- There are ways of avoiding one
Around $8 trillion have been spent globally to deal with the Covid-19 pandemic, to support lives and livelihoods of people affected by the virus and lockdowns, respectively, and to overall keep the economies afloat under an environment of low aggregate demand and supply globally, which has already caused the global economy to shrink by $8.5 trillion since the current crisis began, with the global GDP growth forecast for this year at negative 3.5 percent, according to the UN.
This sharp and deep economic downturn, which many economists now believe will take the form of a prolonged-U shape, with longer time needed for the global economy to return to an upward trend– mainly because the time to find a vaccine, get it approved for commercial use, and actually getting the people vaccinated, can take around one-and-a-half year– has already had severe negative effects on people being pushed below the poverty line. Here, the World Bank expects the number of people going below the poverty line– where poverty line is defined as people ‘living on less than $1.90 per person per day’– to be at around 60 million, while the estimation of UN is grimmer at 130 million.
All this means that government almost everywhere, and especially in emerging and developing countries, will have to continue with greater welfare programmes– for instance, unemployment rates in many parts of the world have seen a significant rise since the start of the pandemic, enhancing in turn allocations in terms of unemployment benefits– and overall loose monetary and fiscal policies. In addition, shrinking of the aggregate demand and supply globally has meant negative impact of exports, and remittances for instance, along with a sharp outflow of financial capital from emerging and developing world, has already been $100 billion since the beginning of last week of January this year, according to International Institute of Finance, has all meant that the debt repayment capacity of these group of countries has diminished significantly. For instance, Ramin Toloui, formerly assistant secretary for US Treasury, indicated ‘The withdrawal of money [from EM funds] is greater and more sudden than in 2008, the economic shock is huge and the path to recovery is more uncertain than it was after the last crisis’, and hence the emerging economies faced an ‘enormous’ challenge to save themselves from a possible debt crisis.
It is hoped developing countries, including Pakistan, will take timely and meaningful measures, to meet this challenge
Global debt, which had already seen a significant rise since the Global Financial Crisis 2007/08, is expected to rise a lot at the back of welfare policies being pursued during the current crisis. In this regard, UN DESA (United Nations Department of Economic and Social Affairs) in a recent policy brief highlighted ‘The global community has offered partial debt service suspensions to 76 low-income countries, and the IMF has offered debt service relief to 25 of the poorest countries. These do not cover commercial and multilateral debt or middle-income countries, and will not suffice to avoid defaults. Debt distress will impede countries’ efforts to combat the coronavirus pandemic and derail progress towards the Sustainable Development Goals (SDGs)… Despite near zero global interest rates, borrowing costs for most developing countries have risen; credit spreads on emerging market sovereign bonds more than doubled from the beginning of the year to April, widening to more than 600bps… Median public debt in developing countries grew almost 15 percentage points of GDP from 2012 to 2019 (from 35 per cent to 51 per cent of GDP).’
At the same time, developing countries are also stuck in the dilemma of how much debt relief to seek, especially with regard to the debt owed to private creditors, so that their credit-ratings do not slip down, making it difficult for them to approach creditors for future financing. One way, therefore, for safeguarding the debtor countries is highlighted by Berry Eichengreen in his recent article ‘Managing the coming global debt crisis’ as follows, ‘This debt crisis is also a humanitarian crisis and a global public-policy crisis. The appropriate entity to organize the response is therefore the International Monetary Fund [IMF], not the Institute of International Finance, the house organ of the creditors (as recommended by the G20). As a United Nations organization, the IMF could request that Chapter VII of the UN Charter be invoked to shield debtors from disruptive legal action by opportunistic investors. A crisis of this magnitude warrants no less.’
Another important step that needs to be taken is with regard to the supply of the IMF’s SDRs (Special Drawing Rights). Hence, given the dilemma facing debtors of emerging and developing countries, there has been a rising call from many corners for the IMF to provide greater support to indebted countries facing a possible crisis by making available greater amounts of SDRs to them. For instance, David Lubin in a recent article ‘IMF’s $1tn lending power is not all it is cracked up to be’ recommends ‘One way out of this might have been an emergency allocation of special drawing rights, a tool last used in 2009. This would credit member countries’ accounts with new, unconditional liquidity that could be exchanged for the five currencies that underpin the SDR: the dollar, the yen, the euro, sterling and the renminbi. That will not be happening, though, since the US is firmly opposed, for reasons bad and good. So in the end the IMF and its shareholders face a huge problem. It either lends more money on easy terms without the “collateral” of conditionality (borrowing government tighten its belt and exercise restraint in public spending), at the expense of undermining its own balance sheet; or it remains, in systemic terms, on the sidelines of this crisis.’
At the same time, Nobel Laureate, Joseph Stiglitz, among others, recommend to debtor countries, in a recent article ‘Restructuring Argentina’s private debt is essential’, to also take note of the path recently thought out by policymakers in Argentina to face the challenge of a likely debt crisis, whereby ‘‘Against the backdrop of this global emergency, Argentina is spearheading its public debt-restructuring process in a constructive manner, in good faith, and with the support of all domestic political sectors… Argentina has presented its private creditors a responsible offer that adequately reflects the country’s payment capacity: a three-year grace period with a minor cut in capital and a significant cut in interest… At this exceptional moment, Argentina’s proposal also presents an opportunity for the international financial community to show that it can resolve a sovereign-debt crisis in an orderly, efficient, and sustainable manner. The absence of an international legal framework for sovereign-debt restructuring should not deprive indebted countries of the possibility to protect their people and provide for economic recovery during the greatest global crisis in our memory.’
The above are some solutions to save from a possible debt crisis, likely in the wake of the covid-19 crisis, and it is hoped developing countries, including Pakistan, will take timely and meaningful measures, including taking a leaf out of these solutions, to meet this challenge.
