Creditors must wake up fast to threat of emerging market debt crisis
Zambia is running out of money to pay its debts. It has asked bondholders for breathing space so that it can put a restructuring plan in place. The copper-rich African state is at risk of being the first country to default on its debts since the start of the coronavirus pandemic.
But not the last. Zambia is the canary in the coalmine, a harbinger of a full-blown crisis that has been lurking in the background from the moment the full seriousness of Covid-19 became apparent.
All the ingredients were in place for serious trouble. A lot of countries, Zambia included, had behaved recklessly in the good times and, as the managing director of the International Monetary Fund, Kristalina Georgieva pointed out last week, went into the crisis with levels of debt that were already uncomfortably high.
Growth has slowed, exports have collapsed and remittances from workers abroad have dried up. The longer it takes to tackle the pandemic the worse the debt crisis will become.
Nor can poor countries turn on the spending taps the way rich countries can. Their central banks can’t print money without running the risk of hyper-inflation.
The result has been entirely predictable. According to the World Bank, a steady decline in extreme poverty that has lasted two decades is now being reversed. Researchers at the John Hopkins university in the US estimated that there may have been half a million extra child deaths over the past six months as the result of the disruption of routine health services such as immunisation programmes.
Back in the spring, the IMF and the World Bank helped orchestrate a suspension of debt payments for 74 countries for the rest of 2020. The agreement provided a bit of a respite but no more than that. The debts still have to repaid eventually and, in any case, the deal was incomplete. Some major countries were involved but China – a big creditor in much of sub-Saharan Africa – was not. Moreover, despite the urging of the IMF and the World Bank, there was not any obligation on private-sector creditors to take part. For a country such as Zambia, which has debts collateralised against its copper mines, the outlook is bleak. It is spending more on servicing its debts than on health and education combined, but its private-sector creditors are playing hardball, saying they won’t agree to a restructuring unless they are treated the same as China.
Sudan is another country in desperate need of help. The IMF’s latest health check lists the country’s problems; a new government in power intent on doing the right thing but faced with a legacy of bad governance and corruption; a reputation for sponsoring terrorism; raging inflation; huge humanitarian needs. Debt relief can only be obtained under the multilateral Heavily-Indebted Poor Country initiative (HIPC) if Sudan’s arrears to the World Bank and IMF are cleared first. Doing so requires a bit of creative accounting and some political will.
It would make sense, as a new IMF paper made clear last week, to deal with debt before the crisis happens rather than deal with the consequences after the event. The economic cost in terms of lost growth, investment, private sector credit and capital inflows from overseas is much greater if action is delayed until after a default. Georgieva has warned that there will be a lost decade if pre-emptive action is not taken and history shows she is absolutely right.
The IMF and the World Bank are holding their annual meetings this month. Covid-19 means the gatherings will be held by video conferencing, which makes it harder for finance ministers to fully engage with issues beyond their own borders.
That said, it would be an act of crass stupidity for the looming crisis in low-income countries to be ignored or downplayed.
At the very least, there should be an extension of the debt moratorium not just for one year – which is the current suggestion – but until the end of 2022.
That would not really solve the basic problem, which is that for many countries the issue is one of solvency, an inability to pay their debts no matter how long the repayment holiday lasts. So, the IMF and the Bank should use the time provided by a two-year extension to conduct a full debt sustainability assessment of all 74 countries currently being helped with a view to providing debt relief.
Georgieva has already made the case for a new debt framework and that is indeed sorely needed. Debt relief is no longer simply a question of getting a bunch of rich western governments to agree a deal: it now requires the involvement of private sector creditors, such as BlackRock, and Beijing.
Securing that involvement has so far proved to be difficult and it is time for the IMF and the Bank to step up the pressure, warning private creditors that they can either take a “haircut” voluntarily or face a disorderly process. G20 countries should be prepared to change their laws to ensure full participation and to prevent their courts being used to prosecute claims for unpayable debt contracts often entered into with a complete lack of transparency.
China should be reminded that it would suffer immense damage to its reputation unless it agrees to take part in a programme – overseen by the IMF and the World Bank – that see the benefits of debt relief channelled into higher spending on health, education and stronger social safety nets.
Above all, it is time for the IMF and the World Bank to make a simple argument; the world’s poorest countries can try to repay their debts or they can save lives. They can’t do both.
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