World Bank IMF and Dev Agencies | |
World Bank IMF and Dev Agencies | |
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Thursday,
April 16, 2020 / 1:10 PM / by CFI.co / Header Image Credit:
A grand coalition of
creditors is to provide debt relief to the world's least developed countries.
Earlier this week, the International Monetary Fund (IMF) took the lead and
cancelled some $214 million in debt repayments owed by 25 of its most
vulnerable member states. IMF Managing Director Kristalina Georgieva explained
that countries qualifying for assistance under the $500 million Catastrophe
Containment and Relief Trust (CCRT) may direct more of their scarce financial
resources towards public healthcare and programmes aimed at lessening the
impact of the pandemic.
The
United Kingdom, Japan, and a few other donor countries last month pledged
additional funds to the trust. The vehicle was set up in 2015 to provide
emergency debt relief to low-income countries facing natural disasters or
health crises. In extreme cases the trust may cancel a country's entire stock
of debt owed to the IMF.
During
a video conference on Tuesday, G7 finance ministers and central bank governors
promised to support the efforts of the IMF and World Bank to help reduce the
debt burden of the world's poorest countries as they deal with the consequences
of the pandemic. The meeting was hosted by US Treasury Secretary Steven Mnuchin
who agreed to provide a 'time-bound' suspension of debt repayments to countries
eligible for World Bank concessional financing. The G7 will join a wider G20
initiative currently in the works to suspend up to $18 billion in debt
repayments.
Multilateral
lenders are concerned that thirty or more years of economic and social
development may be lost as the group of least developed countries watches
global demand for their exports evaporate whilst facing an escalation of
pandemic-related expenditure. In a study citing research conducted by King's
College London and published just weeks before the pandemic hit, aid charity
Oxfam warned that some 500 million people could slip back into poverty unless a
major bailout is organised.
A
disconcerting number of countries in Sub-Saharan Africa was already teetering
on the brink of default after the commodities super cycle of the 2000s petered
out and left them with heavy debt loads resulting from large infrastructure
investments. In late March, Mrs Georgieva said that concerted action by all
creditors, including commercial banks, is needed to avoid a full-blown debt
crisis. The IMF estimates that up to $2.5 trillion is ultimately needed to help
distressed developing countries meet their financial commitments.
Over
the past few weeks, more than 80 member states have contacted the IMF to
explore ways of obtaining assistance. Mrs Georgieva pointed out that many of
them are dealing with a series of simultaneous setbacks as capital takes
flight, commodity prices collapse, and domestic demand dries up.
However,
efforts to lighten the debt burden for the poorest countries are hampered by
past experience. Since the last write-off decided during the G8 (G7+1)
conference of 2005, when some $40 billion was cancelled, the countries that
benefitted most moved quickly to contract new debt.
The
deluge of credit that followed the debt jubilee originated in China which
deployed its financial muscle as a tool to broaden the country's diplomatic
footprint in Africa and elsewhere. China did so by partially displacing the
World Bank as the preferred partner in large-scale infrastructure undertakings
– a number of which promptly turned into white elephants.
Slightly
less mindful of thorough planning, good governance and sound project management,
the Chinese offered not only vast amounts of low- to no-doc credit, but also
supplied the engineers, workers, and building materials. However, countries
unable to meet their financial obligations to Beijing fell into debt traps and
were subjected to humiliating penalties. In the absence of proper feasibility
studies, many of the projects financed and built by the Chinese under the Belt
and Road Initiative (BRI) became heavy millstones instead of roaring engines of
development.
Sri
Lanka offers a case in point. The country took an estimated $8 billion in
Chinese credit, including $301 million at 6.3 percent annual interest for the
construction of the Hambantota Port, touted as the 'biggest harbour constructed
in the 21st century'. The port underperformed from day one, as have
most other large projects financed with Chinese credit. In 2017, The Sri Lanka
government was forced to hand Hambantota Port to China in lieu of payment after
the country ran into financial trouble over its high debt load.
Creditor
nations are currently looking for ways to help emerging markets weather the
pandemic's economic fallout and financial consequences without indirectly
funnelling funds to China. It doesn't help that most, though by no means all,
Sub-Saharan countries that now urgently need support, paid scant attention to
improving governance during the almost 20 years that their economies boomed.
Though
fatigue amongst donors is palpable, so is the recognition that a large-scale
crisis in emerging and pioneer markets will lengthen to path of post-corona
recovery for developed nations as well. The pandemic's timing is particularly
unfortunate. In a landmark study released late last year, the World Bank
concluded that the latest surge in credit flowing to emerging market and
developing economies was the 'largest, fastest, and most broad-based' in nearly
five decades.
Global Waves of Debt compares four distinct periods of significant debt accumulation since
1970. The study found that in developing countries the ratio of all debt
(government, corporate, and private) to GDP rose by 54 percentage points to 168
percent since 2010 when the debt build-up gathered speed. The analysis also
states that about half of the 521 'national episodes of rapid debt growth' studied resulted in financial crises that depressed per capita incomes and
slowed investment. Even more disconcerting, the report noted that most
governments have failed to invest in human capital even as credit was widely
available.
Whilst
the need for debt write-offs on a massive scale is recognised by most, the
conditions attached to this in part self-serving largesse may yet cause heated
debate, especially when attention turns to the plight of larger emerging market
economies that have made a business model out of debt defaults such as
Argentina.
The
recipient of a controversial $56 billion bailout package put together in record
time only months ago, the South American country has singularly failed to
implement the full set of structural fiscal reforms promised. With inflation
running at almost 50 percent and the economy set for a 3 percent contraction
even before the pandemic struck, Argentina now seeks to leverage the crisis to
renegotiate its national debt on a take-it-or-leave-it basis, insisting on an
interest rate ceiling of 2 percent.
Though
the IMF has called on private lenders to accept a 'haircut', most seem
unwilling to do so and express annoyance at the Argentine government's refusal
to engage and communicate constructively. Bondholders also remember the
precedent set by the so-called 'vulture funds' that for more than a decade
refused to accept a haircut and were ultimately rewarded with generous terms,
proving that stamina pays off.
However,
this time stamina may only add an extra layer to the economic disaster in the
making. Recriminations over the way the debt jubilee of 2005 was mishandled are
likewise unhelpful. The global nature of the economic recession caused by the
pandemic, requires a global response. As the IMF showed in its latest growth
forecast, released earlier in the week: there are no winners in this recession.
Even on a global scale, the corona virus acts as a great equaliser and no
economy is more equal than others.
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