facility (RCF) for concessional and the Rapid Financing Instrument (RFI) for non-concessional loans. The funds requested and approved since early March are being tracked at a new dataset at IMF Monitor, and are summarised in the figure below.

IMF approved financing requests March - May 2020

Department of Economics, SOAS, University of London, This blog is based on a talk given at the SOAS Economics of COVID-19 Seminar Series available here.

Most countries accessing this finance are low income and in sub Saharan Africa. In this period countries have also had funds approved through existing programmes in place, augmentations of existing programmes in place or activated precautionary funding lines previously agreed.

The dataset tracks across three issues:

  • Sense checker: How many countries already in severe debt difficulty are being lent more funds to deal with a health pandemic? Answer: Many. As of May 7th, of the countries that receive a risk rating, 42% of loans are to countries in or at high risk of debt distress.
  • Transparency checker: how many loans are approved with accompanying data? Answer: Few. As of May 7th, 10% of approved requests to all facilities have accompanying data. This prohibits public scrutiny of the assumptions on which IMF made its loans.
  • Realism Checker: When data is published what kind of assumptions are the loan decisions made on? Loans are approved based on an optimistic bounce-back and fiscal consolidation assumed to take place over the coming years.

The cost of dealing with the crisis will only increase, and yet the IMF has set itself up for the movement of low-conditionality loans to eventually become fully conditional programmes down the line, as indicated in the early April Staff paper. Financing from low-conditionality facilities is limited, with at least 19 countries having already accessed 100% of quota through RCF or RFI (more on eligibility criteria here and here).

IMF financing approved since March 2020

Debt service relief through the Catastrophe Containment and Relief Trust (CCRT)

The IMF is on a fundraising mission to collect donor funds to pay for debt service that is due to it. Several governments have pledged money to the CCRT such as the UK. On April 13th, the IMF announced it would use money in the CCRT to pay for the debt service falling due on IMF loans. The framework of this agreement is short term – through to mid-October, it applies for only a limited number of low-income countries and covers only debt service due to the IMF.

Despite this being significant for the countries involved, the amounts are trivial on a global scale, with the initial package for 25 countries amounting to approximately $215mn. The granting of this debt service is not clearly a net gain for developing countries for there is a concern that the donations going into the CCRT pot could be repurposing ODA funds. Importantly, beneficiaries of this facility are countries that the IMF loaned heavily to in a previous pandemic, Ebola. For previous experiences of IMF financing during pandemics see here.

IMF financing approved since March 2020 - countries

The G20’s Debt Service Suspension Initiative (DSSI)

The G20 got off to a slow start but on 15th April agreed to a “time-bound suspension of debt service payment” for all official bilateral creditors. It is available to all countries eligible to receive financing from IDA and all countries classified as Least developed by the UN – covering potentially 77 countries. To participate, countries must have secured or made requests for IMF financing and be current on repayments to those institutions, therefore excluding some. Duration is short, with the DSSI planned to run until end of 2020. Debts are to be rescheduled or refinanced under same terms: after a grace period of a year debts must be repaid within three years. There is no relief through this as the terms of this rescheduling are NPV neutral.

Together with prior commitments, the G20 has postponed the problem for when conditions will be arguably a lot worse. For the long-standing critique towards the Paris Club, the forum through which DSSI will be implemented, see here.

Private creditors

The G20 has called for a voluntary participation by private creditors on comparable terms, responded to here. Without an obligation to participate, the rapid financing loans by the IMF, the G20 bilateral debt rescheduling and any gains made from the IMF debt service agreement enable private creditors to be paid at the expense of the populations that will see much needed resources going to repay private creditors rather than shoring up domestic health care systems and economies.

Proposals for how to include private creditors in a standstill include imaginative use of collective action clauses (Gelpern, Hagan and Mazarei) and the proposal for a Central Credit Facility by Bolton et al. Institutional proposals include an International Developing Country Debt Authority by UNCTAD, a sovereign debt coordination group by Gelpern, Hagan and Mazarei, and a revamp of a policy leftover from the 1980s using the IMF’s Articles of Agreement, made by Munevar and Pustovit.

Legislation could be extended to protect against litigation in the main governing law areas to ensure that borrowers will not suffer if they are unable to meet their repayments. A far-reaching civil society initiative has called for debt cancellation and provision of emergency additional finance which does not create debt. Calls for such liquidity include the use of the IMF’s own resources, such as selling parts of its gold reserves. There is also a reinvigorated desire to see the IMF create more of its reserve assets, SDRs, as had been done previously during the GFC (here). The case for capital controls to stem the ‘largest capital outflow ever recorded’ was also made in late March.

The long standing issue that there is no framework for dealing with debt repayment difficulties in equitable ways, despite the evidence that debt restructurings lead to too little relief, too late, remains. Current practice leaves debt problems dragging on for decades, under extensive international surveillance and structural reform programmes, preventing fulfilment of human rights.

The IMF is approving loans where assumptions of sustainability do not exist in the expectation that many countries will seek fully conditional programmes down the line. What would avert the IMF bankrolling the repayment of private foreign creditors on the conditions of contractionary fiscal programmes, as done previously?

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Written by Christina Laskaridis, a PhD candidate in Economics at SOAS, University of London working on debt crisis resolution with an emphasis on the World Bank and the International Monetary Fund. 

Christina was a Research Fellow at Duke University's Centre for the History of Political Economy. Area interests include Sub Saharan Africa, the Franc Zone and Ethiopia. Christina also works on the political economy of the Eurozone crisis, in particular on matters relating to institutional governance reform, fiscal, monetary and debt policy.