In recent months, the fiscal clock has been ticking faster than ever for many small and vulnerable states around the world due to the devastating impact of the coronavirus pandemic on the global economy.
With Joe Biden’s victory in the U.S. presidential election, which increased the possibility of meaningful global collaboration on pressing issues that disproportionately affect vulnerable states like climate change, as well as developing several COVID-19 vaccines that could help stop the pandemic To get under control, countries have recently started seeing a faint light at the end of the tunnel.
The road to economic salvation is still fraught with roadblocks, however, and the coming winter months are likely to be long and dark for many nations whose economies are collapsing under the weight of the additional debt they have amassed in response to the pandemic.
In this context, the G20’s recent decision to extend the Debt Service Suspension Initiative (DSSI) launched in April until the middle of next year to help the world’s poorest countries cope with the economic consequences of the COVID-19 crisis has taken place was very welcome.
However, expanding the DSSI alone cannot solve the fiscal challenges associated with the mammoth pandemic that poorer nations are facing. Fortunately, the G20 appears to be recognizing this and has also put in place a “Common Framework for the Treatment of Debt Outside the DSSI”, which aims to address the unsustainable debt issue that many DSSI-eligible countries will continue to face after the pandemic Case by case.
While these G20 initiatives are undoubtedly important steps in the right direction, their scope is limited. In order for all the nations of the world to bounce back from this unprecedented public health emergency, the debt relief efforts of the world’s richest nations must go further.
The problem of eligibility
The main limiting factor in the success of these well-meaning G20 initiatives in mitigating the economic impact of the pandemic is “eligibility”.
Currently, 73 low-income countries around the world are eligible to use the DSSI. Many small, middle-income countries, also suffering from the economic consequences of the pandemic, are excluded from this initiative and its expansion.
A recent paper by the Commonwealth Secretariat has shown that due to the new fiscal pressures introduced by the COVID-19 pandemic, the debt ratio of the 32 small state members of the Commonwealth could rise by an average of 27 percentage points by the end of 2021. twice as high as forecast for other developing countries in the Commonwealth.
Despite the economic devastation they are experiencing, some of these small states are not eligible to participate in the DSSI as, after years of prudent financial management and investment, they are now classified as middle-income countries that do not need financial assistance.
Of course, despite their middle income, these nations are also grappling with the income losses they have suffered as a result of the pandemic, and they could face economic collapse if they do not receive the necessary support from the international community. And their economic struggles will inevitably affect the world economy.
If the G20 is to avoid the very global disruptions that they sought to prevent through the DSSI and the Common Framework for Debt Management, they need to support more than just the poorest countries. They need to extend the eligibility for G20 debt restructuring initiatives from only the poorest countries to all countries in need of support.
Most economists agree that regardless of a country’s income classification, debt relief is required if persistent debt overhang is accompanied by negative or sluggish growth. In other words, there is no economic justification for the G20’s refusal to extend the eligibility of its debt restructuring and suspension programs to middle-income countries. Indeed, it is clear that supporting a wider range of countries would increase the pace of global economic recovery.
An expansion of the scope of these regulations is also politically sensible for the G20 member states.
If small and vulnerable countries are not given debt relief, they cannot meet the most basic needs of their citizens. This could lead to new waves of migration and increase the pressure that the rich nations that are part of the G20 are already facing. In addition, a lack of debt relief could lead some small, middle-income countries to become dependent on international aid.
The need for debt write-offs
A mere expansion of the admission criteria for COVID-19 debt restructuring and suspension programs is not enough to get the global economy going again. Given the scale of the economic disruption caused by the pandemic, some countries will need more than just debt relief – they will need a clean start.
It is generally accepted that after the pandemic ends, the global economy will look very different from what it was before. Countries are now spending on recovery, but once the dust settles they will all find themselves in an economic landscape very different from what it was before the pandemic.
As a result, future income will be difficult to predict, and this means that debt restructuring under existing schemes or a new expanded initiative could prolong rather than solve core solvency problems in certain countries.
The G20 should therefore work with the IMF and the World Bank to help countries better understand their growth potential and, when projected income is highly uncertain, provide for direct debt relief.
In this way, highly indebted and potentially bankrupt countries have the space and time to restructure their economies according to the opportunities of the post-COVID-19 landscape.
Commonwealth support
The Commonwealth, with its already strong partnership with these institutions and its long-established and highly respected debt management program, is ideally positioned to assist the IMF and World Bank in their debt relief efforts.
We can only address the debt sustainability problems caused by the pandemic and prevent the possible consequences of such crises by expanding the eligibility for existing debt relief systems and offering write-offs to most countries in difficulty. These goals can be achieved through increased collaboration between the Commonwealth, global governance institutions and the G20.
After months of uncertainty and suffering, we now seem close to winning the fight against COVID-19. Vaccines may help us defeat this deadly virus in the coming months, but if we don’t act now, its impact on vulnerable economies around the world will continue to devastate millions of people in the years to come. This pandemic could be an opportunity to build a fairer and more prosperous world for all. But we must act now and address the systemic challenges small and vulnerable nations face if we are all to enjoy the dawn of a post-COVID-19 world.
The views expressed in this article are from the author and do not necessarily reflect the editorial stance of Al Jazeera.
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