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

Added 19 Mar 2020
Prepared by Daniel Munevar and Mark Perera

This is the fourth 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. 

COVID-19 poses a serious set of threats to Low-Income Economies (LIEs). The most vulnerable in the global south will require substantial support from the international community to tackle the public health and economic risks posed by the epidemic. As we touched upon in the previous parts of this blog series, for many countries, their capacity to deal with the public health crisis is hampered by large debt service requirements. Policy responses must go beyond the limited and fragmentary proposals so far put forward by multilateral organisations. An integral response requires a combination of short and long-term measures, which address the different types of vulnerabilities present in LIEs. 

Short-term responses
  • Provision of emergency medical support & supplies: As discussed in Part 1 of this blog series, 42 LIEs have vulnerable health care systems with severe capacity and performance limitations. COVID-19 is already present in 23 of these countries. Scaling up health services will require substantial external technical, material and financial support. The WHO has established a response plan for this specific purpose and launched a solidarity response fund to finance these efforts. IFIs and donor countries ought to provide immediate and substantial financial support to WHO response plans.
  • Non-debt creating financial support in times of crisis: The World Bank and IMF have announced a combined emergency response package worth US$ 64 billion. From this figure, only US$ 400 million can be used to provide debt relief to free up existing resources in affected countries that would otherwise be used to repay outstanding IMF loans. The rest of the resources announced, including US$ 6 billion to strengthen health care services, are provided in the form of loans with different degrees of concessionality (below market interest rates). Given the high degree of debt vulnerabilities in LIEs, this is the wrong approach. Fresh financial support provided to LIEs experiencing a national health emergency must be delivered as grants by IFIs and other international donors. 
  • Health before debt: Countries at risk must be encouraged to adopt all the possible measures available to strengthen their health services and social safety nets. It’s imperative that countries prioritise expenditures in these areas over debt service. IFIs and other official creditors must consider the adoption of an emergency debt moratorium on official external debt of LIEs. A debt moratorium would allow countries to free up foreign currency reserves previously tied to debt service and direct them to critical imports as part of WHO response plans. Consideration should then be given to linking moratoria to comprehensive debt relief for affected countries once the emergency has passed, to support strengthened long term resilience against shocks such as the current pandemic.
Long-term responses
  • Public services and the Agenda 2030: When times are normal, public services play a critical role in the protection of basic human rights. In times of crisis, they are the only mechanism available to protect lives. Yet, decades of relentless attacks by IFIs on the public sector have left it at its weakest when we most need it. The COVID-19 crisis has revealed how misguided the prevailing market-based approach to financing development is. With the even greater threat of climate crisis looming on the horizon, this is a stark reminder of the State’s function as our only insurance against systemic risk, as well as the central role it must play in achieving the Agenda 2030. 
  • Health before debt: Systemic underinvestment in health services is at the heart of the vulnerabilities present in LIEs. Debt is a key factor in this dynamic. There are 46 countries currently spending more on debt service than health care. All of these countries spend less than half the amount of resources required to meet the SDG 3 on Health by 2030. This situation cannot continue. IFIs and donor countries must consider large scale debt relief for LIEs. Debt relief and debt sustainability assessments need to be structured in alignment with the Agenda 2030. They must be designed to support country efforts to increase health care expenditure and prioritise resources for other essential public services over debt requirements. 
  • Gender inequality: As public services are being overwhelmed across the world, it is women who are disproportionately providing a safety net. From extended shifts at hospitals, to care at home for children and sick relatives, women are providing an invaluable yet unrecognised service to society. The redesign of public services that ought to take place after this crisis must recognise these efforts and address structural inequalities, from unequal pay structures in health services to gender budgeting principles and a renewed commitment to the goals and principles of SDG 5.
  • A multilateral debt workout mechanism: A debt crisis threatens LIEs. Current approaches to deal with these situations exacerbate the negative impact of debt on societies. Austerity measures ultimately undermine human rights and fail to revive economies. Delayed and insufficient debt restructurings deepen and prolong the social impacts of crises. Fundamental reforms to the system for debt resolution are therefore vital, alongside measures to address the urgent challenges facing countries, for example, systematic SDG-linked debt relief, among others.  
Policy-makers and the general public are rapidly recognising the severity of the current risks to public health and the global economy posed by COVID-19. Further bold action will be needed to protect the most vulnerable and to finally tackle the persisting challenge of disorderly, delayed, and unfair debt crisis resolution. The cost of delay will be measured in human losses. Time is of the essence