The world is facing an unprecedented humanitarian crisis triggered by the outbreak of COVID-19. As the Bretton Woods Institutions (BWIs) deliver their virtual Spring Meetings, there are strong calls for an ambitious response. Both the World Bank and the IMF are under pressure to deliver in a world confronted with the ‘the worst recession since the Great Depression’. Short term measures are essential and urgent. However, long term measures will be the key determinant of the future for ourselves and the planet at this critical juncture.
The crisis imposes its heaviest tolls on the marginalised and most vulnerable. Women are exposed to multiple burdens, being under or un-paid and overrepresented in care, social, frontline health and food systems, as well as in the informal economy and small enterprises. The pandemic exposes the depth of the inequalities within and between countries and the consequences of decades of austerity policies that have undermined public health systems and stifled progress on universal social protection. The ‘Maximising Finance for Development’ approach of the World Bank Group incentivises - and may have even reinforced - these problematic trends.
While some measures have already been announced by both institutions, they may remain insufficient to cater for both immediate and future funding needs, as pre-existent development challenges are exacerbated.
• Emergency financing
There is an urgent need to prioritise spending on health and social protection. The focus of World Bank Group support must be on strengthening public systems, particularly health, education and social protection, rather than promoting private involvement through privatisation and public-private partnerships. These erode service capacity and undermine equity. Barriers to access for precarious or informal workers should be eliminated in order to leave no one behind.
The terms and conditions under which the World Bank provides its support are also critical for developing countries and their ability to respond to the current multiple crises that they face. Budget support and direct transfers to national response plans and healthcare services through public institutions should be prioritised. Given the exogenous nature of the crisis, emergency financing should be free of economic policy conditionalities. The 23 March comments from the World Bank President to G20 Finance Ministers on the need for countries to implement ‘structural reforms’ focused on liberalisation and deregulation are gravely concerning.
• The need for debt cancellation
As many developing countries do not have enough policy space to respond to the multiple crises that they face, the BWIs must approve bold measures this week in line with a debt jubilee. Eurodad research has found that debt levels are inextricably linked to countries’ ability to deal with the crisis. Moreover, our research has revealed that a suspension of official bilateral debt payments in 2020 - and not that of other creditors - could result in an estimated US$9.4 billion of the emergency funding required by low income economies being diverted to debt repayments.
While the call from the BWIs for a moratorium on 2020 official, bilateral debt payments for low income countries is welcome, it should apply also to multilateral and private creditors, and involve permanent cancellation of all 2020 payments. This would safeguard freed up resources being channeled to respond to the crisis rather than to service debt.
The IMF has already made a welcome step in the right direction, with the announcement of debt cancellation for a selected group of 25 countries for six months.
But the resources available for IMF debt relief could be rapidly exhausted by the scale of demand, and despite reforms, not all countries in need are eligible. Indeed, the 215m USD relief offered by the IMF equates to less than one per cent of low-income countries’ external debt payments in 2020. To scale up the length, volume, and scope of this cancellation, which the magnitude of the Covid-19 crisis requires, beefing-up the resources available for debt relief and concessional lending to developing countries will be critical. But this must not undermine existing ODA commitments: alongside fresh, additional injections from donor countries, the IMF must explore using its existing reserves, gold stocks, and the possibility of a new issuance of special drawing rights (SDRs), to ensure adequate support can be provided to countries at this exceptional time.
Meanwhile, the G20 yesterday announced the suspension of debt payments for the world's poorest countries until the end of 2020 for debts owed to bilateral official creditors. While a significant step, and one that will support the immediate Covid-19 response with around US$12 billion worth of debt payments suspended, the breathing space it provides countries may be short-lived.
By agreeing only to postpone payments, debt crisis risks are being stored up for later. Furthermore, the suspension will be done on a basis to ensure it costs creditors nothing. Borrowing countries will face bigger repayments when the suspension period ends, and may need to borrow more to be able to repay. We can expect that developing countries will be dealing with the impacts of the Covid-19 crisis on their economies for many years to come, so without full cancellation from all creditors, the G20 action currently pushes debt crisis risks further down the road. We need much more than this to fix failing health systems and fight the multiple crises exposed by the COVID19 crises – it is fair to say that they are not new for many. The BWIs will have to play their part in engaging private creditors in any debt relief initiatives. The World Bank must itself step up to offer cancellation of its claims.
• The need for grant financing
It is critically important that World Bank financing does not further compound debt vulnerabilities, so front-loaded support should be provided as grant-financing. In line with this, concessional lending should be expanded to cover middle-income countries currently not eligible for grant financing. CSOs are calling for an immediate reconsideration of systems and criteria used to make states eligible for concessional lending. The WB could consider recapitalising its arm providing grants to low income countries – the International Development Association, IDA – in order to take contributions from donor countries to enable increased financing to support countries in the emergency response and recovery. Although it was recently replenished, in these exceptional circumstances we could argue that additional funding is urgently needed.
Long term measures
The multiple crises that the COVID-19 pandemic leaves in its wake, juxtaposed by the ongoing need for systemic change that growing inequalities and climate change poses, demands a fundamental rethink of how we organise the economic system and the role of finance herein.
The current crises shows the need to invest in high quality and equitable public services. The ‘private finance first’ model of financing public services has to be rethought as market-based solutions to public services can undermine basic rights. The milestone decision of the World Bank Group not to fund for-profit providers of education comes as a result of strong criticism and work of civil society organisations and the failures of the Pandemic Emergency Financing Facility (PEF) have to serve as a hard lesson. The PEF has completely failed to provide speedy financial support to countries affected by outbreaks of deadly diseases, and to contain their spread, while it has benefited private investors.
Official Development Assistance (ODA) plays a key role in many low-income countries. The UN has called for channeling at least a quarter of committed, yet undelivered, ODA into a Marshall Plan.
Instead of using ODA to crowd-in private finance in the productive sectors, the focus on ODA should go into strengthening the provision of public services and support where it is most needed. The World Bank Group, as a leading development actor, has to play its part and rethink its approach to blended finance.
The scope, gravity and systemic nature of the crisis requires an ambitious multi-lateral response under the auspices, leadership and coordination of the United Nations, and the BWIs should support calls in this regard.
Immediate cancellation of debt payments should be linked to a more comprehensive approach to debt crisis resolution. To make debt restructuring more efficient, equitable and successful, the BWIs should support the creation through the United Nations of a systematic, comprehensive and enforceable process for sovereign debt restructurings. A process to make these changes must begin before the end of 2020.
• The need for a UN process
Moreover, CSO are calling for an ambitious UN-centred process to assess the crisis and agree on responses leading to an International Economic Reconstruction and Systemic Reform Summit, either later this year or in early 2021. The G24 – the group of major developing countries and emerging economies – included welcome references in its statement earlier this week, when calling for an “inclusive forum to examine the adequacy of the existing international financial and economic architecture and its ability to respond equitably and rapidly to global crises.”
After this week, the world will take stock of what the BWIs were able to deliver. Major shareholders have the responsibility to show leadership and support bold measures that require political and social commitment. The risk of not taking the right decisions is huge.