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Debt cancellation in Global South would assist COVID-19 response
As difficult as dealing with COVID-19 is for countries of the developed world with their sophisticated healthcare systems, the coronavirus pandemic has the potential to devastate the countries of the Global South. As Social Justice Ireland has already pointed out, this crisis will expose afresh the depth of the inequalities within and between countries. It is important that the developed world do what it can to assist poorer countries in combatting this crisis. First and foremost, this must involve a deal on current levels of sovereign debt in the Global South. Social Justice Ireland supports the call for the permanent cancellation of all external debt payments due from developing countries in 2020, with no accrual of interest or charges or other penalties, and the provision of additional emergency finance that does not create more debt.
Currently, more than 60 countries spend more on debt re-financing than they do on healthcare. Already, in an unprecedented move, the IMF and the World Bank have called for debt payments by the poorest countries to other governments to be suspended. However, the effects of the pandemic are likely to last for years, so delaying (rather than cancelling) payments won’t solve the problem in the long term.
As Maeve Bateman, Director at Financial Justice Ireland, recently pointed out, permanently cancelling upcoming debt payments owed by these countries would be the fastest way to free up existing public resources to tackle this crisis and save lives. Unprecedented though it is, the suspension on debt payments called for by the IMF and World Bank will fall short of what is needed if it doesn’t apply to all lenders. It is also only a call for the postponement of payments, not the cancellation.
It is also imperative that any emergency finance provided at this time does not add to existing debt burdens, and a process is needed to reduce debts to sustainable levels in the medium-to-long term. Many countries were in a debt crisis before this pandemic began, and many of those will emerge from this crisis with debt levels that are even more unsustainable. The immediate cancellation of debt payments should be linked to a more comprehensive and long-term approach to debt crisis resolution. The creation through the United Nations of a systematic, comprehensive and enforceable process for sovereign debt restructuring would help. The IMF should introduce clear guidelines on when a debt is unsustainable, and only to lend to countries with unsustainable debts if there is a default or debt restructuring.
Cancelling all debt payments owed by low-income countries to other governments, multilateral institutions and private lenders would make available around US$25 billion to fight the coronavirus this year alone. Extending the cancellation to apply to payments due in 2021 would make approximately another US$25 billion available. Cancellation should apply to all creditors, including bilateral, multilateral and private lenders, to ensure money generated is used to fund pandemic response, including investment in healthcare, and not to pay off other debts.
As well as the above, up to an additional US$73 billion in emergency finance will be needed to help low income economies as they respond to the crisis in 2020. This must be provided through grants, rather than loans, to stop recipient countries getting even deeper into debt.