Last month’s virtual Spring Meetings of the Bretton Woods Institutions (BWIs) – the International Monetary Fund and the World Bank – were probably the most significant gathering of the last decade. The world is facing an unprecedented humanitarian crisis triggered by the outbreak of Covid-19. The IMF projected the worst recession since the Great Depression and warned that even this forecast might be too optimistic. Despite the urgency of the moment, geopolitical battles limited the ambition of the institutions. Short-term measures are essential and urgent, while long-term measures will be the key determinant of the future for ourselves and the planet.
For the global south, the economic stakes could not be higher. Beyond the public health emergency, they are seeing sharp declines in tourism and export revenue, remittances and collapsing commodity prices. All this is set against record capital flight: roughly US$ 100 billion has been pulled out of emerging economies since the start of the year. Debt levels and costs in the global south were already at unprecedented levels before Covid-19, impacting public service expenditure, and underinvestment was rife in already vulnerable public healthcare systems.
With the IMF reporting that 100 countries had already approached it for emergency support, urgent efforts have been made to boost its lending resources over recent weeks. The IMF increased the ceilings and country borrowing limits for its emergency financing instruments. It also set up a new short-term liquidity line to give revolving access only to countries with ‘strong policies and fundamentals’ to resources of up to 145 per cent of their quota. Yet these measures may still not be enough to meet all developing countries’ needs. More resources will be needed to meet the liquidity constraints facing low- and middle-income countries.
The option also remains for the IMF to consider a new and large issuance of Special Drawing Rights (SDRs), as was done after the global financial crisis. These can be created at the stroke of the IMF’s pen, and increase member reserves at the Fund according to their quotas. A mechanism could then be established for richer countries to donate SDRs to increase the resources available to support poorer nations. However, the US remains opposed to this, and no agreement could be reached. There are also calls for the IMF to sell off some of its gold reserves, valued to be around US$ 160 billion. Gold sales were used in 1999 to support debt relief, and are a recognised measure ‘to boost the IMF’s concessional lending capacity to Low Income Countries’. No action on this front was agreed either.
The World Bank Group, on the other hand, issued a response package for US$ 160 billion in 15 months. Bank’s shareholders asked the institution to ‘help governments deploy resources toward public health interventions, nutrition, education, essential services, and social protection’. This comes as no surprise, as the pandemic exposes the consequences of decades of austerity policies that have undermined public health systems and stifled progress on universal social protection.
However, the response of the institution falls short on ambition. It is primarily based on reprogramming and front-loading of resources. While these are relevant measures, they may be insufficient to cater to both immediate and future funding needs, as pre-existing development challenges are exacerbated in the current context. Moreover, more than half of the US$14 billion package of fast-track financing will be channelled through the WB’s private sector arm, the International Finance Corporation (IFC), and the bulk of this will go to ‘client financial institutions’. This requires strong accountability and transparency on the part of the IFC. The IFC must publicly disclose ultimate recipients and their uses of the money, ensuring that its support helps preserve employment and does not serve to bail out private financial institutions.
Given the constraints that many developing countries are facing, debt relief seems to be unavoidable. Two major announcements were made last week. First, the IMF agreed to cancel payments it is owed over the next six months for 25 countries. While this is a welcome first step, the relief offered (US$ 213.4 million) equates to less than 1% of total low-income economy external debt in 2020.
Second, the G20 offered a suspension of debt payments owed to bilateral official creditors to 77 of the world’s poorest countries until the end of 2020. While this was a significant step, the breathing space it provides may be short-lived. Postponing debt payments means that debt crisis risks are being stored up for the future. Importantly, the G20 signalled the need for multilateral development banks and private creditors to offer similar relief to countries in need. However, no steps were taken to compel or enforce participation. For instance, the World Bank President noted the reluctance of the institution, arguing that a decision on this would risk its ‘AAA’ credit rating, and called for more donor contributions to facilitate any action. This demonstrates an alarming unwillingness to act boldly to meet the scale of human need the world is witnessing. A large-scale multilateral process to bring debt levels down to sustainable levels is needed to guarantee the full realisation of all human rights.
Looking forward, emergency responses will need to be tied to actions addressing structural issues. BWIs will need to shift development finance away from promoting market-friendly reforms and incentivising private investment, which have contributed to countries’ vulnerability to exogenous economic shocks. They will need to turn away from the dogma of austerity that has contributed to under-prepared and under-resourced public health systems. And long-standing power imbalances within these institutions will need to be addressed to ensure that the needs and rights of two-thirds of the global population living in developing countries (excluding China) are considered fairly.
María José Romero is a second year Bloomsbury PhD student working with Dr Elisa Van Waeyenberge (SOAS Economics Department), Dr Jasmine Gideon (BBK) and Professor Elaine Unterhalter (UCL-IOE). Her research focuses on public private partnerships in health and education. She has worked for several years for the European Network on Debt and Development (Eurodad).