Coronavirus: Mounting debt crisis for the world’s poorest countries

Philip Brien

This is a fast-moving issue and should be read as correct at the date of publication (03.06.20).

The coronavirus is having a serious impact on developing countries. Although there are major variations between different countries and regions, overall the number of deaths is still rising. The economic consequences of the pandemic are already severe.

This Insight looks at the mounting debt crisis being experienced by the world’s poorest countries. It also surveys the international response, which former UK Prime Minister Gordon Brown complains has lacked both urgency and understanding of the scale of the challenge.

What impact has the coronavirus had in developing countries?

“Developing countries” is defined here as lower-middle income and low-income countries, as classified by the World Bank.

While the data should be treated with caution, the table below indicates that developing countries are still experiencing a much lower daily death rate than developed countries.

The graph shows developing countries are still experiencing a lower Covid-19 daily death rate than developed countries.

It is a rapidly evolving situation. In mid-May the World Health Organisation (WHO) estimated that there could be 250 million coronavirus cases in Africa over the next year – although there would still be fewer deaths than in Europe and the US.

The economic consequences of the coronavirus on developing countries are already severe. The UN Conference on Trade and Development (UNCTAD) estimates that developing countries will lose nearly $800 billion of export revenue in 2020. The Free Market Commodity Price Index (FMCPI), which measures changes in the prices of commodities exported by developing countries, fell 20.4% between February and March 2020. That is the largest month on month drop in the index’s history. Developing countries are also expected to experience a dramatic decline in foreign direct investment.

This situation has led to rapidly deteriorating public finances. There is a growing inability by developing countries to service their external debts to multilateral, bilateral and commercial creditors. Many of the world’s poorest countries are being heavily affected.

Debt outlook for the world’s poorest countries

The “world’s poorest countries” is defined here as those countries eligible for grants and concessional loans from the International Development Association, which is part of the World Bank. The majority are in Africa.

The Brookings Institution, a US think-tank, estimates that the cost of medium- and long-term (MLT) debt service for the world’s poorest countries could amount to $36 billion in 2020.

The table below shows that a significant number of the poorest countries were already struggling to service their debts before the coronavirus crisis.

Some leaders are now calling not just for massively increased debt relief, but for outright debt cancellation (also known as “debt forgiveness”). Among them are the President of Tanzania, John Magufuli, French President Emmanuel Macron and Pope Francis.

A “looming financial tsunami”

At the end of March, the UN warned there was a “looming financial tsunami” for developing countries. It called for a $2.5 trillion emergency package to help them cope with the impact of the coronavirus pandemic. Proposed measures included balance of payments support, debt relief and funding for health systems. The UN also called for debt cancellation for the world’s poorest countries.

This intervention was intended to influence the G20, IMF and World Bank, all of which had meetings scheduled for April. Others also voiced their concerns ahead of these meetings – among them Oxfam, which warned that over half a billion more people around the world could be pushed into poverty unless prompt action was taken.

International support to the world’s poorest countries

On 22 April the G20 offered to suspend bilateral debt service payments by 76 of the world’s poorest countries from May until the end of 2020.

A few days before the G20 met, the IMF approved immediate debt relief to 25 poor countries under its Catastrophe Containment and Relief Trust (CCRT). Four more countries were soon added to the list. The IMF is tripling the CCRT from about US$500 million to US$1.4 billion to extend the duration of such relief.

The IMF and World Bank have also made substantial new amounts of emergency funding available to such countries.

Terms of reference for the voluntary participation of commercial creditors in the G20 initiative were published at the end of May.

The UK Department for International Development’s immediate coronavirus response, which amounts to £744 million so far, includes £150 million for the IMF’s CCRT.

What do the critics say?

One criticism of the international response to the coronavirus pandemic so far has been that it has involved the suspension of debt payments during 2020 rather than their cancellation.

If debt cancellation happens, it could be on a case-by-case basis for some of the world’s poorest countries. Creditors, as well as some developing countries, may be reluctant to support cancellation because they worry it could damage their ability to generate commercial loans via international debt markets.

Some debt may instead be rescheduled. But critics argue that this approach has often in the past come with “strings attached” which can prove harmful to the interests of poor countries – for example, requiring them to reduce spending on public services, including already weak health systems.

Are there precedents for such action?

There are precedents to build on. Since the mid-2000s, major creditor countries established the Multilateral Debt Relief Initiative (MDRI) for outright forgiveness of debt owed by a group of 36 low-income countries, 29 of them in Africa. This built upon earlier initiatives for debt relief, including the IMF and World Bank’s Heavily Indebted Poor Countries (HIPC) initiative.

What next?

G20 heads of state and government are due to meet next in November 2020. The annual meetings of the Boards of Governors of the IMF and the World Bank will take place in October. Gordon Brown accuses the G20 of having “gone awol”, calling on it to bring its next meeting forward.

However, with relations between the US and China – a major creditor country these days – under strain on several fronts, not least coronavirus, the effectiveness of future international cooperation to tackle the economic fall-out from the pandemic is uncertain.