In response to the coronavirus pandemic, which has upended the global economy in a matter of weeks, governments in both the developed and low-income world have intervened to soften the blow. Most have borrowed to try to limit the economic damage. Low-income countries, some with significant existing debts and facing collapsing oil prices and tourism, will be particularly hard hit.
How serious is the indebtedness of low-income nations? Can they borrow even more to cope with the pandemic?
The positions of emerging and low-income countries differ significantly. Some countries have substantial debt, but also substantial external reserves. Some countries have mostly borrowed in their own currency, while others have primarily borrowed in foreign currency. Some have borrowed from private creditors; others have borrowed from official ones (other governments) who may show more forbearance. In general, countries that have borrowed in foreign currency from the private market are in the most immediate financial trouble—many of the roughly thirty so-called frontier market countries are at high risk of default. (See the International Monetary Fund’s [IMF] Global Financial Stability Report from last fall [PDF] for background.) A broader set of countries may struggle to raise the funds to fight the pandemic successfully.
But debt is only half the equation; revenue also matters. Many of the countries in the most trouble—Ecuador and Zambia, for examples—have substantial external debt and rely on oil, another commodity export such as copper, or tourism for export proceeds. The falloff in these kinds of revenues will obviously be enormous. That’s a problem for countries whose debt had been rising even before the pandemic.
How will China’s response matter?
China’s external foreign currency debt is roughly 10 percent of its gross domestic product (GDP). The external foreign currency assets of China’s banks and its government account for close to 40 percent of China’s GDP. Yes, Chinese state firms and Chinese local governments have substantial internal debt and a few Chinese companies have borrowed from abroad, but globally speaking, China is essentially a creditor.
China could obviously contribute significantly to the stabilization of the many low-income countries that already have borrowed substantial sums from it. African countries in particular have borrowed heavily from Beijing, taking out more than $100 billion over the past two decades. Many African countries owe more to China than they owe to private bond holders. In dollar terms, Angola has been the biggest borrower—it has over $20 billion worth of outstanding loans to China. Djibouti, an extreme case, owes China more than 70 percent of its GDP. At a meeting of Group of Twenty (G20) finance ministers last week, China agreed to reschedule debts coming due in the remainder of 2020. It could do more though: rescheduling payments due in 2021, for example, or providing financial relief to a broader set of countries. And depending on how the global economy evolves, China may need to reduce some of its claims, not just agree to defer payment until later.
China should also disclose exactly how much its big state institutions—the China Development Bank; the Export-Import Bank of China; and its trade insurance agency, Sinosure—have already lent to the world’s low-income countries, and the terms of any payment deferment.
What about China’s effect on global markets?
The primary way China impacts global financial markets is through its exchange rate management. If it can continue to keep its currency basically stable—and there is no reason why it should not be able to do so given how much it benefits from lower commodity prices—then that would also help global markets stabilize.
What role should the IMF play in assisting developing countries? Should it insist on its usual conditions for aid, such as liberalization, or be more forgiving?
The IMF will play a host of different roles right now, which is why it needs to lend using several different facilities:
- In low-income countries that already have too much debt, the IMF can provide limited amounts of concessional financing.
- For a broader set of countries that have sustainable debts, it can use its Rapid Financing Instrument to provide quick-disbursing funds to deal with the immediate financial burden of fighting the pandemic.
- It can provide precautionary financing for a set of stronger emerging economies, either through Flexible Credit Lines (FCLs) or the new Short-term Liquidity Line (SLL). It was disappointing, though, that the new SLL wasn’t bigger—145 percent of quota is a relatively small sum for most countries.
- Finally, for some countries with long-standing problems, traditional fund programs—so-called Stand-By Arrangements (SBAs)—remain the best way to help. The IMF of course will also need to rethink its conditionality. For many countries, it should insist that they spend more, not less, so that they have the funds needed to protect public health and provide cash assistance to families without work.
What role should other multilateral institutions such as the G20 play?
The G20 is mostly a coordinating committee as it lacks resources of its own. But it can indicate that its members won’t insist on immediate repayment of the loans they have made to other countries, like it did last week. But that agreement is limited to only the low-income countries that qualify for concessional financing (see this blog post by Anna Gelpern of the Peterson Institute for International Economics [PIIE]), so its practical impact will likely be modest, and there are questions about how China will implement its commitments. And since the G20 gathers most of the major shareholders of the IMF and World Bank, it can help decide on questions including what resources these institutions need and what role they should play in the global response to the pandemic. It also can signal that the world’s biggest economies stand united and are willing to work together in the face of a common shock.
I was a bit disappointed that the G20 finance ministers didn’t agree to do more last week. Specifically, I would have liked to see the G20 countries, including the United States, call on the IMF to do a large special drawing right (SDR) allocation to increase the world’s reserves in the face of a common shock. I also would have liked to see the G20 agree to pull forward the planned expansion of the IMF’s New Arrangements to Borrow (the NAB), which is expected to double in size in 2021, and commit to keeping the IMF’s existing backup bilateral credit lines at the current level even as the NAB expands. Those moves would have assured that the IMF really could lend close to a trillion dollars over the next year if needed (see PIIE’s Ted Truman).
Are there actions the United States can take unilaterally to assist low-income countries?
The United States was the main opponent to an SDR allocation, which would increase the reserves of all countries. If the United States drops its opposition, I believe the IMF will have the needed support to go forward with this move.
The United States also can increase its contribution to the IMF’s concessional facilities so it can provide more grant financing to the world’s poorest countries.
Finally, the United States could endorse plans to increase the World Bank’s lending by allowing the bank to take more risks with its existing (paid-in) capital and make more use of its callable capital. The Center for Global Development has made some interesting proposals here.
Once the crisis has abated, how can developing countries keep debt from slowing long-term growth?
Depending on the nature and strength of the recovery, some countries may need relief for official debts (including those they owe China) and potentially for the debts they owe to private creditors. But there is tremendous uncertainty now about the duration of the downturn and the shape of the recovery. Will tourism recover in 2022? Where will the price of oil settle? This uncertainty means that the immediate priority is providing low-income countries with the funds needed to effectively respond to the pandemic. If some countries can only end up repaying fast-disbursing loans from the IMF and the World Bank (so-called preferred creditors) by writing off some existing debt to other creditors over time, that is an acceptable trade-off given the extraordinary nature of this crisis.