Some of the latest economic and poverty data from international institution, the World Bank, shows that “desperate inequality” is being caused by the Covid-19 pandemic and the subsequent economic shutdowns, which have led to recessions in various countries.
While the recessions in advanced economies are less severe than what had been feared, in most developing countries is has become a depression, especially for the poorest, which may see extreme poverty, globally, rise by 150-million as early as 2021.
As part of the World Bank’s health emergency programme in 111 countries, it expects to provide $50-billion in grants or highly concessional credits by June next year, which is hoped to help provide large net positive flows to the poorest and most fragile countries.
Earlier this year, in March, the G20 Finance Ministers’ meeting endorsed a vital debt relief programme for the poorest countries, where the Debt Service Suspension Initiative (DSSI) helped increase fiscal resources for over 40 countries and “created more transparency on the overwhelming debt burden”.
While the World Bank is making progress on its goal of fiscal savings for the poorest countries, it is “not nearly enough”, World Bank president David Malpass said on October 14.
The DSSI has since been extended and the term sheet strengthened, but he lamented that “some core DSSI-related problems are still unresolved” such as a lack of participation by private creditors and incomplete participation by some official bilateral creditors.
“The bigger challenge is the need to look beyond DSSI. It’s important to note that the DSSI defers payments into the future but doesn’t reduce them and that interest charges compound quickly on the deferred amounts, leaving countries with even more debt,” Malpass warned.
The tendency in past debt crises is for countries in debt distress to go through a series of ineffective debt reschedulings that leave them weaker and, while creditors may eventually allow them to get to a debt reduction process, it comes “at a tremendous cost” to the poor, he lamented, urging creditors and partners “to work better and faster this time”.
While there have been G20 discussions of a common framework on debt treatment, Malpass added that, given the urgency of the debt crisis, the International Monetary Fund (IMF) and World Bank have proposed that the parties undertake a joint action plan on debt reduction for the most indebted International Development Association (IDA) countries.
This option will be further discussed this week, he added, emphasising the importance of “making rapid progress” on a framework owing to the risk of rising disorderly defaults.
Further, the World Bank board on October 13 approved a $12-billion package to expand and fast-track the institutions’ Covid-19 response for buying and distributing Covid-19 vaccines, tests and treatments.
“The scale of the challenges ahead is staggering, so we need to do more. With the strong support of its shareholders, IDA has frontloaded IDA-19 resources to the fullest possible extent as a key part of the surge in our commitments this fiscal year.”
However, Malpass said the IDA lending would have to decline in the next two years even though the latest forecasts, including those just announced by the IMF, suggest that the reduction in economic activity will extend well into subsequent years.
Therefore, the World Bank has proposed a $25-billion supplemental Covid-Emergency Financing Package to be made available to various IDA deputies later this month.