Proposals and pressure mount for more action on COVID-19 financing

By Adva Saldinger 

Dozens of heads of state, top United Nations officials, and the heads of the World Bank and the International Monetary Fund gathered virtually last week in the largest convening of its kind about the economic response to COVID-19. They discussed a number of proposals from an ongoing U.N. process and pushed the Group of 20 and other multilateral bodies to take further action.

“Failing to take action now is not a failure of generosity but an act of self-harm,” Mark Lowcock, head of the United Nations Office for the Coordination of Humanitarian Affairs, said at the High-Level Event on Financing for Development in the Era of COVID-19 and Beyond, summing up the urgency expressed at the event.

This meeting was part of a process started by the U.N. in May to address funding the pandemic response. The process has focused on six key areas — external finance, remittances, jobs and inclusive growth; recovering better for sustainability; global liquidity and financial stability, debt vulnerability; private sector creditors engagement; and illicit financial flows — each of which had a discussion group working over the past few months to come up with a specific menu of options.

While this was a U.N. process, it “acknowledged that any decisions in the short to medium term will be made by the G-20, IMF, and World Bank,” Eric LeCompte, the executive director of the Jubilee USA Network, told Devex.

The menu of options developed through the process for finance ministers and governments was done with the “intention to be able to influence the choices and decisions the G-20, IMF, and World Bank are making between now and the end of the year.”

Menu of Policy Recommendations

While policy recommendations that emerged from the process range from new mechanisms for trade and investment to doubling down on digitization of economies, much of the discussion last week, and in the weeks and months ahead is likely to focus on debt relief and providing additional liquidity.

In April the G-20 approved the Debt Service Suspension Initiative, or DSSI, which essentially deferred debt payments for the world’s poorest countries through the end of this year. There is now a clear push for the G-20 to extend that initiative, but also to do more to compel private creditors to defer debt payments, consider relief for middle-income countries and come up with a system for debt restructuring.

U.N. Secretary-General António Guterres highlighted the need for debt relief in his remarks at the event, calling for it to be “expanded to all developing and middle-income countries that really need it; and these countries must have more time to make payments,” he said. “Any comprehensive solution must include engagement with private creditors and credit rating agencies.”

South African President Cyril Ramaphosa said DSSI does not go far enough, and South Africa supports extending the initiative and in some cases considering debt cancellation. He also welcomed attention in the process to illicit financial flows “which pose a serious threat” to the economic and development trajectory of African countries.

Those illicit financial flows result in the African continent losing about $50 billion a year, Ghana’s President Nana Akufo-Addo said, adding that it’s critical to ensure transparency in how COVID-19 financing relief is spent.

It is “paramount to sustain and support people and businesses until a durable exit from the pandemic is achieved everywhere,” IMF chief Kristalina Georgieva said at the meeting. “In low-income countries and emerging markets with weak fundamentals, it can only be done with international support.”

Georgieva called on the G-20 to extend DSSI, and for all creditors to work together to develop an “orderly” debt restructuring process.

Any future debt process should draw from the Heavily Indebted Poor Countries initiative launched by IMF and World Bank in 1996, Malawi’s President Lazarus Chakwera said at the meeting. Chakwera, who is also the chair of the 47 Least Developed Countries called for a “global stimulus package for LDCs in order to save economies and societies from collapse.”

While debt relief and access to finance is important, LDCs also need grant-based aid to recover, he said.

Africa’s finance ministers have asked for $100 billion a year for the next three years and have received less than $50 billion to date, Vera Songwe, executive secretary at the United Nations Economic Commission for Africa told Devex.

The world’s wealthy countries have mobilized about $13 trillion in seven months, so providing Africa with $100 billion “is affordable and within their remit,” Songwe said in an interview with Devex.

Multilateral development banks also have an important role to play in providing additional capital, Songwe said. Donor countries should commit to recapitalizing the MDBs so they can lend more freely without being concerned that they will spend down all the funds they raised in recent capital increases, she said.

Other proposals were floated through the process, including a new fund that would support emerging economies, debt for climate swaps, proposals for mobilizing private sector engagement, improving tax administration, and more.

While the long menu of options developed and shared with governments included a lot of “actual possibilities,” in the short-term “only a handful are actually actionable,” LeCompte said.

What's Next

While last week’s convening had few concrete commitments, the upcoming World Bank and G-20 meetings are expected to result in some tangible announcements, most likely on debt relief, sources tell Devex.

A G-7 finance ministers meeting on Sept. 25 may provide some clues as to what those upcoming meetings might bring. The G-7 released a statement after that meeting saying it supports extending DSSI and supports the development of a common framework for future debt restructuring.

The statement also criticized China, though not by name, for classifying large state-owned financial institutions as commercial lenders and excluding them from DSSI. Those institutions will be treated as commercial claims in future debt treatments, according to the statement, which also pushed private creditors to implement the debt suspension initiative.

Later this month the G-20 and IMF are likely to announce an extension of DSSI through June, and may also address the issue of debt reduction with more specificity, though a framework is likely to take several months to develop, LeCompte said.

The upcoming G-20 and World Bank meetings will likely also discuss what to do with IMF Special Drawing Rights, which would provide countries with additional liquidity. Wealthy countries could decide to donate existing SDRs, about $176 billion worth, to poor countries through concessional lending facilities — Canada has already said that it will do so.

At the high-level event. Georgieva urged other countries to follow Canada’s lead and allow IMF to use existing special drawing rights to help countries in need.

The G-20 could also decide to support a new allocation of SDRs. If the issuance is below a $648 billion quota it would not require congressional or parliamentary approval, which seems a more palatable option for leaders. Some experts however have called for between $1 trillion and $3 trillion in SDRs to meet global needs.

“From what we see, liquidity and development needs surpass $1 trillion in developing countries,” LeCompte said. “At this time a high allocation would help meet that demand. A lower allocation would be helpful but wouldn’t meet the full demand in terms COVID response and liquidity issues.”

Read more here.