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COVID-19 and debt in the global south: Protecting the most vulnerable in times of crisis II

Added 13 Mar 2020
This is the second part of a blog series covering the impact of COVID-19 on vulnerable countries in the Global South. Part 1 analyses the impact of debt burdens on health services. Part 2 discusses how the economic crisis will affect countires in the global south. Part 3 highlights the degree of vulnerability of countries in the global south to the COVID-19 epidemic. Part 4 provides a discussion on policy responses to tackle the risks posed by the epidemic.


Healthcare challenges posed by COVID-19 to countries in the global south are heightened by economic factors. Even if these countries manage to avoid large outbreaks, they will still be exposed to the economic fallout of the epidemic, putting them at risk of a debt crisis. Available estimates suggest that a sharp slowdown of the global economy is already happening, involving a reduction of at least 0.5 percentage points of global GDP growth and a reduction of over US$ 50 billion in global exports. While the initial outbreak took place in China, causing a heavy degree of economic disruption, COVID-19 is already creating a similar degree of economic upset within the EU.  

Developing countries, however, are exposed to the economic impact of COVID-19 through several trade and financial channels. In the case of trade, developing countries have become increasingly reliant on China as one of their main export markets. In fact, China currently accounts for US$ 1.7 trillion in imports from the rest of the world and is the destination for more than a fifth of exports from over 20 countries. In addition, the impact China has had on demand for commodities has increased developing countries’ dependence on these type of products. The number of commodity-dependent countries has increased from 92 in 1998-2002 to 102 in 2013-2017. As a result, countries with close trade ties to China and a high degree of dependence on commodity exports are very sensitive to the type of economic shock that is currently being felt. Since the beginning of the year, imports to China have decreased by 4% and commodity prices have dropped by 30%
In the case of financial linkages, developing countries also present a troubling degree of exposure. Over the last decade, debt in Lower Income Economies (LIEs)1  has increased from an average of over 40% of GDP to 49% in 2019. The increase in debt stocks has been accompanied by a parallel escalation of debt vulnerabilities. Over the last five years, the number of countries the IMF classifies to be at high risk or already in debt distress has increased from 37 to 51. 

Recent trends in development finance, embedded in the so-called Wall Street Consensus, have simultaneously reduced the availability of ODA and exposed LIEs to complex and expensive financing instruments in the form of Eurobonds, currency swaps and PPPs, among others. As a result, vulnerable countries are now more susceptible to the panic that has engulfed global financial markets over the past weeks characterized by large drops in stock markets, sizable currency depreciations and capital outflows. The impact of these shocks on fragile balance sheets, such as governments or non-financial corporations in emerging markets, may amplify the effects of the crisis after the initial supply and demand shocks fade away. Potential impacts range from difficulties to rollover debts by individual corporations or governments, to a debt crisis engulfing a number of countries. 

The next section of this blog series will highlight how vulnerable countries in the global south are to a crisis caused by any of the previously discussed risk factors.




1 LIEs include 59 IDA-only, PRGT eligible countries, 13 high-income small states and 4 countries that have graduated from PRGT eligibility since 2010.