Sierra Leone: Since the outbreak of COVID, the World Bank Group (WPG) has been the largest provider of net transfers to International Development Association (IDA) and least-developed countries.
David Malpass, WBG President said from April to December 2020, their net transfers to these countries alone were close to $17 billion, of which $5.8 billion were on grant terms, and new commitments were almost $30 billion. “But much more is needed.”
According to WBG, IDA aims to reduce poverty by providing grants and very long-term, zero-rate or near-zero-rate loans. In the fiscal year ending June 30, 2020, IDA made commitments for 305 projects totalling $30 billion, of which 26% was provided on grant terms. Since its inception, IDA has provided about $450 billion for investments in 114 countries.
The G20 Debt Service Suspension Initiative (DSSI) which Malpass and IMF Managing Director Kristalina Georgieva called for almost exactly one year ago he said has helped. “It has enabled 43 countries to postpone around $5.7 billion in debt-service payments between May and December of last year, with further savings of up to $7.3 billion expected between
then and its current end-date of June” said Malpass who was speaking at the London School of Economics, last week.
Yet so far, the relief has been less than anticipated because not all creditors participated. Large non-Paris Club bilateral creditors have only partially participated in the DSSI and, most troubling of all, bondholders and other private creditors have continued to collect full repayments throughout the crisis.
Malpass said that he believes the DSSI should be extended one more time by six months, through the end of 2021 as many countries are still battling COVID and facing a liquidity squeeze. He however cautioned that it’s also time to encourage overindebted countries to adopt a debt strategy that allows them to achieve a moderate debt position.
“Debt sustainability needs to achieve more than just short-term solvency—the ability to not default, while providing only minimal social and economic priorities. History tells us that countries with no way out of overhanging burdens of debt don’t grow and don’t achieve lasting reductions in poverty. The G20 Common Framework for Debt Treatments—which goes beyond the DSSI—can make an important difference here” he added.
The recent DSSI experience shows that commercial creditors won’t comply with calls for “voluntary participation” in debt relief initiatives. As the implementation of the Common Framework commences, G20 countries need to instruct and create incentives for all their public bilateral creditors to participate in debt relief efforts, including national policy banks. They also need to forcefully encourage the private creditors under their jurisdiction to participate fully in sovereign debt relief efforts for low-income countries.
He went on to note that, there are specific measures that should be considered by G7 countries to encourage more participation. To give just one example, sovereign immunity laws might be amended to include immunity from attachment by commercial creditors who refuse to participate in a Common Framework treatment in which their Government is participating.
While some progress on debt is underway, many of the poorer countries are coping with record debt burdens. Even before the pandemic, the World Bank report on Global Waves of Debt—which studied the causes and consequences of the four waves of debt accumulation that the global economy has experienced over the past fifty years—found that half of all low-income countries were already in debt distress or at a high risk of it.
Malpass said that the pandemic has only exacerbated the debt burden on people, many of whom would be poor even without having to pay the interest and principle on their governments’ debt. Every day, high debt-service payments are diverting scarce resources that could be used for urgent needs: for health, education, nutrition – and also climate action.
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