If the G7 leaders are serious about helping low- and middle-income countries prepare for the next pandemic or tackle climate change, they have a strange way of showing it. As many developing countries plunge into debt crises, rich countries are failing to pull the levers that could help them avoid the worst
LONDON – Next week, G7 leaders will meet in Germany to discuss a litany of overlapping global crises, including the war in Ukraine, food insecurity, inflation, lagging global supply chains, the response to the pandemic and the climate change. These challenges have a common denominator: they are all hitting low- and middle-income countries hardest, already facing a mounting debt crisis.
When Covid-19 hit two and a half years ago, nearly 60% of the poorest countries were already in debt distress or at high risk of debt distress. Since then, the pandemic has pushed this cohort’s total indebtedness horizon to a 50-year high, leaving more than two dozen countries at risk of default in 2022 (with Sri Lanka becoming the first victim, last month). .
Most of these countries are still struggling to recover from the pandemic, and now a tsunami of negative shocks further threatens their prospects. In addition to skyrocketing prices for such commodities as energy, wheat and fertilizer, interest rate increases in the United States and other major economies are driving up global borrowing costs.
Furthermore, because many of the lowest income countries do not even have credit ratings, they remain entirely dependent on development finance to make up income shortfalls and meet basic needs. The World Bank projects that nearly 100 million more people may fall into extreme poverty by the end of this year.
The members of the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, and the European Union) are in a unique position to help low-income countries manage deteriorating macroeconomic conditions. Apart from China, they are the world’s largest source of financing for development. They are also among the largest shareholders in the International Monetary Fund and the World Bank and are power players in key forums such as the Paris Club of sovereign creditors and the G20, where most current debt relief and workout deals are formed. .
Despite their enormous power, this small wealthy group has not fully used the tools at their disposal to help poorer countries. The first tool is the IMF’s special drawing rights (SDRs), an international fiat currency that G7 countries can urge the IMF to issue to help poorer countries manage their mounting debts and the effects of inflation.
We know this tool works because the IMF’s $650 billion SDR allocation in August 2021 helped many low- and middle-income countries avoid fiscal crises and defaults while maintaining essential public services. Now, a new allocation is needed to help avert human and economic catastrophe as hunger crises and inflationary pressures intensify in the coming months.
The G7 countries should also urge the United States to “recycle” its own unused SDR allocation to support countries in need. All other G7 members have already done so through commitments to the IMF’s Resilience and Sustainability Trust.
The second tool is conditional debt relief. At this month’s summit, G7 leaders must urge G20 member countries to immediately extend the Debt Service and Suspension Initiative until 2023. They must also underpin the G20 Common Framework, which is the benchmark forum current for sovereign debt. restructuring.
Here, it is important to find ways to engage constructively with China and private creditors. Otherwise, the mechanism must be abandoned so that a more functional truly multilateral framework for debt restructuring can be developed.
In any case, the G7 should explore the idea of debt-for-health or debt-for-climate swaps, whereby sovereign debt is forgiven in exchange for a country’s commitment to use the freed-up funds to invest in health systems. clean energy etc The Global Fund has already used this mechanism (on a smaller scale) to mobilize funding for the fight against HIV, tuberculosis and malaria. Now, the same approach needs to be applied more broadly to strengthen health systems and pandemic preparedness and response (PPR).
Given that the PPR’s annual funding gap is estimated at about $10.5 billion and that the G20 financial intermediary fund for the PPR has raised less than $1 billion to date, it is clear that more effective ways need to be developed. to help low- and middle-income countries and finance investments in their health systems. Targeted debt relief is an essential first step.
The third tool is the IMF loan regime, but only if it can be reformed. Since the start of the pandemic, the IMF has provided more than 150 loans to countries, ostensibly to help low- and middle-income countries create fiscal space with which to manage an economic and public health crisis. But most of these agreements contain self-defeating provisions that require recipient governments to reduce their spending on public wages or reduce their debt-to-GDP ratio. The IMF’s own research department has found that these conditions tend to undermine state capacity, jeopardize essential services, and increase inequality in the medium and long term.
The G7 leaders should use their substantial influence at the IMF to push for a new operating model, so that the money it lends to support public investment in essential services does not end up destroying those countries’ ability to provide those services.
If the G7 wants low- and middle-income countries to invest more in “health for all,” decarbonization, and other UN Sustainable Development Goals, it must do everything in its power to help create the right external conditions. . By backing a new SDR allocation, offering conditional debt relief, and ending the IMF’s fixation on austerity, G7 leaders can help give the poorest countries a fighting chance.
Copyright: Project Syndicate, 2022