In a crisis, it pays to be wealthy. The response of the developed world to the devastation of their economies by coronavirus has been to throw money at the problem. The IMF estimates that the combined fiscal and monetary stimulus delivered by advanced economies has been equal to 20 per cent of their gross domestic product.
Middle income countries in the developing world have been able to do less but they still put together a combined response equal to 6 or 7 per cent of GDP, according to the IMF.
For the poorest countries, however, the reaction has been much more modest. Together they injected spending equal to just 2 per cent of their much smaller national output in reaction to the pandemic. That has left their economies much more vulnerable to a prolonged slump, potentially pushing millions of people into poverty.
Right from the start of the crisis, the IMF and other international institutions have warned in stark terms about the threat that the pandemic presented to the world’s poorest countries.
In April, Kristalina Georgieva, the IMF managing director, said the external financing needs of emerging market and developing countries would be in “the trillions of dollars”.
But the response from the international community so far has been more muted. The IMF itself has lent $100bn in emergency loans. The World Bank has set aside $160bn to lend over 15 months — while estimating that low and middle-income countries will need between $175bn and $700bn a year.
The only co-ordinated innovation has been a debt service suspension initiative unveiled in April by the G20 group of the world’s largest economies. The DSSI allowed 73 of the world’s poorest countries to postpone repayments.
“In this crisis, there has been no co-ordinated, messaged response,” says Douglas Rediker, a senior fellow at the Brookings Institution and former US executive director on the board of the IMF. “The international architecture that was created in a different era is struggling to adapt.”
The situation is getting more urgent as the pain from the pandemic crisis starts to be felt. Zambia this week became the sixth developing country to default or restructure debts in 2020 and more are expected as the economic cost of the virus mounts — even amid the good news about potential vaccines.
Some observers think that even large developing countries such as Brazil and South Africa, which are both in the G20 group of large nations, could face severe challenges in obtaining finance in the coming 12 to 24 months.
But there is also potential that the international institutions will begin to step up their response to the developing world. The first opportunity is a meeting this weekend of the G20, where leaders will be buoyed by the prospect of vaccines bringing their own crises to an end.
They are expected to approve a “common framework” on debt treatment for poor countries, moving beyond immediate cash flow problems to address longer-term debt sustainability.
Mohammed al-Jadaan, finance minister of Saudi Arabia, which holds the G20 presidency this year, says the framework offers a “tool for structural reform” to help heavily indebted low-income countries break the cycle of unsustainable borrowing, as relief will be linked to IMF programmes.
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The other factor is US President-elect Joe Biden’s incoming administration, which many observers believe will be more supportive of multilateralism than was the case under President Donald Trump.
One result could be a revival of a proposal for the IMF to issue special drawing rights — an international reserve asset. SDRs can be used to deliver cash injections that some officials and economists believe is the silver bullet that could limit the economic pain in the developing world.
“The SDRs idea will come back to life under Biden,” says Tim Adams, chief executive of the Institute of International Finance. “There will be a fresh set of eyes and a willingness to look at anything and everything that might work.”
Little sign of trickle-down
If so, it would mark a break with the recent past. In contrast with the co-ordinated action among the G20 during the global financial crisis a decade ago, much of the rich world has spent this crisis looking after its own.
Some of their spending has trickled down to poor countries. The US Federal Reserve and other advanced economy central banks have pumped trillions of dollars into financial markets, buoying up demand for risky assets. As a consequence, middle-income and some low-income countries were able to borrow $145bn by issuing dollar-denominated sovereign bonds between January and September, according to the IIF.
Ms Georgieva said such actions had “an incredibly high significance” in reducing uncertainty. “While there has been criticism that there hasn’t been the same level of pronouncements by heads of state as there was during the global financial crisis, the mechanism of co-operation of finance ministry and central bank authorities has proven to be durable and is paying back,” she said.
Nevertheless, many developing countries remain shut out of bond markets by high interest rates. No country in sub-Saharan Africa, for example, has issued international bonds since the crisis began.
Other countries have used the available short-term liquidity to finance an immediate response, storing up potentially severe problems ahead. Brazil launched a generous income-transfer programme which it has had to rein in because of budget constraints, and borrowed heavily to fund it by issuing short-term domestic bonds that offer cheap finance but must be repaid quickly.
“Brazil and South Africa face the kind of problem that other emerging markets will slowly encounter — a big fiscal problem killing growth,” says Bhanu Baweja, chief strategist at investment bank UBS.
The G20’s flagship response to the crisis, the DSSI, only addresses a part of the problem. The initiative allowed 73 of the world’s poorest countries to postpone repayments due until December this year on official bilateral loans from G20 governments and their policy banks — though the debts must still be met in full, with repayments spread over four years. Last month, the DSSI was extended to June 2021, with repayments spread over six years.
Forty-six debtor countries took up the offer this year, deferring about $5bn in repayments. That is a quarter of the amount projected by the G20 when the initiative was announced in April and less than a tenth of the increase in the external borrowing needs of the eligible countries this year as a consequence of the pandemic, according to the IMF.
Last week, the G20 agreed to go further. Its proposed common framework, to be approved at this weekend’s summit, is an advance on the DSSI, which can offer short-term relief up to the amount of debt falling due during the period but does not take into account a country’s ability to pay.
The common framework aims to address this by assessing whether a country’s debts are sustainable, by signing it up to an IMF programme, and by involving both official bilateral creditors — governments and their policy banks — and commercial creditors — banks, bondholders, commodity traders and others.
If successful, it will solve a big shortcoming of the DSSI, widely criticised for failing to deliver relief from commercial lenders, which the scheme called on to participate on comparable terms with bilateral creditors if asked to do so by debtor countries.
Debtor countries have been reluctant to make that request. According to the IMF, just three countries had approached commercial lenders by the end of September, with no agreements reached. Not a single request for relief has been made to bondholders under the DSSI.
The reason is that many indebted countries have spent years enacting the kind of reforms mandated by the IMF and by investors, for which part of the reward is access to international bond markets. They are reluctant to give up that lifeline. Asking bondholders to delay payments would constitute a default and risk locking them out of bond markets for years.
Pakistan, the first country to ask for relief under the DSSI, said it would not ask for private sector involvement and that, if bilateral relief were made conditional on securing commercial relief, it would reconsider its request.
As a means of securing relief from the private sector, then, the DSSI was a non-starter. Critics say this reveals the lack of co-ordination among the parties involved, including the G20, the Paris Club group of creditor nations, the IMF and the World Bank.
“Part of the problem was not knowing who was in charge,” says one senior official involved in negotiations over the initiative that continued beyond its launch. “There were so many different entities trying to steer things and they were literally not talking to each other.”
The discussions over how to respond to the crisis have also been affected by the growing rivalry between the US and China.
China has emerged this century as the biggest bilateral lender to many developing countries, providing nearly $150bn to governments and state-owned companies in Africa, for example, as it sought to secure commodity supplies and win contracts for infrastructure projects.
Beijing has been criticised for a lack of transparency in its loans, made by a variety of state and quasi-state lenders on both concessionary and commercial terms, and for failing to participate fully in the DSSI.
Among its most vocal critics is David Malpass, president of the World Bank. He said last month that it was “frustrating” that China was not participating more fully, and that its lenders charged higher interest rates than others with “very little transparency” in their loan contracts.
China has rejected such criticism. Its foreign ministry said last month it was “actively committed to fully implementing” the DSSI.
In fact, China has contributed $1.9bn out of $5.3bn of relief delivered by the DSSI this year according to an internal G20 document seen by the FT, much more than any other country. Three of its lenders are understood to have renegotiated a further $6.7bn of repayments due from Angola.
Critics say the comments made by Mr Malpass — nominated by Mr Trump for the World Bank job and seen as a Trump loyalist — were designed for consumption in Washington and have been unhelpful at a time when China, by co-operating on debt at the G20, is edging towards greater multilateral engagement than has been its habit in the past.
One senior European official says an aversion to multilateralism under Mr Trump meant the World Bank is co-operating less with other institutions. “It is quite hard to work with the World Bank at the moment,” the official says, expressing annoyance at Mr Malpass’s comments.
Even if there is frustration at the slow progress so far, some observers believe that the political support for more substantial measures is improving.
The G20 summit to be held online this weekend is one chance to build momentum. Mr Jadaan, the Saudi finance minister, says the common framework is a “historic step towards bringing the world together, to look at its less fortunate segments and help them in the medium and long term. It’s not only the debt, it’s the root cause you need to look at.”
Mr Rediker at the Brookings Institution agrees that the meeting marks a significant moment. “It is a big step to get China to sign up to a common framework, make no mistake,” he says.
But he has reservations about how effective it will be. “You still end up with the member countries and the private sector having to enforce it, and there will be costs in doing so,” he adds.
Vera Songwe, UN under-secretary general and head of the UN Economic Commission for Africa, says the last thing developing countries need is enforced private-sector involvement in debt relief.
“A common debt framework that confounds public concessional borrowing with commercial market access would undermine Africa’s recovery,” she says.
Instead, low- and middle-income countries need concessional lending and grants — sub-Saharan Africa alone will need $100bn a year for the next three years, she said. “Otherwise, we are heading for debt default on a scale never seen.”
Uneca is one of several organisations and individuals backing the call for a new issue of SDRs by the IMF. Others include the UN Conference on Trade and Development, the People’s Bank of China, European and African heads of state and a host of debt and poverty campaigners, along with the IMF itself.
The appeal of SDRs for developing countries is that they fill a gap in the toolkit available to advanced economies: money creation. While advanced economies have been able effectively to print money by buying their own bonds in a world of low or negative interest rates, most developing countries cannot do that without risking instability, inflation and worse.
SDRs, a form of virtual currency, promise an immediate cash injection with none of the conditionality attached to IMF programmes. The IMF has issued them in past crises and proponents say it should do so now. But the proposal was vetoed by the US in April on the basis that it would benefit rich countries more than poor ones, although critics suggest the US was motivated by an unwillingness to see funds going to rivals such as China and Iran.
For many, the issuance of SDRs is the biggest single test of global co-operation in the crisis.
“SDRs mean giving unconditional liquidity to developing countries,” says Stephanie Blankenburg, head of debt and development finance at Unctad. “If advanced economies can’t agree on that, then the whole multilateral system is pretty much bankrupt.”
The hope in such quarters is that the incoming administration in the US will deliver on its promise of greater engagement in world affairs and that the issue of SDRs will be reopened for discussion.
Even with increased support, however, the IIF’s Mr Adams warns against complacency.
“Even before Covid, the world was in the midst of a great wave of debt,” he says. “We are going to need sober, thoughtful leadership in how we manage those debts going forward. At the technical level there are a lot of enlightened people in position, but will we have the political leadership? I don’t know. I hope so.”
Additional reporting by Andrew England