A moratorium on public external debt service could free up to US$50.4 billion over the next two years. The estimations highlight the potential of a debt moratorium as a mechanism to release significant existing domestic of resources to redeploy in the fight against Covid-19.

The briefing is provided to further the development of policy responses to the Covid-19 crisis and is in support of calls from wider civil society for debt moratoriums in the face of the current crisis. 

(Note: This briefing has been updated to include an assessment of the IMF-World Bank proposal for a suspension of debt payments for 76 IDA eligible countries)

The devastating impact of the Covid-19 pandemic requires the adoption of large-scale measures to protect as many lives as possible around the world. For Low Income Economies (LIEs)* the pandemic represents an existential crisis in a context characterised by vulnerable health care systems and high levels of debt. As outlined in a previous article, the emergency response of the international community must focus on three key areas:

1. Provision of emergency medical support and supplies to scale up health services in countries with vulnerable health care systems.
2. Provision of extensive financial support with conditionality free grants.
3. An immediate debt moratorium in LIEs linked to long-term SDG-focused debt relief.

Building on these proposals, this analysis provides an assessment of the costs and implications of an immediate debt moratorium for 69 countries classified as LIEs**. A moratorium on public external debt service could free up to US$50.4 billion over the next two years. The estimations highlight the potential of this mechanism to release significant existing domestic of resources to redeploy in the fight against Covid-19.

Debt moratorium in LIEs: An initial cost assessment

LIEs have different alternatives to organise a debt moratorium on their external obligations. An optimal mechanism to deliver financial relief would be a multilateral framework for a comprehensive debt moratorium and relief, organised by the UN. A multilateral approach would ensure that the measures adopted are comprehensive and provide special and differentiated treatment to small and vulnerable countries. However, in a scenario of multilateral inertia where debt relief is used as a tool for the introduction of conditionalities and structural adjustment, countries experiencing a humanitarian emergency caused by Covid-19 could declare a sovereign unilateral debt moratorium. The human rights imperative to protect lives at risk would provide all the justification necessary for the adoption of this approach.  

From a financial perspective, there are at least three complementary options, depending on the types of external debt covered by the moratorium:

A debt moratorium on IMF and World Bank payments: The most immediate alternative is for debtors to coordinate a moratorium on payments to the IMF and World Bank for the concepts of principal repayments, interest and charges. This procedure would require a majority vote of the Board of Directors of both organizations. Given the circumstances, the IMF and World Bank can take the initiative and accelerate the declaration of a broader moratorium covering other creditors. A moratorium for 2020 would free up to US$ 3.8 billion without any type of policy conditionalities. An extension until 2021 would release an additional US$ 4.8 billion, for a total of US$ 8.6 billion (Figure 1). 

Figure 1 – Impact of a moratorium on IMF and World Bank payments by LIEs organized by IMF country risk groups of debt distress (2020-2021) (US$ Millions)

Source: IMF. Data as of 29 February 2020

A debt moratorium on external official creditors: A broader debt moratorium covering all official external creditors of the public sector in LIEs could free up a total of US$ 19.5 billion in 2020. An extension until 2021 would release an additional US$ 18.7 billion, for a total of US$ 38.2 billion (Figure 2). Countries currently assessed to be at low and moderate risks of debt distress would be the main beneficiaries. A key element to achieve an immediate moratorium is the coordination amongst bilateral creditors, mainly Paris Club members and China, in order to avoid a situation where resources freed up end up potentially being used to pay other creditors. However, even without a multilateral agreement, debtor countries in a situation of humanitarian emergency can address creditor coordination failures and promote a wider agreement on the issue by adopting a sovereign unilateral debt moratorium.

Figure 2 – Impact of debt moratorium on external official creditors of LIEs organised by IMF country risk groups of debt distress (2020-2021) (US$ billion)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

A debt moratorium on external private creditors: The moratorium could be expanded to cover private external creditors to the public sector. A policy designed for 2020 could release up to US$ 5.9 billion in additional resources previously tied to debt service. Extension into 2021 would add US$ 6.2 billion for a total of US$ 12.1 billion (Figure 3). Countries currently assessed to be at high risk of debt distress would be the main beneficiaries. A multilateral framework for a debt moratorium, coordinated under the auspices of UN, could request the US, UK and the EU for the introduction of a temporary stay on sovereign debt litigation in order to protect vulnerable countries from vulture funds aiming to profit from the crisis. 

Figure 3 – Impact of debt moratorium on external private creditors of LIEs organised by IMF country risk groups of debt distress (2020-2021) (US$ billion)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

Adding together the official and private components, a comprehensive debt moratorium could release up to US$ 50.4 billion in resources for governments in LIEs to tackle the Covid-19 pandemic (Figure 4 - Table 1). From a geographical perspective, this initiative is ideally suited to delivering the highest amounts of relief to those in most need. Thirty-five highly vulnerable countries in Africa would be the main recipients of the benefits of a debt moratorium. An estimated US$ 32.8 billion could be made available over the next 2 years for countries in the region.

Table 1 – Debt moratorium estimates for 69 LIEs (2020-2021)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

Figure 4 – Debt moratorium estimates for 69 LIEs (2020-2021)

Source: Author estimations based on IMF WEO, IMF country DSA; World Bank IDS.

Debt moratorium in perspective

US$ 50.4 billion was a large number in the world that existed previous to Covid-19. After the pandemic, this is not the case. The wide ranging implications of this new threat are forcing society to reconsider the scale and requirements of public action to tackle uninsurable risks. In this context, the resources mobilised from a comprehensive debt moratorium need to be understood as the initial investment of an even larger multilateral response. Assuming that all the resources obtained from a debt moratorium were invested in Covid-19 testing kits, they wouldn’t be enough to provide one testing per capita to the 1.2 billion people that live in the 69 countries included in this assessment.

This example highlights how important comprehensive emergency responses that include financial strategies, such as a debt moratorium and large amounts of non-conditional grant financing, are to the mobilisation of real resources. Only then will it be to possible to produce and distribute the quantities of medical equipment required to slow down and control the growth of Covid-19. From a long run perspective, our best defence against the pandemic is to ensure that no one is left behind. Now more than ever, financial considerations must come second to the protection of human lives and rights. This means increasing the scale of efforts to achieve the goals of Agenda 2030. For this purpose, it is imperative to link the initial stages of a wide debt moratorium with a more comprehensive debt relief strategy. After the crisis, we must shift to a new paradigm where debt sustainability is assessed with respect to the financing needs of the Agenda 2030. Enough debt relief must be granted to allow countries to fund their national programs to achieve the SDGs. Until then, we need to remind ourselves that no-one is safe until everyone is safe.

Annex

Definitions

Public debt service: Defined as principal repayments and interest payments on short, medium and long-term debt, including both its domestic and external components as a share of GDP. Figures for 2016 to 2018 correspond to country level data from the IMF. Figures for 2020 and 2021 correspond to IMF DSA country level projections. Figures are converted to US dollars using IMF WEO estimations. Data from latest IMF DSA available per country.

Public debt service – External private debt: Defined as the sum of principal repayments and interest payments on public and publicly guaranteed external debt to private creditors including bonds and commercial bank loans. Figures for 2016 to 2018 correspond to country level data from the World Bank International Debt Statistics. Figures for 2020 to 2021 correspond to an estimation made using the average ratio of external debt service on private debt to public debt service per country from 2016 to 2018. The ratio is applied to IMF DSA projections of public debt service for 2020 and 2021 and converted to US dollars using IMF WEO estimations.

Public debt service – External official debt: Defined as the sum of principal repayments and interest payments on public and publicly guaranteed external debt to official creditors including multilateral institutions and bilateral creditors. Figures for 2016 to 2018 correspond to country level data from the World Bank International Debt Statistics. Figures for 2020 to 2021 correspond to an estimation made using the average ratio of external debt service on official debt to public debt service per country from 2016 to 2018. The ratio is applied to IMF DSA projections of public debt service for 2020 and 2021 and converted to US dollars using IMF WEO estimations.

Debt moratorium estimations: Figures quoted in this article are based on the figures for projected requirements on debt service for external private and official debt for 2020 and 2021 using the methodology presented above. A more accurate assessment would require country level DSAs to estimate current financing requirements. This is an area for further work. 

Download the entire annex for full country figures on debt service

* As defined by the IMF, LIEs include 59 countries eligible for IFI concessional financing, 13 high-income small states and four countries that have graduated from concessionality eligibility since 2010. For a complete list of countries included in the analysis, please refer to the annex. Announcement by IFIs covers a total of 76 countries. Not included in this analysis are 5 so-called blend countries (which can access both concessional and non-concessional lending) and 2 inactive countries. The countries not included in the assessment are Fiji, Kosovo, Mongolia, Nigeria, Pakistan (blend countries) and Eritrea, Syria (inactive countries). 

** Focus on LIEs in the vulnerability analysis previously published by Eurodad. This does not preclude nor detract from calls for international action on debt moratorium for developing countries more widely.