17 April 2020

Summary

1. Jubilee Debt Campaign is a UK charity working to end poverty caused by unjust debt. We do this through research, education, organising and campaigning, in partnership with allies in the UK and globally. Our current areas of focus are the global South sovereign debt crisis and the UK’s household debt crisis.

2. This submission highlights how the economics shocks resulting from Covid-19 have deepened the debt crises faced by many developing countries. A significant number of countries were already in debt crisis or at high risk prior to the outbreak of the pandemic. The pandemic has led to a global commodity price crash and the largest capital outflow from developing countries ever recorded. As a result, falling government revenues and rising debt payments are reducing funds available to countries to expand healthcare and social protection in response to the crisis.

3. Tackling the Covid-19 debt crises requires urgent action to bring developing country debts down to a sustainable level, so countries don’t have to choose between making debt payments and investing in healthcare and social protection.

4. The UK Government has already shown global leadership by donating £150 million to the IMF to support debt relief. It is critical the UK now builds on this leadership. Priority measures include: updating the 2010 Debt relief (Developing Countries) Act to prevent developing countries from being sued by vulture funds in UK courts; pushing the IMF and World Bank to cancel multilateral debt payments in 2020; working with G20 countries to agree the cancellation of debt payments from IDA countries in 2020 to official bilateral creditors; and supporting countries who are forced to suspend debt payments, including to private creditors, because of Covid-19.

Context: Sovereign debt picture prior to Covid-19

5. A new wave of debt crises was spreading across the developing world prior to the outbreak of the Covid-19 pandemic. According to the IMF, in early 2020, there were 7 countries in debt distress, meaning they were struggling to meet their debt payment obligations, and a further 27 countries at high risk of entering debt distress[1]. These 34 heavily-indebted countries already faced high levels of poverty, collectively hosting 291 million people who live on less than $5.50 (£4.20) a day[2].

6. Many of the countries in or approaching debt crisis prior to Covid-19 were countries which received debt cancellation under the Heavily-Indebted Poor Countries Initiative (HIPC) at the turn of the millennium. In total, the initiative cancelled $130 billion of debt for 36 countries, and the financial breathing space it provided led to big improvements in human development metrics such as maternal and child mortality and participation of children in primary education.

7. This most recent wave of debt crises can be attributed to underlying structural factors in the operation of the global economy, and to two key catalysts. While HIPC provided much-needed financial breathing space for countries, it did not address the structural factors that lead to the ongoing extraction of wealth from poor countries and keep them locked in poverty and underdevelopment. These structural issues include tax avoidance and evasion, other illicit finance flows, repatriation of profits by multinational corporations, and unfair global trade rules, which keep developing country economies locked into raw material extraction and low value manufacturing.

8. Collectively, these factors lead to an ongoing financial outflow from developing countries to the economies in the global North, and increase the reliance of developing countries on debt as a source of revenue to fund key government functions like healthcare and education. One estimate suggests that Africa alone loses US$240bn in government revenue every year because of tax avoidance and tax evasion[3].

9. A further set of structural factors are the overall lack of regulation of lending to sovereigns, with the main global financial centres of London and New York failing to set clear rules around responsible and transparent lending, and also the current weaknesses in the systems for resolving sovereign debt crises. In relation to the latter, the lack of an internationally-agreed bankruptcy process for countries creates a moral hazard which incentives reckless lending. Furthermore, the IMF and World Bank regularly breach their own policies of requiring debt restructuring from countries with high debts before they agreed to bail-outs, meaning that their loans are used to effectively bail-out reckless private sector lenders. Jubilee Debt Campaign analysis conducted in 2019 found that the IMF was spending $93 billion bailing out reckless lenders to 18 countries[4].

10. The catalysts for this new wave of developing country debt crises were the 2008 financial crisis and the 2014 global commodity price crash. Post-2008, the pumping of billions of dollars of finance into the economies of the rich countries through Quantitative Easing, combined with the ultra-low interest rate environment in these richer economies, led to a flight to yield, with investors seeking higher returns by investing in high risk developing country debt.

11. The 2014 commodity price crash led to the collapse of revenues from commodities like copper, and a collapse in the value of developing country currencies against the dollar, dramatically increasing the value of their debt payments.

12. As a result of this boom in lending and reduction in their funds available to repay their debts, external debt payments by developing country governments grew by 85%, as a proportion of government revenue, between 2010 and 2018[5]. In December 2019, the World Bank described the debt surge in developing countries as the largest in 50 years[6].

13. This rising indebtedness diverted vital funds away from public spending, with public spending falling in two thirds of the countries with the highest debt payments in 2019. In total, 64 lower income countries were spending more on debt payments than they were on health spending just prior to the Covid-19, with Gambia, Ghana, Zambia, Laos, Lebanon and Pakistan being amongst the countries with the highest disparities[7].

14. To summarise, the sovereign debt picture was already extremely worrying across the developing world prior to Covid-19, with a significant number of countries already in debt crisis or at high risk of becoming so, and spiralling debt payments eating into the funds available to governments for health spending and social protection.

Impacts of Covid-19 on debt levels

15. Covid-19 has imposed a series of major economic shocks on developing countries. First, the economic slow-down in richer, high-consumption economies like the UK, US, Europe and China because of Covid-19 has caused another commodity price crash, collapsing the global price of raw materials like oil and copper, on which many developing economies depend. The Bloomberg commodity price index has fallen 22% since the start of 2020[8] and is now at its lowest level since 1986. Furthermore, many countries will be hit by falling tourism revenues, with small island states being particularly affected because of their size and economic reliance on tourism.

16. The pandemic has also given rise to the largest capital outflow from developing countries ‘ever recorded’, with the IMF’s new Executive Director Kristalina Georgieva announcing on 23 March that investors had already removed US$83 billion from emerging markets since the beginning of the crisis[9]. And finally, with the two processes above leading to a collapse in investor confidence in developing country economies, confidence in their ability to repay their debts has also collapsed, leading to a dramatic increase in their future borrowing costs and undermining their ability to refinance their debt.

17. Research released by Jubilee Debt Campaign on 22 March showed that interest rates on new government borrowing have increased by an average of 3.5 percentage points for low- and lower-middle income countries since late-February. The average yield for these governments, which is an indication of the cost of new borrowing, is now 10%[10].

18. These major macroeconomic shocks faced by developing countries as a result of Covid-19 will have major impacts on their ability to respond to the crisis in the short-term, and to recover their economies in the medium to long-term. In the short-term, falling government revenues and rising debt payments will reduce funds available to countries to expand healthcare and social protection in response to the crisis.

Global call to action

19. In response to the Covid-19 debt crisis, Jubilee Debt Campaign has joined over 200 global civil society organisations in calling for:

• Cancellation of all developing country debt payments falling due in 2020 by all bilateral, multilateral and private sector lenders, with no accrual of interest, charges or penalties
• Commencement of a UN-led process to restructure and cancel debts down to a sustainable level.[11]

20. We estimate cancellation of external debt payments in 2020 for 76 countries[12] classified by the World Bank as IDA countries, would save $18.1 billion in external debt payments to other governments, $12.4 billion to multilateral institutions and $10.1 billion to private external lenders.[13]

Implementing cancellation of 2020 debt payments

21. Cancellation of 2020 developing country debt payments requires urgent action by a number of different global actors:

21.1              Multilateral institutions, including the IMF and World Bank, should offer an immediate cancellation of all principal, interest and charges for the remainder of 2020 for all countries in need, and most urgently for all IDA countries.

21.2              The IMF and World Bank should urge any country ceasing multilateral and/or bilateral debt payments to also cancel payments to private external lenders.

21.3              Any new IMF and World Bank finance should be in the form of grants not loans, and require other lenders to reprofile the debt where sustainability is uncertain, or restructure their debt where it is unsustainable[14], to help ensure money is used to support public policy priorities in response to the COVID-19 crisis, rather than to repay other lenders.

21.4              Lender governments, both Paris Club members and others such as China, Saudi Arabia and Kuwait, should cancel all principal, interest and charges for the remainder of 2020 for all countries in need, and most urgently for all PRGT and IDA countries. Ideally a debt cancellation should be coordinated between lenders but should not wait for them all to agree.

21.5              The G20 should support moves by any country to stop making payments on debt to private external lenders.

21.6              Debt payment cancellations and additional finance should be free of economic policy conditionality promoting privatisation, deregulation and trade liberalisation. The crisis has been caused by exogenous shocks: developments over which developing countries had no control.

21.7              Debt payment cancellation and additional finance should be designed specifically to bolster public expenditure targeted at protecting the rights and needs of populations, especially to maintain and increase social protection and health spending in response to COVID-19 and ensure relief goes directly to benefit those in need.

Resolving future debt crises

22. Many countries were in debt crisis before the Covid-19 crisis began. Many more will emerge from this crisis with even higher unsustainable debts. Immediate cancellation of debt payments should therefore be linked to a more comprehensive and long-term approach to debt crisis resolution. As such, to make debt restructuring more efficient, equitable and successful we are calling:

• The creation through the United Nations of a systematic, comprehensive and enforceable process for sovereign debt restructurings.[15]
• The IMF to introduce clear guidelines on when a debt is unsustainable, and follow its policy only to lend to countries with unsustainable debts if there is a default or debt restructuring.[16]

Progress to date

23. On 14 April the IMF announced plans to cancel six months’ worth of debt payments, worth around $215 million, for 25 of the poorest countries under the Fund’s revamped Catastrophe Containment and Relief Trust (CCRT).The countries that will receive debt service relief are: Afghanistan, Benin, Burkina Faso, Central African Republic, Chad, Comoros, Congo, D.R., The Gambia, Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Tajikistan, Togo, and Yemen.[17]

24. On 15 April the G20 Finance Ministers announced plans to suspend bilateral debt payments by 77 countries to the G20 and other governments from 1 May to the end of 2020, estimated to be worth $12 billion. The payments will not be cancelled but come due to be paid between 2022 and 2024, along with interest accrued in the meantime. There will be a review before the end of 2020 as to whether further action will be taken. The G20 also called for private lenders to suspend debt payments from the 77 countries on the same terms as bilateral lenders.

25. While the above moves are steps forward, much more ambitious action is needed to prevent a spiralling of this new debt crisis. Suspending debt payments does nothing to tackle the underlying problem of countries being unable to afford their debt payments, it simply lays the ground for an even bigger debt crisis in the future. Furthermore, without further action, payments to multilateral and private lenders may continue in 2020, depriving countries of urgent funds. There is a risk that the bilateral debt suspension and new grants and loans from multilateral institutions will just be used to pay private lenders rather than for healthcare and social protection.

Recommendations

26. The Government has already shown global leadership on this new developing country debt crisis, announcing a donation of £150 million to the IMF’s Catastrophe Containment and Relief Trust to help fund cancellation of debt payments. It is critical that the Government builds on this leadership with further action to mitigate the debt crisis. The UK has a central role to play as most international debt contracts for the poorest countries are owed under UK law. We urge the International Development Committee to recommend the following actions to the Government:

26.1               To pass legislation to protect poor countries from vulture funds. Virtually all international debt contracts are owed under UK or New York law, with 90% of African government bonds owed under UK law. Please consider updating the 2010 Debt relief (Developing Countries) Act so that any poor country which has to stop debt payments due to the crisis is protected from being sued by vulture funds seeking large profits on debts they have bought cheaply on the secondary market.

26.2               To support cancellation of multilateral debt payments in 2020. The money the UK has already provided to the IMF could be enhanced by the Fund using a portion of its own reserves to fund debt relief. The IMF has $27 billion in its General Resources Account, which has increased from $12 billion a decade ago due to the income it has made from its lending. The IMF also has gold reserves which have grown by $20bn since the start of the Covid-19 crisis, and which are now worth $135 billion.

26.3              To work with G20 countries to agree the cancellation of debt payments from IDA countries in 2020 to official bilateral creditors, as well as from other countries at risk, while also working for a more comprehensive and long-term approach to debt crisis resolution.

26.4              To support countries who are forced to suspend debt payments, including to private creditors, due to Covid-19. There is a risk that public finance to support poor countries is actually used to pay off high interest loans to private lenders, such as bonds and direct loans from commercial banks. Given the unprecedented economic shock, poor country governments should be reassured that they will not suffer negative consequences from the international community if they need to suspend debt payments to private creditors.

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