COVID-19 must trigger debt cancellation for developing countries
The coronavirus crisis calls for rapid increases in public spending on health. At the same time, it has ground the global economy on which government revenues depend to a standstill.
Debt relief for developing countries is the only way to square the circle.
The COVID shock has combined with an oil price shock to intensify the pain for oil exporters such as Nigeria and Angola. Industrial metal prices have also slumped, and South Africa has lost its last investment-grade rating with Moody’s. The global tourism industry is unviable when many developing countries can’t even ensure the safety of their own people.
The twin COVID and oil shocks have come against a background of stretched public finances. World Bank figures show that the ratio of general government gross debt to GDP in sub-Saharan Africa increased from 37% of GDP in 2012 to 59% in 2019.
According to the World Bank, the deterioration of fiscal balances will be the greatest in commodity exporting countries and those that rely on tourism.
The bank says that oil-exporting countries may see growth cut by up to 7 percentage points as a result of COVID, rising to more than 8 points for metals exporters.
The burden will fall firstly on small businesses and the self-employed in the informal sector, where many people have seen their incomes abruptly curtailed. The result, the World Bank says, is the danger of a food security crisis in Africa.
The US Federal Reserve, the European Central Bank and the Bank of England have protected their economies by flooding the system with liquidity. But such massive interventions are beyond the means of developing country central banks. African finance ministers at the end of March called for urgent debt relief of US$ 44 billion. They noted that the average economic stimulus package in their countries was about 0.8% of GDP – about a tenth of the average level of developed country stimulus packages, at 8% of their GDP.
Public health spending
According to the Jubilee Debt Campaign (JDC), 64 out of 121 low and middle-income countries surveyed are spending more on paying their creditors than they are on health – and that’s a 2019 figure before the pandemic started. Last year, as a share of government revenues, the following countries all spent more than double servicing debts than they did on public health: Angola, Sri Lanka, Gambia, Republic of Congo, Ghana, Zambia, Laos, Lebanon, Pakistan and Cameroon.
Overall, the 121 governments surveyed by JDC spent an average 10.7% of government revenue on public health systems, less than the 12.2% spent on external debt payments in 2019. That can’t continue if global public health is to be protected.
Eighteen heads of state, government and international institutions have called for an immediate moratorium on the servicing of all African external debts of any kind. They have called for an economic support package of at least 100 billion dollars to enable the continent to withstand the pandemic. The IMF and the World Bank are calling for all bilateral creditors to suspend repayments from International Development Association countries that request it. Holding off on payments will buy a little time, but will not resolve the fundamental problem. Aid will help in our time of crisis, but in the longer term, debt cancellation is the quickest, surest and most sustainable way to improve capacity to spend on public health.
This is very much in the interests of the world’s rich countries. As coronavirus has demonstrated, we truly do live in a global village. Weak public health systems in countries that seldom make the headlines have the potential to disrupt the global economy at any time. Failure to grant debt forgiveness now is simply mortgaging future global public health.