IDC Inquiry: Debt relief in low-income countries

Oxfam GB’s response

1. Oxfam is a movement of people working together and with partners to end poverty and inequality across the world. We welcome the Committee’s inquiry into debt relief in low-income countries. Debt repayments from the world's lowest income countries are contributing to poverty and inequality. They are undermining efforts to achieve sustained economic recovery, with clear economic and human costs.
2. This submission is divided into five sections: the current situation and global response, the impact of cuts to public spending, loan conditions, climate crisis, and the relative merits of debt cancellation compared with debt relief. Throughout, the submission highlights the particular impact of high debt levels on women and girls which diminishes their access to essential services, increases unpaid care responsibilities, and reduces access to the types of paid work that tend to be available to women – such as teaching or healthcare.
3. The UK should, along with other members of the G20:

3.1.   Prioritise the debt agenda and cancel all debt payments in 2022 and 2023 for all low and lower-middle-income countries that require it.

3.2.   Immediately suspend debt service for countries applying to the Common Framework and establish a new debt relief process which addresses its failures, particularly ensuring private sector participation.

3.3.   Press the World Bank and IMF to cancel debt payments owed, and the IMF to eliminate surcharges[1] - recognising multilateral institutions account for around one-third of outstanding debt of low- and lower-middle-income countries.

4. The current situation and global response

4.1.   The crises of extreme inequality, unprecedented food and energy price inflation accelerated by the war in Ukraine, climate change and Covid-19 are converging to create a catastrophe for the world’s poorest people. Lowest income countries, already badly hurt by the costs of responding to these crises, are also facing historically high debt levels[2].

4.2.   Poor lending and regulation around debt has resulted in many countries in high debt distress, with the World Bank estimating that 33 countries were already in, or at high risk of debt distress in January of this year. Yet, these countries were expected to make debt payments exceeding $33 billion in 2022 alone[3].

4.3.   60 countries have serious liquidity problems, defined as having a debt service obligation of over 15% of GDP. This is precious money out the door – money needed to afford soaring food import bills and ongoing Covid-19 responses, let alone investments in an equitable and sustainable future.[4] World leaders recognise the risk that cascading defaults pose to global economic recovery. Yet to date, all efforts taken to address unsustainable debt have been half measures.

4.4.   Most Covid-19-related financing mobilised for developing countries has been issued in the form of loans, adding to already excessive debt burdens.[5] The two main initiatives meant to relieve debt – the Debt Service Suspension Initiative (DSSI) and the Common Framework – have proven largely ineffective. The DSSI suspended, rather than cancelled, $12.9 billion in debt payments in 2020 and 2021, ultimately kicking the can down the road. No country has yet benefited from the Common Framework scheme, in part because of opposition from private lenders.

4.5.   Several low-income countries are likely to default on their debts in coming months – this could mean drastic cuts to spending worldwide, exacerbating an already dangerous path towards austerity that countries were beginning to take with the IMF’s backing.[6]

5. The impact of cuts to public spending

5.1.   Debt is preventing governments from investing in what matters most. According to a report by Christian Aid, Oxfam, Global Justice Now and Debt Justice, in 2019, 64 countries were spending more on servicing external government debt payments than on health; 45 countries were spending more on debt payments than on social protection, and 24 countries were spending more on debt payments than on public education.[7] South Sudan spent over 11 times more on servicing debt than on the above listed public services; Haiti, The Gambia and Chad spent over three times more.[8] Included in these figures are countries considered the ten most vulnerable as per health indicators such as maternal and child mortality.

5.2.   Cuts to public spending fall hardest on women. Resources are often channelled away from services that benefit them directly, such as sexual, reproductive, maternal healthcare, as well as services that affect those in their care such as child healthcare. The capacity of governments to invest in social infrastructures that would improve gender equality, such as education and social protection, also becomes limited by heavy debt burdens.[9]

5.3.   Fragile healthcare systems left heavily indebted countries less prepared to respond effectively to the Covid-19 pandemic. Whilst temporary relief schemes such as the Debt Service Suspension Initiative (DSSI) allowed some countries to increase public expenditure on health,[10] like most countries, increases in healthcare spending during this period were channelled toward tackling immediate need rather than long-term planning to build resilient healthcare systems.

5.4.   Analysis by UNICEF also found that for at least 19 countries, increases in expenditure on health appeared to be allocated at the expense of other social sectors as countries had to balance their fiscal response to the pandemic with increasing debt obligations.[11]

5.5.   Moreover, when healthcare systems are fragile or overwhelmed, women involuntarily become “shock absorbers”.[12] Women’s unpaid care responsibilities increase, as it is often women and girls who substitute for these services, providing care to the sick and elderly among their communities.[13] Poorer women and girls are disproportionately impacted as they are not able to outsource care to the market, locking them into cycles of poverty.[14]

5.6.   Additionally, in high-indebted countries, where funds are directed to service debt, less public money is available for essential social care infrastructure, such as clean piped water, regular electricity, and cooking gas, resulting in women having to fetch water, firewood and undertake other unpaid domestic work. As a result, women experience greater time poverty, cutting time available to engage in paid employment, political life, education, or leisure. Conversely, investment in high-quality public services can reduce women’s time poverty and improve their status and quality of life.

6. Loan conditions

6.1.   It is not only the requirement for countries to repay debt that diverts resources away from public services, but also the conditions or expectations attached by creditors to these loans. Historically, the IMF (which accounts for the bulk of debt service in many countries) routinely applied public sector ‘wage caps’ as a condition of their loan programmes, which had a particularly negative impact on women, who are disproportionately represented in public sector work, principally in low-paid care-related roles and teaching.[15]

6.2.   Whilst the IMF scaled back the use of public sector wage caps in favour of ‘wage constraints’ in 2007, this change was to a larger degree in rhetoric than practice. Oxfam’s 2021 report, Adding Fuel to Fire, found 85% of IMF Covid-related loans agreed between March 2020 and March 2021 were tied to expectations of a return to austerity, including wage bill cuts and freezes in 31 countries.[16] Likewise, recent research by ActionAid found that public sector wage constraints recommended by the IMF continue to undermine progress on health, education, gender, and other SDGs.[17]

6.3.   As above, the burden of austerity is not shared equally. Already historically disadvantaged, women are on the sharpest end of cuts to public services, particularly women living in poverty. Access to essential services are diminished, unpaid care responsibilities increase, and the types of work that tend to be available to women – such as teaching or healthcare – are reduced or more poorly paid.

6.4.   Additionally, when governments put in place fiscal measures such as hikes in value-added tax (VAT) on goods and services tax (GST) (often directed by the IMF to service debt), it is women who often bear the brunt. Women are more likely to be responsible for purchasing food and household items attracting VAT. As a result, when VAT is applied to such items, women from low-income households are often required to increase their household expenditure or are prevented from purchasing essential goods.[18]

6.5.   Institutions such as the IMF do recognise the role of women’s unpaid domestic work[19], yet fail to acknowledge how their own policy recommendations, attached to loans, contribute to the structural conditions that lock women into heavy and unequal responsibilities for unpaid labour, undermining their social and economic advancement.[20]

7. Climate crisis

7.1.   Extreme weather-related disasters increase women’s unpaid domestic work responsibilities as they are required to spend more time securing water, food and energy supplies.[21] A report by Oxfam outlined the gendered impact of Hurricane Maria in Puerto Rico, following which the power grid and water systems were disabled. As women are often seen as managers of the household, they shoulder the majority of the physical, financial and emotional burdens when access to basic household supplies are lost.[22] In the wake of Hurricane Maria, some rural areas were left without water supplies for months due to the government’s limited capacity to engage in reconstruction due to debt crises and austerity[23].

7.2.   High and unsustainable debt levels reduce the financial capacity of governments to adapt to or mitigate the effects of climate change. As a result, the impact of climate-related disasters is worsened and requires countries to borrow more money to fund the response and reconstruction, creating a negative feedback loop. Much like cuts to public services, the adverse social consequences are borne disproportionately by women. In many respects, this is due to women representing the majority of the world’s poor, and that proportionately women are more dependent on threatened natural resources.[24]

7.3.   There is a misplaced assumption that climate finance loans are only going in large volumes to middle-income countries. But research by Oxfam estimated that in 2017-2018 the majority of climate finance to LDCs, and around half to SIDS, was provided in the form of loans and other non-grant instruments.[25] Finance that should be helping countries respond to the climate crisis is likely to be harming them in other ways, by depleting resources that could be channelled toward necessary social infrastructures and public services.

7.4.   Moreover, the provision of loans as opposed to grants is essentially a bet on the climate stabilising in order that countries’ capacities to make repayments are expanded. This bet is not matched by current projections which set warming at 2.4°C above pre-industrial levels when based on current Nationally Determined Contributions (NDCs).[26]

7.5.   Every fraction of a degree of warming increases climate risks, meaning that low-income countries will be required to mobilise further funds for climate impacts they are not responsible for causing – not just for mitigation and adaptation, but also losses and damages. In any case, the world’s poorest countries should not be forced to take out loans to protect themselves from the impact of rich countries’ excess carbon emissions.

7.6.   The impact of climate change on debt distress and soverign credit ratings is a serious concern for countries on the frontlines of the climate crisis.[27] Accounting for climate-related risks in the financial system is crucial, and governments must allocate climate finance in the form of grants, and provide sufficient investment in adaptation to strengthen low-income countries’ resilience to climate shocks before they occur, as well as mobilising grants-based funding for loss and damage.[28] This would have the effect of making debt more sustainable, freeing up fiscal space for countries to take transformative action on climate change and other emerging crises.

8. The relative merits of debt cancellations compared with debt relief

8.1.   Debt relief and debt cancellation are sometimes used interchangeably, however debt relief is a broader term that can refer simply to changes to how the debt is structured or repaid, such as through interest rate alterations or the period over which the debt is to be repaid. Debt cancellation writes off a portion of the debt itself.

8.2.   Any measurement of debt cancellation versus debt relief should focus on whether the initiative has had the effect of lowering a country’s debt burden, making it more sustainable and thereby allowing its government to channel more resources toward public services, to lift people out of poverty, reduce inequality and respond to crises such as the pandemic or the climate emergency.

8.3.   The potential merits of debt cancellation were clear during the height of the Covid-19 pandemic – cancelling debt payments of the 76 poorest countries could have freed up $40 billion to support millions of people through the crisis.[29]

8.4.   Instead, the Debt Service Suspension Initiative (DSSI), established in response to Covid-19, deferred debt payments for eligible countries, and so now requires that debt payments resume. In addition, with no requirement for private creditors to take part in the DSSI, the initiative barely scratched the surface of what was needed.[30] Kenya did not join DSSI through fear of the consequences on its credit rating and the long-term cost of financing. Yet even if Kenya did join DSSI in 2020, it would still have owed $660 million in that year alone.[31]

8.5.   The IMF have noted that despite relief measures established in response to Covid-19, 60% of low-income countries are now at high risk of debt distress – up from 30% in 2015.[32] Yet, governments and financial institutions have so far failed to provide interventions that would make debt more sustainable, instead choosing temporary fixes.

8.6.   Debt cancellation, rather than relief measures that delay or alter repayments, will make debt more sustainable. This would allow governments to better meet the needs of their populations – especially women and girls and those most likely to be left behind.