Geneva, 5 May (Chandrakant Patel*) – An immediate programme of financial support, including an immediate moratorium on debt-repayment by poorer developing countries, financial support from multilateral financial institutions, including issuance of new Special Drawing Rights (SDRs) by the IMF, needs to be launched to arrest and eradicate the COVID-19 global pandemic.
As the UN Secretary-General has pointed out in his call for a concerted financial effort to fill the 2-3 trillion US dollar gap that has emerged in the developing countries as a consequence of the pandemic on the on-going health, social and economic crises in the developing world, if measures aren’t taken now there is a possibility of emergence of more virulent mutations of the novel coronavirus emerging in many areas of extreme poverty and refugees camps in many countries around the world, and with unforeseeable consequences on control and eradication of the pandemic.
Several of these ideas for financial support have been articulated by many G-20 members, and by UNCTAD, IMF and the World Bank.
The asymmetric nature of the measures and responses among the richer and the poorer countries suggests that the multilateral systems, most notably the multilateral financial institutions, can play a very critical role to intermediate the gap.
The MFIs need to engage as actively as the governments and central banks in expanding their capacity to lend.
The current near-zero interest-rate environment provides the MFIs greater leverage in their borrowing and disbursing programs.
Against this background, the G-20 Finance Ministers adopted on 15 April a number of decisions – cancellation of bilateral debt owed by poorer countries until end of this year, strengthening the resources of the IMF, augmenting the capacity of the World Bank (WB) and the regional development banks (RDBs).
The private creditors have been invited to participate in the initiative on “comparable terms”.
On its part, the IMF has put in place new arrangements or extended existing facilities such as the Catastrophe Containment and Relief Trust (CCRT) and to double access to its emergency facilities – the Rapid Credit Facility and Rapid Financing Instrument – so as to meet the expected demand of about $100 billion in financing.
Under the CCRT, the IMF has cancelled an estimated $214 million in repayments for the next six months by 25 poorest member countries, allowing them to use the money to fight coronavirus instead. Finally, it is committed to deploying the now available USD one trillion to fight the current crisis.
Similarly, the multilateral development banks (MDBs) have targeted an amount of USD 200 billion for low- income countries.
The World Bank Group is deploying up to $160 billion in long-term financial support over the next 15 months – with an emphasis on policy-based financing and protecting the poorest households.
Finally, the involvement of the private sector in this programme is welcome but perforce requires national legislative support; so far, there has been no evidence that such support is under way.
Embracing a variety of combination of policies and measures — debt relief can provide the most efficient and rapid form of finance in the current situation: the combinations may embrace part or complete cancellation, moratorium of interest and/or capital and rescheduling/new refinancing.
To be effective, however, the relief needs to be sustainable and manageable. The choice facing the international community, is between an orderly reorganization or a disorderly response affecting the functioning and stability of the international market.
Taking into account the likely continuation of recession next year and arguably beyond, failure to reorganize debts of poorer countries will balloon to unmanageable levels.
In conditions of unexceptional capital outflows from developing countries and sharply fallen trade and services receipts, there is a risk of unilateral cessation of debt service that may precipitate a cascading effect. That would be a much worse outcome for all involved.
In the event, a comprehensive and fair debt restructuring that includes NPV (net present value) reductions sufficient for restoring debt sustainability is by far the most practical solution for all involved.
The most transparent means of arriving at this would be a comprehensive programme embracing all, or at least the major creditors. The advantage of such a programme is that it involves a transparent formula for burden sharing among the creditors and benefits are shared equitably between the debtors.
The programme clearly should embrace all the major creditors to ensure that the burden of debt relief is shared equitably and not result in shifting the funds to creditors not part of the rescue.
Any single creditor remaining outside the arrangements creates disincentives for others willing to provide debt relief.
There is also the concern in several quarters that debt relief extended by multilateral institutions would simply facilitate repayment of debt obligations to countries or other creditors, not part of the rescue.
The G-20 refers to a time-bound suspension of debt service payments; it is not clear whether, as is reported in the media, it goes beyond this year.
Suspending payments rather than cancelling them suggests that countries will continue to accumulate interest and debt would be then rolled into the following years.
In addition, questions remain about the coverage of creditors: while the G-20 refers to Paris Club members, a number of G-20 members themselves are major creditors but are not members of the Paris Club. How are their commitments, if any, to be reflected in the overall package of the G-20’s decisions?
The G-20 communique refers to a “coordinated approach with a common term sheet providing the key features for this debt service suspension initiative”.
As of now, however, there is little clarity or transparency about the quantum, coverage, terms or conditions of the proposed suspension. To be sure, the Ministers have left open the possibility of a further extension beyond this year.
THE IMF AND SDRs
Beyond these initiatives, several members have urged the issuance of SDR’s to provide rapid access to liquidity to developing countries. The amount proposed varies from approximately twice the amount distributed in the 2008 financial crises (around USD 500 billion) to an allocation of USD one trillion.
The main attraction of this approach is that it would create highly liquid and unconditional assets available immediately.
Since SDRs would be distributed in proportion to IMF member’s quotas, distribution requires an 85 percent voting majority by IMF members (around 10 percent share for the low-income countries and 25 percent if middle income and China are included).
Under its present law, the US administration can accept, without Congressional approval, an allocation up to its quota of USD 649 billion. Since US’s quota is about one-fifth of the total, it can get about one-fifth of any new SDRs created by the Fund.
Thus, the potential scope for new SDR creation, without Congressional approval, is enormous. It means though that the US, which has a veto, would have to agree to this decision.
There are several ways to deal with this, including to pool or redistribute developed countries’ share to poorer countries. Even with the current rules (allowing a much greater share for developed countries) a new issuance would still send a powerful message of commitment to the poorer countries.
In the event, there was no consensus at the G-20 meetings, reportedly due to opposition of the US. It is hoped, however, that a consensus will emerge in time later this year to meet the needs of developing countries.
Likewise, in addition to relieving debt interest payments, the IMF, with its $150 billion in gold reserves and network of credit lines with central banks, should be prepared to lend up to $1 trillion this year.
In order to deliver such an unexceptional commitment rapidly, the IMF’s conditionalities would need to respond accordingly.
SPECIFIC CASE OF CHINA
Of the eight G-20 developing countries (Argentina, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, and South Africa), three – China, India and Saudi Arabia – provide significant contributions to other developing countries. Of these, China remains by far the most important, larger than MFIs or any single OECD member country.
Given China’s trade and credits reaches virtually the entire developing world, it has a critical role in assisting them, especially in the current crisis. It is now formally part of the commitments made by the G-20 to tackle the pandemic. To be sure, it has not so far been part of any multilateral debt (or aid) initiative – such as HIPC.
Evidence of its involvement with debt rearrangements with developing countries shows China’s revealed preference for a case-by-case debt restructuring and debt/equity swap arrangement.
This establishes China’s comparatively high level of seniority among other international creditors. Considering its role as trillion dollar creditor in the Belt and Road Project and the soft leverage it has acquired therein, it is unlikely that it will cede a meaningful role to a multilateral debt arrangement or, indeed, cancellation of debt.
Compared to terms of the DAC countries, China prefers to lend at near-market terms (with risk premia), shorter maturities, and includes collateral clauses that secure repayment through commodity export proceeds such as copper, timber and oil.
Drawing on China’s balance of payments data, it has been suggested that China’s direct loans and trade credits have grown from zero in 2000 to more than 1.6 trillion dollars by 2018 or close to 2 percent of the world’s GDP (Kiel, June 2019). As a result, this has transformed China into the largest single official creditor, surpassing the IMF or the World Bank.
There is no official published information about the size of the debt stock or its distribution, terms and concessionality or other conditions associated with its lending.
It is also not a member of the OECD’s DAC reporting system and accordingly does not embrace the ODA terms and conditions covering issues such as criteria for threshold of ODA, aid tying, project versus programme assistance and treatment of local expenditures.
While it does not share any data with OECD’s Creditor Reporting System (which provides very comprehensive ODA data from DAC members) it is clear from the destinations of its credits that its terms and conditions are tailored to recipients; the advanced countries tend to benefit from portfolio debt whereas the poorest countries receive loans at close to market rates.
China does not report its sovereign bond purchases, nor the composition of its portfolio. More importantly, using unpublished data from the World Bank’s Debtor Reporting System and data on BIS reported bank claims, the Kiel study found that about 50 percent of its lending is “hidden”.
Neither the IMF, nor the World Bank, nor credit rating agencies report on these “hidden” debt stocks, which have grown to more than USD 400 billion as of 2018.
These findings have important implications for debt sustainability in recipient countries, also because China’s state-driven lending abroad differs strongly from other official lenders such as the World Bank or OECD governments.
As noted earlier, many of the recent recipients of Chinese loans are low-income countries who benefited from the HIPC and MDRI debt relief initiatives of the 2000s. They are now re-leveraged and on course to attain pre-HIPC levels.
It is estimated that the Chinese government, banks and mostly state-sponsored contractors loaned some $143 billion to African governments and state-owned enterprises between 2000 and 2017.
However, several governments reportedly want to see a formal commitment to a transparent burden sharing before they back an IMF bailout of any country heavily indebted to China.
The IMF, the World Bank and the African Development Bank have all agreed that there was now a requirement for both debt stocks and overall debt servicing obligations to be reduced particularly for the sub-Saharan African countries.
There was also a strong consensus of opinion as to how this should be achieved, namely via bilateral and commercial debt rescheduling and write-offs, particularly through the operations of the Paris and London Clubs.
But without the fuller integration of China in these multilateral arrangements, the final outcomes will inevitably fall well short of the required need of developing countries.
(* Dr. Chandrakant Patel, who contributed this article, is a former Director of UNCTAD’s LDC Programme.)