Post-pandemic debt crisis
With the 2020 onset of the COVID-19 pandemic came a drastic slow in economic activity and collapse in government revenue, prompting a widespread increase in both government and private debt levels. Currently, at the beginning of 2021, with no concrete prediction for the end of the COVID-19 pandemic, businesses and the private sector continue to accumulate great foreign currency debt. There is a steady increase in government loans for funding and there has been at least a 20% reduction in 2020 remittances from global citizens and diasporas. Developing nations report skyrocketing borrowing needs that are usually that advanced economies can usually only manage. Additionally, central bank purchases of corporate bonds to boost the money supply of local firms have stifled the debt ratings of local firms in emerging markets and developing economies. As a result, our world is facing rising budget pressures, which a wave of sovereign debt downgrades that are likely to lead to a post-pandemic debt crisis are accompanying.

Context and the Role of the IMF

In comparison to the end of 2019, in addition to already unusually elevated figures and debt distress, expectations have determined that 2021 debt ratios will increase by 20% GDP in advanced economies, 10% in emerging market economies and 7% in low-income economies. Unfortunately, the emerging and developing world have much smaller borrowing capacities, and so for some, a post-pandemic debt crisis appears imminent.

In the past, debt crises have set the global economy into long-lasting instability. In order to prevent such an economic downfall on top of a global health crisis, many of the leading international organizations such as the International Monetary Fund (IMF) have prepared to help keep nations afloat. While the IMF has provided over $30 billion in emergency funding to its member countries in a response to the pandemic, it has also given direct attention to implementing measures that contribute to debt-service relief. Here are some of these measures.

4 Measures to Contribute to Debt-Service Relief

  1. Catastrophe Containment and Relief Trust (CCRT): Undergoing establishment in 2015 as a response to the Ebola outbreak and receiving modification in March 2020 for the COVID-19 pandemic, CCRT allows the IMF to provide grant funding for debt relief to the poorest and most vulnerable nations that a natural disaster or public health crises have hit. The purpose of the CCRT is to aid eligible low-income member countries to meet the balance of payment needs that disasters create. This stops the reassigning of resources to debt service, preventing a post-pandemic debt crisis.
  2. Debt Service Suspension Initiative (DSSI): In a collaboration between the IMF Managing Director and the President of the World Bank, a call emerged for the bilateral creditors to suspend debt service payments from the poorest member countries until the end of 2020, extended to June 2021. Accepted in April 2020, this debt suspension allows 73 low and lower-middle-income countries to temporarily receive relief from their debt service payments. In addition to releasing the countries’ resources to COVID-19 relief, this initiative prompted the International Institute of Finance (IIF) to also call for private-sector creditors to grant debt payments forbearance to their debtors in a similar way. Many private firms have volunteered to aid in debt relief as a result.
  3. Short Term Liquidity Line (SLL): With the increase in global uncertainty, the IMF has established a short-term liquidity line (SLL) with the unique design of being a liquidity backstop for its member countries who have superior policy and fundamentals, but are in need of increased immediate liquidity needs as a result of the external shocks that came with this global pandemic. This liquidity line has a lower cost structure than other typical IMF lines of liquidity such as the Flexible Credit Line (FCL). This allows for a country to retain cost savings relative to reserves, and benefits related to lower yields on public debt.
  4. Capacity Development: In addition to its financial support, the IMF is also offering real-time policy guidance and capacity development to more than 160 of its 190 member countries. This advice is for specifically navigating debt management strategies, cash management, financial supervision, cybersecurity and economic governance through the pandemic. The IMF has collaborated with tax administrations and budget officers to restore and support halted or slowed business operations. It has also launched online learning platforms available to government officials, members and the general public for the widespread reach of solutions to aid in economic recovery during and post-pandemic.

Cause for Optimism

With the measures above, as well as the collaborative effort of the entire globe, according to the IMF Managing Director Kristalina Georgieva, “the global economy is beginning to climb back from the depths of the crisis, but this calamity is far from over.”

Thankfully, the IMF continues to show its commitment to providing financial support, capacity development and debt relief, especially for its poorest, most affected and vulnerable member countries in this unprecedented time, as the world works to stave off an impending debt crisis.

Rebecca Harris
Photo: Flickr

Pact is a United States based non-governmental organization (NGO) that focuses on developing communities in regions of the world plagued by health crises, resource dependence, and extreme poverty. Its unique operating procedure partners donors with local communities in such regions as Southeast Asia, Eastern Europe, and sub-Saharan Africa. Pact was founded in 1971 to oversee the distribution of small-scale USAID grants to development assistance organizations.

Pact’s three core values of (a) local solutions, (b) partnerships, and (c) results, put people at the center of their approach. With over 10,000 local partners, Pact customizes its system for every community. For example, Pact leads a development project in Ethiopia funded by USAID. It involves local and federal governments, NGOs, and nonprofits to provide health treatment and formal education for nearly 50,000 kids and adults.

The NGOs focus on local solutions, allowing vulnerable populations to take responsibility for the aid they will receive. Capacity development is highly prioritized in the regions served by Pact; local governments are developed, infrastructure is improved, and effective governance systems are formed.

Partners with Pact, small and large organizations alike, are also assured of progress with tangible success. The organization publishes a yearly report, called “Measuring Pact’s Mission,” where six different impact areas are examined. These impact areas include health, livelihood, natural resource management, and state-society engagement.

While accountability and effectiveness are frequent concerns of NGOs, Pact is the first USAID partner to publish its program data to the International Aid Transparency Initiative (IATI). IATI aims to provide information about NGO spending and its measurable results. While the Initiative is relatively new – the first annual report of IATI was published at the end of April 2013 – it promises a clear picture of where aid money goes.

Pact works in more than 25 countries worldwide, and its program services are incredibly diverse. These programs include formal schooling for children in several African nations, the improvement of health care for HIV/AIDS patients in the Ukraine, and the responsible micro-financing of productive enterprises in Myanmar. Pact’s holistic view of global development and its commitment to aid transparency make the organization a prime example for other development-focused NGOs.

– Naomi Doraisamy

Sources: Pact, International Aid Transparency Initiative
Photo: Pact Facebook

Paris Declaration on Aid EffectivenessThe Paris Declaration on Aid Effectiveness (PDAE), drafted in 2005, was born out of decades of experience for what does and does not work when allocating and utilizing aid development money. The principles have gained support across the world and within aid agencies – changing aid practices for the better. More and more aid recipients are creating their own national development strategies and aligning with donor groups to streamline efforts and goals, to ensure qualitative results for every dollar spent.

The five core principles of PDAE

1. Ownership: Developing countries set their own strategies for poverty reduction, improve their institutions and tackle corruption.
2. Alignment: Donor countries align behind these objectives and use local systems.
3. Harmonisation: Donor countries coordinate, simplify procedures and share information to avoid duplication.
4. Results: Developing countries and donors shift focus to development results, and results get measured.
5. Mutual accountability: Donors and partners are accountable for development results.
In 2008 the Accra Agenda for Action was designed and added to the Paris Declaration in order to strengthen and accelerate advancement towards the Paris targets. It proposed four main areas for improvement:
1. Ownership: Countries have more say over their development processes through wider participation in development policy formulation, stronger leadership on aid coordination and more use of country systems for aid delivery.
2. Inclusive partnerships: All partners – including donors in the OECD Development Assistance Committee and developing countries, as well as other donors, foundations and civil society – participate fully.
3. Delivering results: Aid is focused on the real and measurable impacts on development.
4. Capacity development: to build the ability of countries to manage their own development agendas.
– Mary Purcell

Source: OECD
Photo: Flixya