Committee for the Abolition of Illegitimate Debt

The devastating impact of the Covid-19 pandemic requires the adoption of large-scale measures to protect as many lives as possible around the world. For Low Income Economies (LIEs) [1] the pandemic represents an existential crisis in a context characterised by vulnerable health care Care Le concept de « care work » (travail de soin) fait référence à un ensemble de pratiques matérielles et psychologiques destinées à apporter une réponse concrète aux besoins des autres et d’une communauté (dont des écosystèmes). On préfère le concept de care à celui de travail « domestique » ou de « reproduction » car il intègre les dimensions émotionnelles et psychologiques (charge mentale, affection, soutien), et il ne se limite pas aux aspects « privés » et gratuit en englobant également les activités rémunérées nécessaires à la reproduction de la vie humaine. systems and high levels of debt. As outlined in a previous article, the emergency response of the international community must focus on three key areas:

• Provision of emergency medical support and supplies to scale up health services in countries with vulnerable health care systems.
• Provision of extensive financial support with conditionality free grants.
• An immediate debt moratorium in LIEs linked to long-term SDG-focused debt relief.

Building on these proposals, this analysis provides an assessment of the costs and implications of an immediate debt moratorium for 69 countries classified as LIEs [2]. A moratorium on public external debt service Debt service The sum of the interests and the amortization of the capital borrowed. could free up to US$50.4 billion over the next two years. The estimations highlight the potential of this mechanism to release significant existing domestic of resources to redeploy in the fight against Covid-19.

 Debt moratorium in LIEs: An initial cost assessment

LIEs have different alternatives to organise a debt moratorium on their external obligations. An optimal mechanism to deliver financial relief would be a multilateral framework for a comprehensive debt moratorium and relief, organised by the UN. A multilateral approach would ensure that the measures adopted are comprehensive and provide special and differentiated treatment to small and vulnerable countries. However, in a scenario of multilateral inertia where debt relief is used as a tool for the introduction of conditionalities and structural adjustment, countries experiencing a humanitarian emergency caused by Covid-19 could declare a sovereign unilateral debt moratorium. The human rights imperative to protect lives at risk would provide all the justification necessary for the adoption of this approach.

From a financial perspective, there are at least three complementary options, depending on the types of external debt covered by the moratorium:

• A debt moratorium on IMF IMF
  International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.
  
  When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.
  
  As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).
  
  The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
  The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
  
  http://imf.org and World Bank World Bank
  WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.
  
  It consists of several closely associated institutions, among which :
  
  1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;
  
  2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;
  
  3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.
  
  As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.
  
  payments: The most immediate alternative is for debtors to coordinate a moratorium on payments to the IMF and World Bank for the concepts of principal repayments, interest and charges. This procedure would require a majority vote of the Board of Directors of both organizations. Given the circumstances, the IMF and World Bank can take the initiative and accelerate the declaration of a broader moratorium covering other creditors. A moratorium for 2020 would free up to US$ 3.8 billion without any type of policy conditionalities. An extension until 2021 would release an additional US$ 4.8 billion, for a total of US$ 8.6 billion (Figure 1).

Figure 1 – Impact of a moratorium on IMF and World Bank payments by LIEs organized by IMF country risk groups of debt distress (2020-2021) (US$ Millions)

Source: IMF. Data as of February 29^th of 2020.

• A debt moratorium on external official creditors: A broader debt moratorium covering all official external creditors of the public sector in LIEs could free up a total of US$ 19.5 billion in 2020. An extension until 2021 would release an additional US$ 18.7 billion, for a total of US$ 38.2 billion (Figure 2). Countries currently assessed to be at low and moderate risks of debt distress would be the main beneficiaries. A key element to achieve an immediate moratorium is the coordination amongst bilateral creditors, mainly Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.
  
  members and China, in order to avoid a situation where resources freed up end up potentially being used to pay other creditors. However, even without a multilateral agreement, debtor countries in a situation of humanitarian emergency can address creditor coordination failures and promote a wider agreement on the issue by adopting a sovereign unilateral debt moratorium.

Figure 2 – Impact of debt moratorium on external official creditors of LIEs organized by IMF country risk groups of debt distress (2020-2021) (US$ Billions)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

• A debt moratorium on external private creditors: The moratorium could be expanded to cover private external creditors to the public sector. A policy designed for 2020 could release up to US$ 5.9 billion in additional resources previously tied to debt service. Extension into 2021 would add US$ 6.2 billion for a total of US$ 12.1 billion (Figure 3). Countries currently assessed to be at high risk of debt distress would be the main beneficiaries. A multilateral framework for a debt moratorium, coordinated under the auspices of UN, could request the US, UK and the EU for the introduction of a temporary stay on sovereign debt Sovereign debt Government debts or debts guaranteed by the government. litigation in order to protect vulnerable countries from vulture funds Vulture funds
  Vulture fund Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors. aiming to profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. from the crisis.

Figure 3 – Impact of debt moratorium on external private creditors of LIEs organized by IMF country risk groups of debt distress (2020-2021) (US$ Billions)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

Adding togther the official and private components, a comprehensive debt moratorium could release up to US$ 50.4 billion in resources for governments in LIEs to tackle the Covid-19 pandemic (Figure 4 - Table 1). From a geographical perspective, this initiative is ideally suited to delivering the highest amounts of relief to those in most need. Thirty-five highly vulnerable countries in Africa would be the main recipients of the benefits of a debt moratorium. An estimated US$ 32.8 billion could be made available over the next 2 years for countries in the region.

Table 1 – Debt moratorium estimates for 69 LIEs (2020-2021)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

Figure 4 – Debt moratorium estimates for 69 LIEs (2020-2021)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

 Debt moratorium in perspective

US$ 50.4 billion was a large number in the world that existed previous to Covid-19. After the pandemic, this is not the case. The wide ranging implications of this new threat are forcing society to reconsider the scale and requirements of public action to tackle uninsurable risks. In this context, the resources mobilised from a comprehensive debt moratorium need to be understood as the initial investment of an even larger multilateral response. Assuming that all the resources obtained from a debt moratorium were invested in Covid-19 testing kits, they wouldn’t be enough to provide one testing per capita to the 1.2 billion people that live in the 69 countries included in this assessment.

This example highlights how important comprehensive emergency responses that include financial strategies, such as a debt moratorium and large amounts of non-conditional grant financing, are to the mobilisation of real resources. Only then will it be to possible to produce and distribute the quantities of medical equipment required to slow down and control the growth of Covid-19. From a long run perspective, our best defence against the pandemic is to ensure that no one is left behind. Now more than ever, financial considerations must come second to the protection of human lives and rights. This means increasing the scale of efforts to achieve the goals of Agenda 2030. For this purpose, it is imperative to link the initial stages of a wide debt moratorium with a more comprehensive debt relief strategy. After the crisis, we must shift to a new paradigm where debt sustainability is assessed with respect to the financing needs of the Agenda 2030. Enough debt relief must be granted to allow countries to fund their national programs to achieve the SDGs. Until then, we need to remind ourselves that no-one is safe until everyone is safe.

 Annex

Definitions

• Public debt service: Defined as principal repayments and interest payments on short, medium and long-term debt, including both its domestic and external components as a share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of GDP GDP
  Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. . Figures for 2016 to 2018 correspond to country level data from the IMF. Figures for 2020 and 2021 correspond to IMF DSA country level projections. Figures are converted to US dollars using IMF WEO estimations. Data from latest IMF DSA available per country.
• Public debt service – External private debt: Defined as the sum of principal repayments and interest payments on public and publicly guaranteed external debt to private creditors including bonds and commercial bank loans. Figures for 2016 to 2018 correspond to country level data from the World Bank International Debt Statistics. Figures for 2020 to 2021 correspond to an estimation made using the average ratio of external debt service on private debt to public debt service per country from 2016 to 2018. The ratio is applied to IMF DSA projections of public debt service for 2020 and 2021 and converted to US dollars using IMF WEO estimations.
• Public debt service – External official debt: Defined as the sum of principal repayments and interest payments on public and publicly guaranteed external debt to official creditors including multilateral institutions and bilateral creditors. Figures for 2016 to 2018 correspond to country level data from the World Bank International Debt Statistics. Figures for 2020 to 2021 correspond to an estimation made using the average ratio of external debt service on official debt to public debt service per country from 2016 to 2018. The ratio is applied to IMF DSA projections of public debt service for 2020 and 2021 and converted to US dollars using IMF WEO estimations.
• Debt moratorium estimations: Figures quoted in this article are based on the figures for projected requirements on debt service for external private and official debt for 2020 and 2021 using the methodology presented above. A more accurate assessment would require country level DSAs to estimate current financing requirements. This is an area for further work.

Country figures on debt service

Table 1 – Public debt service projections for LIEs (2020-2021)

Source: IMF WEO, IMF country DSA; World Bank IDS.

Table 2 – Public debt service statistics for LIEs in debt distress (2016-2018)

Source: IMF WEO, IMF country DSA; World Bank IDS.

Table 3 – Public debt service projections for LIEs in debt distress (2020-2021)

Source: IMF WEO, IMF country DSA; World Bank IDS.

Table 4 – Public debt service statistics for LIEs at high risk of debt distress (2016-2018)

Source: IMF WEO, IMF country DSA; World Bank IDS.

Table 5 – Public debt service projections for LIEs at high risk of debt distress (2020-2021)

Source: IMF WEO, IMF country DSA; World Bank IDS.

Table 6 – Public debt service statistics for LIEs at moderate risk of debt distress (2016-2018)

Source: IMF WEO, IMF country DSA; World Bank IDS.

Table 7 – Public debt service projections for LIEs at moderate risk of debt distress (2020-2021)

Source: IMF WEO, IMF country DSA; World Bank IDS

Table 8 – Public debt service statistics for LIEs at low risk of debt distress (2016-2018)

Source: IMF WEO, IMF country DSA; World Bank IDS.

Table 9 – Public debt service projections for LIEs at low risk of debt distress (2020-2021)

Source: IMF WEO, IMF country DSA; World Bank IDS.

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