Prioritise pandemic relief, recovery: No time for debt buybacks

Anis Chowdhury, Jomo Kwame Sundaram

SYDNEY, KUALA LUMPUR: Developing country governments are being wrongly advised to use their modest fiscal resources to pay down accumulated debt instead of strengthening pandemic relief and recovery. Thus, debt phobia risks deepening and extending COVID-19 recessions by prioritising buybacks.

Pandemic debt mounting

Nearly half (44%) of low-income countries were already debt-distressed or at high risk even before the COVID-19 pandemic was declared in March 2020. Limited fiscal space has constrained developing countries’ relief and recovery measures, making them far more modest than those of developed countries.

Nevertheless, their government debt ratios rose faster in 2020. Many developing countries have taken on more debt, typically on non-concessional terms—from private lenders and non-Paris Club members. Public debt in emerging markets has thus surged to levels not seen in over half a century.

In January-October 2020, the average debt burden of developing countries increased by 26% as tax revenues declined sharply. The IMF projects their average debt ratios will rise by 7-10% of GDP in 2021, with some terming this a “debt pandemic”.

Debt burdens limit fiscal resources and the policy space needed to better address the pandemic health and economic crises in developing countries. Debt is particularly debilitating in the least developed countries, where healthcare services were modest even before the pandemic.

Last October, the United Nations warned G20 senior officials of “protracted fiscal paralysis” and the “worst global crisis since WWII” if developing countries did not get significant debt relief. For the World Bank President, the “disappointing” G20 Debt Services Suspension Initiative (DSSI) only “defers debt payments” as interest mounts, without reducing debt.

Debt buybacks?

Ostensibly to avert the “looming debt crisis”, some are calling for debt buybacks while private creditors refuse to offer any debt relief. They claim “bond buy-backs present a highly attractive solution, offering substantial debt relief at a relatively low cost”.

Hence, they urge using the International Monetary Fund’s (IMF) New Arrangements to Borrow plus funds from donors and multilateral institutions to buy debt at a discount. Such calls have grown with the prospect of new Special Drawing Rights (SDRs) of at least US$500 bn, as the Biden administration has dropped US opposition.

Proponents do not explain why debt buybacks should now take precedence over urgently deploying fiscal resources for relief and recovery. As more countries compete for funds, driving up interest rates, buybacks should ease the credit market for others.

Successful debt buybacks?

Buyback advocates misleadingly imply that the 1989 Brady bond plan and the 2012 Greek bond buybacks were both “successful”. The plan wrote down some sovereign debt to commercial banks for several mainly Latin American countries, following the early 1980s’ spike in US interest rates.

The US debt buyback initiative was launched by George HW Bush’s Treasury Secretary, Nicholas Brady and backed with US Treasury bills after his predecessor failed to resolve the debt crises of several heavily indebted US allies.

In return for IMF support, these countries were subjected to IMF-World Bank programme conditions. These supposedly “growth promoting” policies actually resulted in many “lost years” of stagnation.

Benefits for most debtors were unclear as buybacks failed to improve market confidence in debtor countries, or their development performance. The Brady scheme was portrayed as “voluntary”, although in fact, “officials used various techniques to pressure banks into Brady deals”.

Even with fewer debt-distressed countries and more similar creditors then, “country negotiations with bank creditors often dragged on for months”, even a year. In fact, only the banks gained from the Brady deals which enabled them to close the chapter with minimal losses and move on.

The 2012 Greek debt buyback programme is said to be a “success” in “the sense of being orderly, reasonably quick”. However, it only affected private debt as governments and central banks held over two-thirds of Greece’s sovereign debt.

While treating “holdout creditors” generously, the programme did not restore Greek debt sustainability. Unsurprisingly, the “bigger winners were hedge funds, which pocketed higher profits than many had expected”.

Dubious models for emulation

Debt buyback advocates seem to ignore how debtor-creditor relations have changed since the 1980s. There are now many more types of private creditors, debtors and credit or borrowing arrangements compared to the 1980s, when government debt from US and UK commercial banks was far more significant.

The US government then had much more leverage on US commercial banks as it was seen as trying to avoid bank failures and to ensure financial sector stability. With powerful lobbyists, such as the Institute of International Finance (IIF), private finance has much more bargaining power now.

Today, no single government or multilateral institution has considerable influence on the far more varied private creditors. Such lenders have already rejected the G20 DSSI and ignored IMF and World Bank calls for debt relief. Meanwhile, rating agencies threaten to downgrade the credit ratings of countries considering participation.

Many more countries face debt problems, each with its own history and mix of debt contracts. Hence, a ‘one-size-fits-all’ buyback programme will simply not work. Each country programme will require protracted negotiations, with no guarantee of reaching a settlement.

Who really benefits?

According to World Bank Chief Economist Carmen Reinhart and her co-authors, in most cases, debt buybacks have benefited recalcitrant private creditors without providing much relief to debtors “willing to exchange higher future debt for lower payments now”.

“Private creditors are increasingly claiming outsize shares of repayment in debt restructurings even when the official sector is senior creditor to the private sector…Official creditors may be left holding the bag for the bulk of the losses, even when they start with little of the outstanding debt, as in Greece”.

Hence, they caution: “make sure new funding ends up benefiting the citizens of debtor countries affected by the pandemic rather than lining the pockets of creditors…The more official aid and soft loans can go toward helping needy citizens around the globe—and the less such assistance ends up as debt repayments to uncompromising creditors—the better”.

Get priorities right

With ‘collective action’ complications affecting negotiations, and the greater number and variety of heavily indebted countries and creditors, equitable debt buybacks are impossible to negotiate. Worse, prioritising buybacks means rejecting former debt hawk Reinhart’s current pragmatic advice to “First fight the war, then figure out how to pay for it”.

The urgent priority is for fiscal resources to strengthen relief, recovery and reform measures. Prioritising debt buybacks, instead of urgently augmenting fiscal resources, may thus contribute to another “lost decade” or worse.

Related IPS commentaries

“Finance Covid-19 Relief and Recovery, Not Debt Buybacks”. 27 Oct. 2020. https://www.ipsnews.net/2020/10/finance-covid-19-relief-recovery-not-debt-buybacks/

“Debt Hawks Detract from Urgently Needed Fiscal Recovery Efforts”. 13 Aug. 2020. https://www.ipsnews.net/2020/08/debt-hawks-detract-urgently-needed-fiscal-recovery-efforts/

“Neoliberal Finance Undermines Poor Countries’ Recovery”. 2 Mar. 2021. https://www.ipsnews.net/2021/03/neoliberal-finance-undermines-poor-countries-recovery/

Neoliberal Finance Undermines Poor Countries’ Recovery

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: After being undermined by decades of financial liberalisation, developing countries now are not only victims of vaccine imperialism, but also cannot count on much financial support as their COVID-19 recessions drag on due to global vaccine apartheid.

Financialisation undermined South

Developing countries have long been pressured to liberalise finance by the International Monetary Fund (IMF) and the World Bank. The international financial institutions claimed this would bring net capital inflows. This was supposed to reduce foreign exchange constraints to accelerating growth, creating “a rosy scenario, indeed”.

Globalisation’s claim naively expects “more birds to fly into, rather than out of an open birdcage”. Instead, financial globalisation meant net capital flows from capital-poor developing countries to capital-rich developed countries, i.e., dubbed the “Lucas paradox”. A decade later, flows “uphill” had “intensified over time”.

The past decade saw the largest, fastest and most broad-based foreign debt increase in these economies in half a century. Total foreign debt of emerging market economies rose from around 110% of GDP in 2010 to more than 170% in 2019, while that of low-income countries (LICs) increased from 48% to 67%.

Pandemic woes

Developing countries saw private finance drop by US$700 billion in 2020, while foreign direct investment flows to developing countries declined by 30-45% in 2020. Remittances fell by 7% in 2020, and are expected to fall by another 7.5% in 2021.

Meanwhile, developing countries’ indebtedness increased as total aid flows had long fallen short of even half the long promised 0.7% of donor countries’ incomes. In 2020, when developing countries needed it most, donor governments cut bilateral aid commitments by almost 30%.

With limited access to other finance, developing countries, especially LICs, face much higher borrowing costs, even in normal times. With the pandemic, developing countries have been downgraded by rating agencies, further raising borrowing costs.

Facing falling foreign exchange earnings needed to import essential drugs, vaccines and other vital supplies, including food, most countries have to borrow. In 2020, official foreign debt probably rose by 12% of GDP in emerging market economies, and by 8% in LICs. The pandemic thus greatly worsened developing countries’ debt distress.

Before the pandemic, more than a quarter of official revenue went to servicing debt. With the worst recession since the Great Depression in 2020, as well as declining revenue and foreign exchange inflows, debt is now blocking finance for more adequate relief and recovery in many countries.

Debt relief?

Many – even World Bank Chief Economist Carmen Reinhart, once a ‘debt hawk’ – have called for debt relief, but little has happened. IMF debt service relief of about US$213.5 million for 25 eligible LICs ended six months later in mid-October 2020, as scheduled.

The G20’s ‘Debt Service Suspension Initiative for Poorest Countries’ for 73 mainly LICs for May-December 2020 covered around US$20 billion of bilateral public debt owed to official creditors by International Development Association and least developed countries (LDCs).

The G20 initiative did not provide lasting relief, not even reducing foreign debt burdens and barely addressing immediate needs. It merely kicked the can down the road. Debt still had to be repaid in full during 2022–2024 as interest continues to accumulate. It also offered middle income countries (MICs) nothing.

Also, private creditors refused to join in or help out. UNCTAD estimates that in 2020 and 2021, lower MICs and LICs will pay between US$0.7 trillion and US$1.1tn to service debt, as upper MICs pay US$2.0-2.3tn. Meanwhile, some countries have used US$11.3bn of IMF funds meant “for health budgets and food imports” to service private sector debt.

SDRs to the rescue?

Undoubtedly, distressed developing countries desperately need foreign exchange to cope. But IMF Managing Director Kristalina Georgieva’s call to boost global liquidity with “a sizeable SDR” (Special Drawing Right) allocation was blocked by the Trump administration, who objected that it would give China, Iran, Russia, Syria and Venezuela access to new funds.

The Financial Times (FT) argues that the proposed new SDR1tn (US$1.37tn) issuance – almost five times the US$283bn issued in 2009 – is justified by the scale of the crisis. For the FT, it would be “the simplest and most effective way to get additional purchasing power into the hands of the countries that need it”.

It is now widely agreed that “new issuance of SDRs is vital to help poorer countries”. It would augment the IMF’s US$1tn lending capacity, already inadequate to address the ongoing pandemic and economic crises.

SDRs can only be used to pay other central banks, the IMF and 16 “prescribed holders”, including the World Bank and major regional development banks. Thus, SDRs can help foreign exchange constrained countries, especially if rich countries transfer their unused SDRs to the IMF or for development finance.

The IMF could thus expand two existing special funds for LICs: the Poverty Reduction and Growth Trust provides interest-free loans, while the Catastrophe Containment and Relief Trust pays interest and principal due on their IMF obligations.

But SDRs are not an equitable magic bullet as apportionment reflects the size of a country’s economy. In other words, rich countries would get much more, regardless of need, as during the 2008-2009 global financial crisis.

US role vital

With 85% of IMF votes required to issue new SDRs, and the US holding veto power with 16.5%, Biden administration support is vital. For SDR issuance under US$650 billion, the White House only needs to consult, rather than get approval from the US Congress.

Treasury Secretary Janet Yellen has urged the IMF and World Bank to do everything “they can to ensure that developing countries have the resources for public health and economic recovery”. She has supported new SDRs despite conservative opposition, e.g., from Rupert Murdoch’s Wall Street Journal.

But Fund and Bank resources still pale in comparison with the challenge. With preferred creditor status, they can borrow at the much lower interest rates available to them. By so intermediating, they can help developing countries, especially LICs and LDCs, to more cheaply access desperately needed funds.

Related IPS commentaries

“Developing Countries Struggling To Cope With COVID-19”. 23 February 2021. https://www.ipsnews.net/2021/02/developing-countries-struggling-cope-covid-19/

“Finance Covid-19 Relief and Recovery, Not Debt Buybacks”. 27 October 2020. https://www.ipsnews.net/2020/10/finance-covid-19-relief-recovery-not-debt-buybacks/

“Multilateral Bank Intermediation Must Help Developing Countries’ Recovery”. 7 August 2020. https://www.ipsnews.net/2020/08/multilateral-bank-intermediation-must-help-developing-countries-recovery/

“Covid-19 Compounds Developing Country Debt Burdens”. 23 July 2020. https://www.ipsnews.net/2020/07/covid-19-compounds-developing-country-debt-burdens/

Developing Countries Struggling To Cope With COVID-19

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR: The ongoing COVID-19 pandemic is adversely impacting most developing countries disproportionately, especially the United Nations’ least developed countries (LDCs) and the World Bank’s low-income countries (LICs).

Years of implementing neoliberal policy conditionalities and advice have made most developing countries much more vulnerable to the COVID-19 pandemic by undermining their health systems and fiscal capacities to respond adequately.

Less taxes

Four decades of ‘neoliberal’ policy influence has resulted in a ‘race to the bottom’ to cut direct taxes, particularly corporate tax rates, ostensibly to promote investments and spur growth.

But most LDCs and LICs were left high and dry as foreign direct investment (FDI) seeks profitable locations considering various relevant criteria besides tax rates. Thus, tax cuts have not induced the promised investments, but also resulted in net revenue losses.

Revenue loss due to such tax competition could be five times that due to illicit financial flows seeking to evade taxes. Low and middle-income countries lose US$167~200 billion annually, around 1.2~1.5% of their national incomes, to corporate tax competition.

Poor countries’ tax bases have narrowed since the 1990s, with Sub‐Saharan African countries suffering the highest revenue losses as a share of national incomes. More indirect taxes have not compensated for less direct tax revenues.

Less government spending

As the tax system became less progressive, tax cuts also depleted the public coffers in most developing countries. Pressures on governments to pursue fiscal consolidation and austerity grew, with devastating impacts for public health.

Implementing IMF-World Bank structural adjustment program conditionalities, most sub-Saharan African countries drastically reduced their healthcare budgets. Per capita public spending on health in LICs fell during 2004–2012, while their shares of national income declined during 2004-2015.

Years of public sector underinvestment seriously undermined public health systems in most developing countries, especially LDCs and LICs. Government provision was deliberately reduced to promote for-profit private healthcare, adversely affecting public service quality, effectiveness, costs and access.

Unsurprisingly, these economies not only lacked fiscal resources to cope with the pandemic, but their fiscal systems had also been made incapable of responding to the challenge. Thus, these poorly funded, inadequate health systems were grossly unprepared for the pandemic.

Uneven impacts

United Nations Secretary-General António Guterres cautioned last July that COVID-19 was making achievement of the Sustainable Development Goals (SDGs) “even more challenging” as many developing countries were already “off track” in 2019, before the pandemic.

On 3rd April, International Monetary Fund (IMF) Managing Director Kristalina Georgieva warned that the worst recession since the Great Depression would hit developing countries hardest, as they have “less resources to protect themselves”. World Bank President David Malpass also acknowledged that it would “hurt world’s poorest countries the most”.

The pandemic has already set back decades of modest and uneven progress in developing countries. The World Bank recently estimated those falling into extreme poverty worldwide in 2020 at between 119 and 124 million people, i.e., by around 15%.

And the situation is getting worse. Rich country resistance to the developing countries’ request for a TRIPS waiver, vaccine imperialism and the flawed COVAX arrangements are deepening the crisis in poor countries as most remain far behind in the vaccine queue.

To boost their profits, vaccine developers restrict greater output. Despite having received various generous government subsidies, they refuse to share research findings needed to massively scale up generic production. Meanwhile, rich countries have secured many times more vaccines than they need.

Limited fiscal space

Before the COVID-19 pandemic, low income countries already had the largest deficits, higher borrowing costs and more debt relative to government revenue than high-income countries. Thus, they devote ever larger shares of their modest revenues to pay interest.

The pandemic has undoubtedly worsened public finances. Average deficits in LICs increasedfrom -4.0% of GDP in 2019 to -5.7% in 2020, with debt rising from 43.3% to 48.5% of GDP.

Fiscal responses have been influenced by access to financing. Global fiscal support reached nearly US$14 trillion in 2020, comprising US$7.8 trillion in additional spending or foregone revenue, and U$6 trillion in equity injections, loans and guarantees.

Nearly US$12 trillion (about a fifth of GDP) was deployed in advanced economies to address the pandemic and its economic fallout. Meanwhile, LICs could only afford US$26.6 billion (1.2% of GDP), as emerging market economies deployed around 5%.

Declining fiscal space

Countries relying on primary commodity production, tourism or manufacturing for transnational supply chains have been most disrupted by the pandemic. More open to the outside world, their government revenue and fiscal space have been more severely affected.

Revenue shortfalls from output drops, concurrent commodity price drops and debt demands have limited many LICs’ fiscal capacities. The pandemic is thus more likely to leave lasting impacts, including worse poverty and malnutrition.

The IMF head urged countries not to hesitate to “spend, but keep the receipts”, suggesting a major U-turn in IMF fiscal policy advice. Likewise, despite her earlier reputation as a ‘debt hawk’, World Bank Chief Economist Carmen Reinhart advised “First fight the war, then figure out how to pay for it”.

But most LICs have little alternative but to rely heavily on foreign aid. Even before the pandemic, aid from the OECD countries only reached 0.31% of their gross national income (GNI), less than half the 0.7% of national income target agreed to more than half a century ago.

Had donors met their LDCs aid target of 0.15~0.20% of their national incomes, LDCs would have received an extra US$32 billion more annually at least. Donor government cuts in bilateral aid commitments by almost 30%, from US$23.9 billion in the first five months of 2019 to US$16.9 billion during January-May 2020, have only made things worse.

Meanwhile, despite Boris Johnson’s rhetoric about reviving Commonwealth, i.e., colonial, connections now that Britain has ‘Brexited’, he plans to cut bilateral aid by 50~70% following the £2.9 billion cut in July 2020!

Britain is now paying “Covid bills off the backs of the poor”, even breaching UK law! Ever clever on the hoof, BoJo may yet donate the excess vaccines he has ordered to the ‘most deserving’ in another typically spectacular, grandiloquent gesture while continuing to block much broader access by denying developing countries’ TRIPS vaccine waiver request.