s countries continue to emerge from lockdowns and international travel restrictions are eased, it may seem that the world has learned to live with Covid and is beginning to recover from the pandemic’s devastating effects. But the economic recovery from the pandemic is uneven. As G20 Finance Ministers convened in Washington DC this week they must resolve to step up efforts that will prevent low-income economies across the globe collapsing in what would be a devastating blow to the global economy.
Uneven recovery threatens to undo decades of progress.
COVID-19 is nowhere near subsiding in the developing world and post-covid recovery is not as fast or as robust as in developed economies. Declined exports, plummeting revenues, and capital flight have left many countries struggling to pay off their debts. Even after the IMF’s historic $650 billion Special Drawing Rights (SDRs) allocation, rising poverty and squeezed budgets for health, education, and social safety nets can make some states are unable to prioritize the lives of vulnerable people before their debt obligations.
After a few decades of unmatched progress in human and economic development, we are on the brink of very possible unparalleled reversals. If unsustainable debt in Zambia, Chad, Ethiopia, and other states is not addressed, we could see tangible decreases in quality of healthcare and education, volumes of capital expenditure and investment in economic development, which would lead to decades of lost opportunities for generations and sluggish—if any—growth for economies.
Take Zambia, whose external public debt amounts to almost $14.5bn that is 76% of GDP and total public debt amounts to $21bn—around 110% of GDP. This is clearly an unsustainable level of debt for a low-income economy. Zambia spends nearly double as much on debt servicing than on its health sector. Instead of finding solutions to support low-income countries return to debt sustainability, the G20 ministers’ discussion is mostly centered around Zambia’s debt to Chinese creditors.
By different estimates Zambia owes China-related creditors between $3bn and $6.6bn which means the rest of the $14.5bn is owed to non-Chinese lenders. What we really should be talking about is how to provide debt relief to highly indebted countries like Zambia, find ways to work with China, and in reverse get China to work in strong cooperation with other lenders to ensure a comprehensive debt treatment package is agreed.
What the world financial powers could do to help.
We cannot afford to lose a decade of development in countries like Zambia. Global recovery is only possible if it means recovery for all. There are four steps the global community could make to ensure highly indebted countries do not see reversals in development and embark on a solid path to recovery and growth: 1) step up multilateral support, 2) provide comprehensive debt relief, 3) reallocate SDRs, and 4) support the private banking sector in Africa.
COVID-19 has caused some unprecedented changes in the thinking of multilaterals. In particular, the IMF has seemingly moved away from their austerity obsession and prioritized development and poverty reduction as sensible objectives. Stepping up support with reasonable conditions for highly indebted countries is a priority for the international and regional financial and development organizations.
Providing comprehensive, well-balanced debt relief is another priority. Here, the focus should be to find the right mix between deferring payments like the DSSI framework and granting debt relief, targeting a good combination of easing public finance, and continued trust for lenders, as decades of debt restructuring has taught us.
There are several levers concerned, that should coordinate, if not merge.
The G20 Common Framework was created specifically for that purpose but has yet to prove effective. G20 Finance Ministers must find solutions when they convene this week to bring private creditors into the framework with the aim of speeding up and making debt relief efforts by bilateral partners and the Paris Club more efficient.
Rich and large economies could further boost support by reallocating some of the SDRs they received as part of the recent IMF SDRs allocation. This would provide the much-needed breathing space for the highly indebted countries by easing liquidity challenges.
Finally, the transformation of African economies depends on a well-functioning banking system. Commercial banks in Africa, and Zambia in particular, have continued to work and be profitable despite sovereign defaults. Bilateral partners should work out frameworks for supporting the banks and correcting market defaults, largely infused by global rating agencies. Commercial banks in Africa and are showing the discipline and transparency requested from the government and its lenders.
Tackling structural problems domestically and internationally remains a priority.
At the same time, Zambia needs to make sure its own house is in order. After the inspiring victory of democracy in the country during the presidential elections, the new administration has a unique mandate to change the development dynamic and put Zambia on a new path to sustainable recovery and growth.
It is encouraging to see that the new government declared securing an IMF programme as a priority. The programme will enable Zambia to kickstart an active phase of debt restructuring talks with the country’s creditors and aim to support Zambia’s reform agenda.
In the meantime, Zambia’s authorities need to change the perception of non-transparency around its debt situation. Domestically this is a question of accountability the government owes to its citizens. For international audiences this is about continued engagement with creditors on an equitable basis and regular and robust debt reporting.
Addressing the issue of the so-called hidden Chinese debt would also boost transparency and credibility. Currently, Zambia reports its debt in an aggregate form across three main categories of creditors: multilateral, bilateral, and commercial and spread over categories of debtors: central government, government guaranteed debt, and SOEs non-guaranteed debt, which is a customary practice among sovereigns. Zambia, as many countries who borrowed from China, is limited by non-disclosure clauses in how open it can be about specific creditors, loan agreements terms, and other details. However, there are ways to ensure future borrowing is more sustainable by ensuring parliamentary oversight and parliamentary requirement of loan agreements disclosure.
Now is the time to address the issue of unsustainable debt in poor economies before a new unthinkable challenge hits the world—be that a new winter wave of COVID-19, surging energy prices, climate change, a global financial crisis, or a demise of multilateralism. By ensuring a robust global recovery now we are making the world stronger for all.
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G20 Must Help Low Income Countries Get Out of Debt Crises
Photo via G20 Summit Italian Presidency.
October 14, 2021
As G20 Finance Ministers convened in Washington DC this week they must resolve to step up efforts that will prevent low-income economies across the globe collapsing in what would be a devastating blow to the global economy.
A
s countries continue to emerge from lockdowns and international travel restrictions are eased, it may seem that the world has learned to live with Covid and is beginning to recover from the pandemic’s devastating effects. But the economic recovery from the pandemic is uneven. As G20 Finance Ministers convened in Washington DC this week they must resolve to step up efforts that will prevent low-income economies across the globe collapsing in what would be a devastating blow to the global economy.
Uneven recovery threatens to undo decades of progress.
COVID-19 is nowhere near subsiding in the developing world and post-covid recovery is not as fast or as robust as in developed economies. Declined exports, plummeting revenues, and capital flight have left many countries struggling to pay off their debts. Even after the IMF’s historic $650 billion Special Drawing Rights (SDRs) allocation, rising poverty and squeezed budgets for health, education, and social safety nets can make some states are unable to prioritize the lives of vulnerable people before their debt obligations.
After a few decades of unmatched progress in human and economic development, we are on the brink of very possible unparalleled reversals. If unsustainable debt in Zambia, Chad, Ethiopia, and other states is not addressed, we could see tangible decreases in quality of healthcare and education, volumes of capital expenditure and investment in economic development, which would lead to decades of lost opportunities for generations and sluggish—if any—growth for economies.
Take Zambia, whose external public debt amounts to almost $14.5bn that is 76% of GDP and total public debt amounts to $21bn—around 110% of GDP. This is clearly an unsustainable level of debt for a low-income economy. Zambia spends nearly double as much on debt servicing than on its health sector. Instead of finding solutions to support low-income countries return to debt sustainability, the G20 ministers’ discussion is mostly centered around Zambia’s debt to Chinese creditors.
By different estimates Zambia owes China-related creditors between $3bn and $6.6bn which means the rest of the $14.5bn is owed to non-Chinese lenders. What we really should be talking about is how to provide debt relief to highly indebted countries like Zambia, find ways to work with China, and in reverse get China to work in strong cooperation with other lenders to ensure a comprehensive debt treatment package is agreed.
What the world financial powers could do to help.
We cannot afford to lose a decade of development in countries like Zambia. Global recovery is only possible if it means recovery for all. There are four steps the global community could make to ensure highly indebted countries do not see reversals in development and embark on a solid path to recovery and growth: 1) step up multilateral support, 2) provide comprehensive debt relief, 3) reallocate SDRs, and 4) support the private banking sector in Africa.
COVID-19 has caused some unprecedented changes in the thinking of multilaterals. In particular, the IMF has seemingly moved away from their austerity obsession and prioritized development and poverty reduction as sensible objectives. Stepping up support with reasonable conditions for highly indebted countries is a priority for the international and regional financial and development organizations.
Providing comprehensive, well-balanced debt relief is another priority. Here, the focus should be to find the right mix between deferring payments like the DSSI framework and granting debt relief, targeting a good combination of easing public finance, and continued trust for lenders, as decades of debt restructuring has taught us.
There are several levers concerned, that should coordinate, if not merge.
The G20 Common Framework was created specifically for that purpose but has yet to prove effective. G20 Finance Ministers must find solutions when they convene this week to bring private creditors into the framework with the aim of speeding up and making debt relief efforts by bilateral partners and the Paris Club more efficient.
Rich and large economies could further boost support by reallocating some of the SDRs they received as part of the recent IMF SDRs allocation. This would provide the much-needed breathing space for the highly indebted countries by easing liquidity challenges.
Finally, the transformation of African economies depends on a well-functioning banking system. Commercial banks in Africa, and Zambia in particular, have continued to work and be profitable despite sovereign defaults. Bilateral partners should work out frameworks for supporting the banks and correcting market defaults, largely infused by global rating agencies. Commercial banks in Africa and are showing the discipline and transparency requested from the government and its lenders.
Tackling structural problems domestically and internationally remains a priority.
At the same time, Zambia needs to make sure its own house is in order. After the inspiring victory of democracy in the country during the presidential elections, the new administration has a unique mandate to change the development dynamic and put Zambia on a new path to sustainable recovery and growth.
It is encouraging to see that the new government declared securing an IMF programme as a priority. The programme will enable Zambia to kickstart an active phase of debt restructuring talks with the country’s creditors and aim to support Zambia’s reform agenda.
In the meantime, Zambia’s authorities need to change the perception of non-transparency around its debt situation. Domestically this is a question of accountability the government owes to its citizens. For international audiences this is about continued engagement with creditors on an equitable basis and regular and robust debt reporting.
Addressing the issue of the so-called hidden Chinese debt would also boost transparency and credibility. Currently, Zambia reports its debt in an aggregate form across three main categories of creditors: multilateral, bilateral, and commercial and spread over categories of debtors: central government, government guaranteed debt, and SOEs non-guaranteed debt, which is a customary practice among sovereigns. Zambia, as many countries who borrowed from China, is limited by non-disclosure clauses in how open it can be about specific creditors, loan agreements terms, and other details. However, there are ways to ensure future borrowing is more sustainable by ensuring parliamentary oversight and parliamentary requirement of loan agreements disclosure.
Now is the time to address the issue of unsustainable debt in poor economies before a new unthinkable challenge hits the world—be that a new winter wave of COVID-19, surging energy prices, climate change, a global financial crisis, or a demise of multilateralism. By ensuring a robust global recovery now we are making the world stronger for all.
