In the last few months, due to the devastating effect the coronavirus pandemic has had on the global economy, the fiscal clock has been ticking more rapidly than ever before for many small and vulnerable states across the world.
With Joe Biden’s victory in the United States presidential election, which increased the possibility for meaningful global cooperation on pressing issues disproportionately affecting vulnerable states like climate change, coupled with the development of several COVID-19 vaccines that could help bring the pandemic under control, these countries recently started to see a faint light at the end of the tunnel.
But the path to economic salvation is still full of obstacles, and the upcoming winter months are still expected to be long and dark for many nations whose economies are crumbling under the weight of the extra debt they accumulated to respond to the pandemic.
In this context, the G20’s recent decision to extend until the middle of next year the Debt Service Suspension Initiative (the DSSI), which it introduced in April to help the world’s poorest countries cope with the economic fallout of the COVID-19 crisis, has been most welcome.
But extending the DSSI on its own cannot resolve the mammoth pandemic-related fiscal challenges poorer nations are facing. Encouragingly, the G20 seems to recognise this, and have also introduced a “Common Framework for Debt Treatments beyond the DSSI”, which aims to address the problem of unsustainable debts many DSSI-eligible countries will continue to face in the aftermath of the pandemic on a case-by-case basis.
While these initiatives by the G20 are undoubtedly important steps in the right direction, their scope is limited. For all of the world’s nations to get back on their feet after this unprecedented public health emergency, the debt relief efforts by the world’s richest nations need to go even further.
The problem of eligibility
The main factor limiting the success of these well-meaning G20 initiatives in mitigating the economic effect of the pandemic is “eligibility”.
Currently, some 73 low-income countries around the world are eligible to take advantage of the DSSI. However, many small, middle-income countries, who are also suffering the economic consequences of the pandemic, are left out of this initiative and its extension.
A recent Commonwealth Secretariat paper demonstrated that due to the new fiscal pressures introduced by the COVID-19 pandemic, the debt to GDP ratios of the 32 small state members of the Commonwealth could rise by an average of 27 percentage points by the end of 2021 – twice the increase projected for other developing countries in the Commonwealth.
Despite the economic devastation they are experiencing, some of these small states are not eligible to take part in the DSSI, because after years of prudent financial management and investment, they are now classified as “middle-income” countries, not in need of financial assistance.
Of course, despite being in the middle-income bracket, these nations are also struggling with the loss of income they have experienced because of the pandemic, and they may face economic collapse if they do not receive the necessary assistance from the international community. And their economic struggles will unavoidably have an effect on the global economy.
If the G20 wants to avoid the very global disruption they have sought to prevent through the DSSI and Common Framework for Debt Treatment, they need to support more than just the poorest countries. They need to expand the eligibility for G20 debt restructuring initiatives from just the poorest countries to all nations in need of support.
Most economists agree that regardless of a country’s income classification, debt relief is necessary when persistent debt overhang is accompanied by negative or sluggish growth. In other words, there is no economic justification for the G20’s refusal to expand the eligibility for its debt restructuring and suspension schemes to struggling middle-income countries. In fact, it is clear that offering support to a wider range of countries would increase the speed of global economic recovery.
Expanding the scope of these schemes also makes political sense for G20 member states.
If small and vulnerable states are not given some debt relief, they cannot support their citizens’ most basic needs. This could lead to new migration waves, increasing the pressures already faced by rich nations that are part of the G20. Moreover, a lack of debt relief could lead to some small, middle-income countries becoming dependent on international aid.
The need for debt write-offs
But simply expanding the eligibility criteria for COVID-19 debt restructuring and suspension schemes will also not be enough to bring the global economy back on track. Given the scale of the economic disruption caused by the pandemic, some countries will require more than debt relief – they will need a clean start.
Across the board, it is well accepted that once the pandemic is over, the global economy will look much different than before. Countries are now spending for recovery, but once the dust is settled, they will all find themselves in an economic landscape much different to the one before the pandemic.
As such, future income will be hard to predict and this means that the debt restructuring exercises under existing schemes or a new expanded initiative could prolong, rather than resolve, the core solvency problems of certain states.
The G20 should therefore work with the IMF and World Bank to help countries better understand their growth potential, and where projected income is highly uncertain, provide for outright debt relief.
In this way, highly indebted and possibly insolvent countries will have the space and time to restructure their economies in line with the opportunities presented by the post-COVID-19 landscape.
The Commonwealth is ideally positioned to assist the IMF and the World Bank in their debt relief efforts, given its already strong partnership with these institutions and its long-established and highly respected debt management programme.
We can only tackle the debt sustainability problems created by the pandemic, and prevent the potential follow on effects of such crises, by extending eligibility for existing debt relief schemes and offering debt write-offs for most struggling countries. These goals can be achieved through increased collaboration between the Commonwealth, global governance institutions, and the G20.
After months of uncertainty and suffering, we now appear close to winning the fight against COVID-19. Vaccines may help us defeat this deadly virus in the coming months, but if we do not act now, its effect on vulnerable economies across the world will continue to devastate millions of people in the years to come. This pandemic could be an opportunity to build a more just and prosperous world for everyone. But we must act now and address the systemic challenges facing small and vulnerable nations if we are all to enjoy the dawning of a post-COVID-19 world.