Washington – Bold new mechanisms are urgently needed to help low and middle income countries tackle crippling debt, magnified by the COVID-19 pandemic, which threatens vital investments to fight poverty and climate change in the years to come , the United Nations Development Program (UNDP) says in a new report. The study published today follows a call from the UN Secretary General for more aggressive steps to combat the debt crisis in countries lacking the resources to tackle it.
The Sovereign Debt Vulnerabilities in Developing Economies report, released next week ahead of the World Bank and International Monetary Fund (IMF) spring meeting, analyzes debt vulnerabilities in 120 low- and middle-income economies to identify which are most at risk are. It rates 72 economies as “vulnerable”, of which 19 are “severely vulnerable”. Based on measures of sustainable debt thresholds and ratios, it concludes that debt vulnerability for these countries is likely to remain elevated for years and will not return to pre-pandemic levels before 2024-2025.
The study estimates that between 2021 and 2025, at least $ 598 billion in external public debt service payments in the 72 countries are at risk, with $ 311 billion owed to private creditors. However, the biggest threat, the report says, is not a series of defaults, but the possibility of an ongoing debt crisis that leaves countries for years with overwhelming debt burdens that prevent governments from making critical investments for the benefit of their own people and to tackle the climate crisis .
“There is nearly $ 1.1 trillion in debt servicing payments due this year. Only 2.5 percent of that amount would be enough to vaccinate 2 billion people under the COVAX initiative. Public debt service is displacing the investment space that developing countries must plan to achieve a green and equitable recovery, ”said UNDP Administrator Achim Steiner. “We must now address both liquidity and solvency issues through broader debt relief to avoid devastating development costs.”
Debt distress and vulnerability not only threaten the poorest countries. Of the estimated minimums of $ 598 billion in “debt servicing at risk”, 6 percent are in low-income countries and 94 percent are in middle-income countries. Only 49 of the 72 countries at risk are eligible for existing debt freeze and restructuring programs, leaving about two-thirds ($ 387 billion) of “debt servicing at risk” uncovered.
The Debt Service Suspension Initiative (DSSI), adopted last year by the G20 Group of Rich Nations and Emerging Markets at the insistence of the World Bank and the IMF, was necessary but insufficient, the report said. So far, 46 out of 73 eligible countries have signed up for the initiative, which has only developed around a quarter of its aid potential. The DSSI is temporary and not a targeted instrument, and private creditors have so far declined calls to participate.
“Some countries have been reluctant to join for fear of rating downgrades, and the DSSI is not a solution for countries with solvency problems,” said Homi Kharas, senior fellow at the Brookings Institution’s Center for Sustainable Development. This makes the G20 Common Framework (CF) announced in November for debt management an important step – and we are waiting to see what the outcome will be for the first three countries that have joined a debt restructuring process. However, the DSSI and Common Framework are only available to the 73 poorest countries, with the exception of many middle-income economies and debt problems. All countries in need should be supported with liquidity, and this crisis requires a combination of debt restructuring, additional funding and architectural reforms. “
The IMF has announced the possibility of a new allocation of US $ 650 billion in so-called Special Drawing Rights (SDRs), of which US $ 224 billion would go directly to low- and middle-income countries. The 72 most debt-vulnerable countries would receive approximately $ 51 billion, which is a maximum of 8.6 percent of their total external public debt service payments for 2021-2025. But the variation within the group is great. For some, their allocation would be enough to cover all of their payments, while for others it would cover less than 5 percent.
“An SDR allocation is an important step, but not a sustainable solution for countries with solvency problems, many of which are now likely to use this liquidity to pay off creditors, while they should be offered an effective and reasonable opportunity to reschedule” and their debt dynamics increase change, ”said Lars Jensen, the author of the UNDP report.
Debt developing countries need access to stable, low-cost financing that is preceded by debt restructuring, the report said. In the medium to long term, reallocating spending, increasing spending efficiency and increasing domestic revenue collection are critical to recapturing decades of progress in reducing poverty and tackling the climate crisis.