Photo Credit: Rodrigo Amorim

 

Carmen Reinhart, the chief economist at the World Bank, feels that emerging market and developing economies (EMDEs) should step up their borrowing in the battle against the Covid-19 virus. “First you worry about fighting the war, then you figure out how to pay for it”, the professor was quoted as saying in the Financial Times of London on 09 October.  It appears that she was talking to the international financial media ahead of the annual meetings of the Bank and the IMF this week.

 

Borrowers can take some comfort from the assumption in the Fund’s new World Economic Outlook (WEO) that the leading central banks will “maintain their current settings” to the end of 2025. If we are to have another five years of accommodative monetary policy and cheap money, then there will be time to put together a plan to service new loans.

 

Governments have seen sharp declines in all revenue streams due to the virus and measures to tackle it: direct tax, indirect tax and tax from commodities. As EMDEs look to give some protection to their populations, so their borrowing needs have risen. Additionally, some have a challenging debt service burden that requires restructuring.

 

In the larger economies in SSA, finance ministries can tap domestic institutions to meet a good slice of their borrowing needs in local currency: South Africa and Nigeria and, to a lesser extent, Kenya and Côte d’Ivoire.

 

External borrowing is a greater challenge, and governments will struggle to secure the tools to fight the war in the professor’s words. The UN Economic Commission for Africa (UNECA) has identified a financing need for the continent of US$100bn per year for three years. We have not seen the calculations behind the headline figure and we are sure that the commission will have to strengthen its case if the financing obtained comes anywhere it. To compare the aggregate stimulus to confront the virus in advanced economies and in EMDEs will not move the needle.

The commission has also raised a possible launch of SDRs, which the US has blocked. Another possibility is for Western states to transfer their ‘surplus’ SDRs to fellow members of the IMF in need. We are not clear how this would work.

 

By far the largest lender is the IMF, which says that it has made US$250bn available globally since late March. The total covers its two conditionality-free facilities to tackle external shocks such as Covid-19, its package of debt relief for the most vulnerable economies and its regular credit programmes. Africa’s share of this figure through to the beginning of October is a little over US$25bn.

 

The World Bank and other multilaterals have the firepower ready for launching but disbursement is proving far slower because of conditionality. The bilateral creditors will not up their game because of the resources pledged for their fiscal stimuli.

 

More than 70 EMDEs are eligible for G20’s Debt Service Suspension Initiative (DSSI) that defers bilateral obligations due by end-2020 for three years. According to the Bank, 43 governments have applied for debt service covering a total of US$5.3bn. We understand that G20 is to extend the initiative for another six months.

 

Debtors are expected to seek “comparable treatment” from private creditors but just three have started this process. It seems that the vast majority have avoided it for fear of the impact on their credit ratings and their access to the Eurobond and loan markets. There has been a lot of excitable talk about private creditors having a free ride on the debt relief of others. This is to miss the distinction between the agendas of private and official creditors. They can lose their collective shirts (or, at least, the sleeves thereof), which is likely to be the experience of holders of the Zambia sovereign Eurobonds.

 

We agree with Professor Reinhart that EMDEs should accelerate their borrowing in response to the virus and consider the consequences afterwards. The funds available, however, are well short of the targets set by the most ambitious campaigners. The IMF is leading the pack in terms of new money by some distance: others are constrained by the conditions they set, their domestic fiscal resources and their investment thinking.

 

Jean Puri

19 October 2020