In April 2020, 25 poorest countries won six months of debt cancellation by IMF. The Group of 20 (G-20) leading economies’ Finance ministers also agreed to a “time-bound suspension of debt service payments” for 76 Low Income countries (LICs) eligible for the World Bank’s International Development Association (IDA).
So far, according to the G-20, around $5.3b worth of debt payments from 42 countries has been suspended under the Debt Service Suspension Initiative (DSSI), amounting to 1.68 per cent of all the debt service payments to be made in 2020 by low and middle income countries (excluding China).
While the G-20 debt decision may provide some temporary respite, it does not address longer-term problems. Instead of cancelling repayments outright, it merely pushes the can down the road; countries will just owe the money later, and will continue to pay interest. Moreover, it only applies to a limited number of countries.
We awaited for good news at the G-20 Ministers meeting in July in vain, the actions will not suffice to avoid defaults by LICs since the move does not impact private lenders.
An Oxfam report shows that all the countries that are eligible for the G-20 initiative are still required to pay a minimum of $$33.7b to service their debts this year. The LICs are now at high risk of debt distress or already in distress.
The amount that is being required of them is $$2.8b per month, which is double the amount Uganda, Malawi and Zambia combined spent on their annual health budget. LICs have very limited fiscal capacity to respond to the Covid-19 pandemic - both for immediate relief measures and long-term reconstruction of their economies. The impacts of Covid-19 are exacerbating existing economic, social and gender inequalities. Yet we are still facing growing infection rates and famine because of Covid-19, some of these countries have zero critical care units for their population.
The situation for Uganda is similar to that of other LIC, the budget for loan servicing constitutes nearly 30 per cent of the overall budget and has been increasing for the past five years. Taking a case of Financial Year 2019/2020, Uganda’s Budget allocation to debt repayment rose from Shs10.3 trillion to Shs12.4 trillion (FY2020/2021). This is in spite of the fact that the Covid-19 pandemic has come with additional budget requirements, especially for the health sector.
Due to the lockdown, business has been at a standstill, hence domestic revenue projections may not be realised. Commodity prices also sent tumbling by the global economic slowdown and a crash in local currencies have left many poor nations unable to pay off the legacy of more than a decade of foreign borrowing.
If the G-20 countries do not want to see another ‘lost decade’ for development, then they must prepare for more ambitious and systemic solutions when they meet in the coming months as we look forward to better pronouncement come November at the G-20 Heads of state, also at the UN Assembly and Annual meetings of IMF-WB .
Discussions must result in the scaling up of the DSSI, and an urgent shift in approaches to financing. But they must also result in action on agreeing on a post-Covid-19 debt relief and sustainability initiative under UN auspices to bring developing country debts down to sustainable levels,
Creditors should entreat support to the cause for economic recovery of the LICs, including Uganda, through no-interest on new debts for 10 years commencing 2020; and total debt cancellation of outstanding debt, by the G-20, IMF, World Bank, regional banks, as well as bilateral creditors (eg under the Paris Club).
Ms Naisanga works with Uganda Debt Network.