The wealthiest nations in the world have halted debt repayments from the poorest for the first time since 2005. On the 15th of April, the G20 announced a sweeping plan to suspend $12 billion worth of payments from 77 countries. The move is aimed at helping the globe’s most vulnerable nations avoid economic collapse as the result of the COVID-19 pandemic, with all but 15 of the 77 affected countries already with confirmed cases of the virus. The debt freeze will kick in on the 1st of May and last for the rest of the year.
Reactions to the news have been mixed. German Finance Minister, Olaf Scholz, described the agreement as an “act of international solidarity with a historical dimension” that will allow the world’s poorest countries to weather the crisis. Oxfam International also welcomed the debt moratorium “as a critical step” that will “free up funds to tackle the pandemic”. However, Oxfam went on to call on the G20 to do more to help. Spokesperson Nadia Daar claimed that only cancelling low-income countries’ debt would ensure their long-term economic health. Further criticism came from nations that will not receive the benefit of the moratorium. According to Colombia’s former president Juan Manuel Santos, “middle-income countries” fear they will be “sandwiched in the middle with nothing”.
Problems Ahead
The G20’s proposal has flaws. The first issue is scale. The United Nations estimates that developing countries will need $1 trillion of debt relief to cope with the pandemic. Suspending $12 billion of debt will therefore not be enough. Even with the extra $18 billion that the IMF plans to add to its Poverty Reduction and Growth Trust, the combined figure doesn’t come close to the UN’s projection. Another challenge is the role of private creditors, who control over a quarter of the poorest nations’ debt. The G20 called on them to participate in their scheme, but ruled out any legal action against them. As the FT reported, getting enough creditors to agree to the proposal without using legal force will be extremely difficult. While the current agreement is a vital starting point, as it stands it is insufficient and already seems precarious.
Lessons from 2005?
In 2005, the G8 immediately wrote off £30 billion worth of debt for the world’s 18 poorest countries. Since that time, lower income countries have borrowed heavily to overcome the impact of the 2008 financial crisis. They now owe more than ever before in the midst of a looming global recession, the closure of businesses, and the demands of a generational health crisis. Crowded living conditions in many of these countries will also worsen the spread of disease. Diana Mitlin at the University of Manchester called COVID-19’s potential health impact on these countries a “terrifying scenario,” and the same can be said of its economic effect. If the G8 believed debt cancellation was the right thing to do in 2005, why not now as well?
Suspending the debt of the most vulnerable countries in the world is an important decision. However, the current plan needs to be expanded. Taking further action will save countless lives and economies on the verge of collapse.
