COVID-19 and debt in the global south: Protecting the most vulnerable in times of crisis II

2 April 2020 by Daniel Munevar

(CC - Pixabay : Alexey Hulsov)

This is the second part of a blog series covering the impact of Covid-19 on vulnerable countries in the Global South. [Part 1] analyses the impact of debt burdens on health services. Part 2 discusses how the economic crisis will affect countires in the global south. Part 3 highlights the degree of vulnerability of countries in the global south to the Covid-19 epidemic. Part 4 provides a discussion on policy responses to tackle the risks posed by the epidemic.

Download the methodological annex here

Healthcare challenges posed by Covid-19 to countries in the global south are heightened by economic factors. Even if these countries manage to avoid large outbreaks, they will still be exposed to the economic fallout of the epidemic, putting them at risk of a debt crisis. Available estimates suggest that a sharp slowdown of the global economy is already happening, involving a reduction of at least 0.5 percentage points of global GDP growth and a reduction of over US$ 50 billion in global exports. While the initial outbreak took place in China, causing a heavy degree of economic disruption, Covid-19 is already creating a similar degree of economic upset within the EU.

Developing countries, however, are exposed to the economic impact of Covid-19 through several trade and financial channels. In the case of trade, developing countries have become increasingly reliant on China as one of their main export markets. In fact, China currently accounts for US$ 1.7 trillion in imports from the rest of the world and is the destination for more than a fifth of exports from over 20 countries. In addition, the impact China has had on demand for commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. has increased developing countries’ dependence on these type of products. The number of commodity-dependent countries has increased from 92 in 1998-2002 to 102 in 2013-2017. As a result, countries with close trade ties to China and a high degree of dependence on commodity exports are very sensitive to the type of economic shock that is currently being felt. Since the beginning of the year, imports to China have decreased by 4% and commodity prices have dropped by 30%.

In the case of financial linkages, developing countries also present a troubling degree of exposure. Over the last decade, debt in Lower Income Economies (LIEs) [1] has increased from an average of over 40% 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.
to 49% in 2019. The increase in debt stocks has been accompanied by a parallel escalation of debt vulnerabilities. Over the last five years, the number of countries the 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.
classifies to be at high risk or already in debt distress has increased from 37 to 51.

Recent trends in development finance, embedded in the so-called Wall Street Consensus, have simultaneously reduced the availability of ODA ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
and exposed LIEs to complex and expensive financing instruments in the form of Eurobonds, currency swaps and PPPs, among others. As a result, vulnerable countries are now more susceptible to the panic that has engulfed global financial markets over the past weeks characterized by large drops in stock markets, sizable currency depreciations and capital outflows. The impact of these shocks on fragile balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheets, such as governments or non-financial corporations Non-financial corporations All economic agents that produce non-financial goods and services. They represent the greatest share of productive activity. in emerging markets, may amplify the effects of the crisis after the initial supply and demand shocks fade away. Potential impacts range from difficulties to rollover debts by individual corporations or governments, to a debt crisis engulfing a number of countries.

The next section of this blog series will highlight how vulnerable countries in the global south are to a crisis caused by any of the previously discussed risk factors.

Click here to read part one.


[1LIEs include 59 IDA-only, PRGT eligible countries, 13 high-income small states and 4 countries that have graduated from PRGT eligibility since 2010.

Daniel Munevar

is a post-Keynesian economist from Bogotá, Colombia. From March to July 2015, he worked as an assistant to former Greek Finance Minister Yanis Varoufakis, advising him on fiscal policy and debt sustainability.
Previously, he was an advisor to the Colombian Ministry of Finance. He has also worked at UNCTAD.
He is one of the leading figures in the study of public debt at the international level. He is a researcher at Eurodad.



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