Emergency financing for Low-Income Economies to tackle COVID-19: Cost estimates for the impact of the crisis and emergency financing requirements

2 April 2020 by Daniel Munevar

(CC - Pixabay : Pete Linforth)

This briefing is provided to inform development of policy responses to the Covid-19 crisis and in support of calls from wider civil society for debt cancellations for the world’s poorest countries in the face of the current crisis.

The Covid-19 crisis has the potential to devastate the lives and livelihoods of 1.2 billion people in the 69 low-income countries covered by this briefing. Protection of the most vulnerable populations will require the adoption of measures at an unprecedented scale. This analysis builds on previous research by Eurodad. [1] It provides an initial estimate of the emergency financing requirements faced by 69 countries in 2020 as a result of the current crisis. Furthermore, it considers the implications of different policy proposals currently under consideration in terms of the scale, conditions and efficiency of the use of multilateral resources.

This analysis provides cost estimates for the impact of the crisis and emergency financing requirements for 69 Low Income Economies (LIEs [2]) in 2020 under three different scenarios:

1. In a baseline scenario, the impact of the crisis will force at least 45 LIEs to request US$ 93.8 billion in emergency financing to face the epidemic. Without a suspension of external debt payments, US$ 21.8 billion in emergency financing would be diverted away from Covid-19 response efforts towards creditors. For countries receiving support, provision of loan financing would increase public debt 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 Gross Domestic Product 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.
(GDP) on average by 14.2 percentage points. This would represent an average increase of 36.6 per cent over current debt levels (see Table 1).

Table 1: Estimate of impact of Covid-19 crisis on 69 LIEs in 2020 - baseline scenario

Source: Eurodad estimates based on IMF country DSA (latest available); IMF WEO (2019); World Bank WDI; World Bank IDS.

2. In an alternative scenario, based on 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.

and World Bank World Bank
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.

proposals for a suspension on official bilateral debt payments in 2020, the number of countries requiring emergency financing would drop to 41 and financing needs to US$ 82.8 billion. Continuation of debt payments on private and multilateral creditors and use of loan financing would have negative impacts on LIEs. An estimated US$ 9.4 billion of emergency funding would be diverted to debt repayments. Public debt as a share of GDP would increase on average by 14.2 percentage points. This would represent an increase of 37.6 per cent over current levels (see Table 2).

Table 2: Estimate of impact of Covid-19 on 69 LIEs in 2020 - alternative scenario (IMF and World Bank proposal)

Source: Eurodad estimates based on IMF country DSA (latest available); IMF WEO (2019); World Bank WDI; World Bank IDS

3. In a progressive scenario that assumes a complete cancellation of external public and private debt service Debt service The sum of the interests and the amortization of the capital borrowed. and full grant financing, the number of countries requiring emergency financing would drop to 29 and require US$ 73.2 billion to tackle the crisis. Under this scenario, all emergency financing would support the policy response to the crisis.

Table 3: Estimate of impact of Covid-19 crisis on 69 LIEs in 2020 - progressive scenario (civil society proposal)

Source: Eurodad estimates based on IMF country DSA (latest available); IMF WEO (2019); World Bank WDI; World Bank IDS

Figures 1, 2 and 3 illustrate the impacts of different policy proposals in terms costs, allocations of debt service and public debt levels.

Figure 1: Cost estimates of emergency financing under different scenarios and G7 fiscal measures (US$ billions)

Source: Eurodad estimates, IIF COVID-19 Global Policy Response Summary

Figure 2: Impact of external debt service on allocation of emergency financing for LIEs (US$ billions)

Source: Eurodad estimates

Figure 3: Impact of emergency loan financing on public debt levels in LIEs (% of GDP)

Source: Eurodad estimates

These estimates highlight the moral and economic value of an immediate cancellation of debt payments and provision of grant financing to LIEs to tackle the Covid-19 crisis. Bold and unprecedent actions will be required to protect the most vulnerable amongst us. The cost of delays and inadequate responses will be measured in human losses. Time is of the essence.

For detailed policy analysis, methodology and country by country figures please refer to the full report.


[1Eurodad, ‘A debt moratorium for Low Income Economies,’ 2020. Retrieved from https://eurodad.org/files/pdf/1547157-a-debt-moratorium-for-low-income-economies-.pdf

[2As defined by the International Monetary Fund (IMF), LIEs include 59 countries eligible for IFI concessional financing, 13 high-income small states and four countries that have graduated from concessionality eligibility since 2010. This analysis includes 69 countries where data was available. Announcement by IFIs covers a total of 76 countries. Not included are five so-called ‘blend countries’ (which can access both concessional and non-concessional lending) and two inactive countries. The countries not included in the assessment are Fiji, Kosovo, Mongolia, Nigeria, Pakistan (blend countries) and Eritrea, Syria (inactive countries).

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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