A [Debt] Crisis Like No Other

From a global pandemic into a debt crisis

The impacts of the pandemic in increasing poverty and inequality can be drawn to the direct effects of the lockdowns in jobs and income, and to the limitations of the health and social protection systems, weakened after years of austerity and privatisations, but also to longer term consequences of the economic crisis that the Covid-19 has unfolded. Among those consequences there is the risk of an unprecedented debt crisis across the global south. A scenario that, if the responses continue to fall short of what is needed, could end up in a “lost decade” for development. According to the UNCTAD, tackling a series of pre-existing conditions that were threatening the health of the global economy before the pandemic would be key to avoid that “lost decade”, including hyper-inequality and unsustainable levels of debt.

Public indebtedness in the global south had already reached unprecedented levels before the onset of the Covid-19 pandemic, and the current crisis has exacerbated the pre-existing debt vulnerabilities, pushing debt levels to new heights. According to the International Monetary Fund’s (IMF) projections, average debt ratios will rise by ten percent of Gross Domestic Product (GDP) in emerging market economies and about seven percent in low-income countries.

Since march, when the pandemic was declared, developing countries have seen sharp declines in export revenue – due to the sudden halt in global trade and the collapse of commodity prices –, falls in tourism income and remittances, as well as record levels of capital flight during the first months of the global lockdown. Although some of these trends seem to be slowly improving, the damage to impoverished economies will take much longer to fix. It is likely that the recession triggered by the pandemic will leave lasting economic scars, such as reduced investment, high unemployment and a retreat from global trade and supply linkages, particularly affecting countries in the global south.

Moreover, the impact on people’s rights will also have long-term implications. According to the World Bank latest report, even under the over-optimistic assumption that, after 2021, growth returns to its historical rates, the pandemic’s impoverishing effects will be vast. Under that optimistic scenario, “6.7 percent of the global population will live under the international poverty line in 2030, compared with the target level of 3 percent”. More than 1.6 billion children in developing countries have been unable to go to school because of Covid-19, and they “stand to lose $10 trillion in labour earnings over their work life”. Estimates from the International Labour Organization (ILO) suggest that the equivalent of 240 million jobs were lost in low- and middle-income countries in the second quarter of the year. As a result, half a billion people could be pushed into poverty, according to Oxfam, leading to increased social, economic, racial and gender inequalities, and undoubtedly widening the gender poverty gap. This means that more women will be pushed into extreme poverty than men. According to UNWomen, for countless women “along with losing income, unpaid care and domestic work burden has exploded”, and furthermore, gender-based violence has also been on the rise.

We need to put people at the core of the recovery, especially the most vulnerable – making sure that human rights, gender equality and environmental protection are the key considerations driving the global response. But in order to be able to do that, governments in the global south need support to tackle the increasing debt distress. Governments are facing the impossible challenge of balancing health and social spending to protect their populations from the pandemic and the economic and social impacts of domestic and international lockdown measures, as they endure a sharp decrease in government revenues. Coupled with currency devaluations and an increase in borrowing costs, growing fiscal deficits are making it even harder for governments in the global south to meet their external sovereign debt payments. In cases like Zambia, Ecuador, Belize or Surinam, this situation has led to lengthy and complex restructuring processes with their creditors and, in some cases, to partial debt defaults. Meanwhile, financial support for developing countries to tackle the pandemic is being provided, in the most part, in the form of new loans, which are adding to already unsustainable debt levels.

According to the World Bank, in order to face the health, social and economic crisis and address the risks of increasing inequalities, governments have “little choice but to reprioritize spending, mobilize additional fiscal resources, and, if these efforts are insufficient or prove unfeasible, take on additional debt to finance the necessary responses”. But precisely because debt levels are already high, and interest rates increasing for those with deeper debt vulnerabilities, contracting new debt is not an option for many of the poorest countries. For those that still have access to financial markets and (lending) support from International Financial Institutions (IFIs), driving into more debt to cover the need for investing in public health and social protection today is a path towards further debt distress down the road.

An insufficient response to the challenges of a crisis like no other

The responses to the debt crisis provided so far by the G20 and the IFIs have been painfully falling short of what is needed. Instead of agreeing on an ambitious and immediate debt payments cancellation and progress towards further debt relief and restructuring through a multilateral, fair, transparent, timely and comprehensive mechanism, like more than 500 CSOs demanded, the international community has limited its response to a narrow debt service temporary suspension and a new(ish) “Common Framework” for debt restructuring that offers little more than what the existing mechanisms already provide.

The shortcomings of the Debt Service Suspension Initiative (DSSI) – in short, limited number of countries, non-participation of private and multilateral lenders, and not providing debt cancellation -, have been extended into the recently announced "Common Framework for Debt Treatments Beyond the DSSI" (CF). Like DSSI, the CF is yet another mechanism designed by and for creditors, which fails to ensure mandatory participation of private and multilateral creditors, limits eligibility to a subset of developing countries and disregards needs and financial vulnerability considerations. As the World Bank projections show, more than four fifths of the total new poor from the pandemic, will be in middle-income countries, which are excluded from the debt treatment initiatives.

Until countries get the debt relief they require, they will likely end up locked in a cycle of serial restructurings and defaults, which will hamper their growth prospects and their ability to attract fresh financing. And until the private sector is obliged to participate in the debt relief efforts, any debt cancellation provided by bilateral creditors, and any new financing from the IMF, will be a coarse bailout of the private creditors. This is exactly what is happening with the debt treatment initiatives and the emergency lending put on the table so far by the G20 countries and the IMF: resources are being captured by private lenders while poverty and inequality are on the rise. Additionally, Transparency International announced, “there is a real risk that trillions of dollars meant to support those hardest hit by the crisis may be captured by the wealthy, increasing inequality as countries are saddled with public debt for money lost to corruption”.

Without an ambitious and fair process leading to the debt cancellation that the countries in the global south need, the resulting crisis will keep exacerbating the already staggering levels of social and economic inequality, within countries and between countries. Without debt cancellation there is no green and sustainable recovery. Without a multilateral sovereign debt restructuring mechanism that puts human rights, gender inequality and climate vulnerabilities at its core, there will be no chance of achieving the Sustainable Development Goals nor to fight economic, social, racial or gender inequality.