Coronavirus economy: indebted countries are threatened, as financial markets come to a screeching halt |
Since the start of the pandemic, financial institutions, including World Bank Group and the International Monetary Fund (IMF) – along with United Nations entities, regional organizations and groups of countries such as the G20 – examined the tools available to stabilize markets, prevent job losses and preserve hard-earned development gains.
At a joint IMF-World Bank high-level meeting on mobilization with Africa on Friday, the UN Secretary General António Guterres welcomed the swift actions of the bodies to support member countries, while stressing that more work will be needed.
“We know that this virus will spread like wildfire and that there is no firewall” he said. “Alleviating the overwhelming debt is absolutely crucial. “
The UN chief noted that in Africa, households and businesses were suffering from liquidity problems even before the virus took hold on the continent. As countries strive to prevent millions of people from sliding into poverty, already unacceptable levels of inequality rise, fragility increases and commodity prices fall.
Debt and pandemic: a “perfect storm”
The current health and economic emergencies caused by COVID-19[female[feminine emerged against a backdrop of high indebtedness many developing countries – including middle income countries – around the world.
Since the 2008 financial crisis, the public external debt of many developing countries has skyrocketed. Low interest rates and high liquidity have boosted many countries’ access to commercial loans. As of January 2020, the debt of 44% of least developed countries and other low-income developing countries was already rated as high risk or in difficulty.
The contraction induced by COVID-19 is having dire consequences. Global financial markets come to a halt as investors rush to withdraw funds from emerging markets and other high-risk sectors. The pandemic is straining national budgets as countries struggle to meet health needs, respond to rising unemployment and support their economies.
UN experts warn Africa could be in its first recession in 25 years, while Latin America and the Caribbean face the worst recession in history. Similar decelerations are observed in Asia and the Arab region.
Shaping proactive responses
Against this backdrop, the UN is arguing for a full COVID-19 response set representing a double-digit percentage of global GDP.
He also urges international financial institutions to do everything possible to avert a devastating debt crisis with disorderly defaults, stressing that debt relief must play a central role in the global response to the pandemic.
Speaking at the joint IMF / World Bank meeting, the Secretary General welcomed the first steps taken by the G20, including the suspension of debt service payments for all countries of the International Development Association.
He also called for more resources for the IMF – including through the issuance of special drawing rights – as well as increased support to the World Bank and other global financial institutions and bilateral mechanisms.
Three-phase plan to tackle debt
The organization has proposed a three-step strategy to prevent heavily indebted countries from suffering the worst impacts of the COVID-19 emergency.
First, it calls for a generalized “debt stop” for developing countries without access to financial markets. Second, it calls for more comprehensive options for debt sustainability with instruments, such as debt swaps, and a debt mechanism for the debt. Sustainable Development Goals.
Third, the plan calls for tackling the structural problems of the international debt architecture, in order to avoid defaults.
The framework rests on a foundation of shared responsibility between debtors and creditors, as well as an understanding that debt restructuring must be timely, orderly, effective, fair and negotiated in good faith.
“In all our efforts, we must focus on the most vulnerable and ensure that the rights of all are protected,” said the UN chief.