As fears of a global recession grow as a result of the Covid-19 spread, African countries, along with the World Bank, have issued calls for a moratorium on debt payments.
Dozens of African countries, the World Bank, the International Monetary Fund (IMF), the United Nations and civil rights groups have come forward with calls for a moratorium on debt repayments from struggling countries in the wake of the coronavirus pandemic.
As the global economy heads into a recession, there are fears it will have a disproportionate impact on the most indebted nations, which spend a significant part of their revenue paying interest to foreign lenders, leaving limited resources to tackle a health emergency.
“Even where the virus is not spreading, the economic impact of what is happening around the world is huge. The borrowing costs of the developing countries have shot up and the price of commodities, one of the main exports of many countries, have fallen,” says Tim Jones, the Head of Policy at Jubilee Debt Campaign UK.
“So this is a huge economic shock and it would be a scandalous waste of resources if debt payments are continued to be paid,” he told TRT World.
In a joint statement on Wednesday, the World Bank and IMF requested creditor nations to stop collecting debts from 76 poor countries, which have a per capita annual income of less than $1,175.
These countries include most of Africa and debt-ridden states such as Pakistan and Bangladesh. The multilateral lenders have requested that interest payments be suspended with immediate effect.
But the World Bank and IMF can not unilaterally restructure the debt of a developing country and have to rely on G20 members to take a decision. So far, leaders from these wealthy nations haven’t responded to the calls.
Just last week, the finance ministers of African countries made a similar call as they said the continent was already facing a financial crunch and the estimated $44 billion in interest payments due this year handicaps their ability to fight Covid-19.
Pakistan’s Prime Minister Imran Khan was the first to highlight the issue as he called for a debt-write off. Islamabad has already reached out to bilateral creditors to see if it can get some relief as the Islamic republic, which has for years struggled to increase exports, pays a large chunk of its tax money to foreign creditors.
Last year, Pakistan paid $11.6 billion to lenders - that is almost as much as its central bank has in its reserves at the moment.
“It is very welcome that both Pakistan and African finance ministers have collectively called for a moratorium on interest payments,” says Jones.
“This is very unusual because governments normally don't want to call for a moratorium as they are concerned how it will be perceived.”
Most of the debt of the developing and poor countries consist of loans, which are borrowed to pay off previous loans - trapping them in a vicious debt cycle.
Lawmakers in Ecuador, which drives most of its export revenue from oil, have called for a suspension of debt repayments as it deals with the coronavirus, which has killed 27 people there.
The recent crash in the price of oil has significantly reduced its ability to pay interest and Ecuador's Finance Minister Richard Martinez said the country will delay interest payments on some of the bonds.
Earlier this month, Lebanon defaulted on its foreign debt for the first time. Even though its problems stem from internal political issues which have bogged down the economy for over a year, Beirut’s decision could encourage other countries to follow suit.
The poorest countries are the most vulnerable, as their debt repayments as a percentage of government revenue have been steadily rising over the years.
A recent study by Jubilee found that 63 impoverished countries were consuming 5.2 percent of revenues to pay foreign creditors in 2011. This average rose to 12 percent in 2019.
In just five years between 2012 and 2017, the average external debt as a percentage of the GDP of low-income developing countries surged to 50 percent from 30.35 percent.
Countries like Ghana, which heavily depend on export of gold, oil and cocoa, are particularly at risk of a crisis as the price of commodities have plunged and the cost of dealing with the Covid-19 pandemic is rising.
Debt write offs are not unusual. In 2001, developed economies agreed to give debt service relief amounting to $34 billion to 23 Heavily Indebted Poor Countries (HIPC), 19 of which were in Africa. The initiative was meant to tackle poverty.
But this time, the United States and major creditors in Europe could be hesitant to reach any restructuring settlement because of China’s growing role as a lender to developing countries.
China has emerged as the single largest creditor to African governments accounting for as much as 24 percent of their total external debt.
“Definitely China needs to offer a moratorium on debt payments for the next year or two. That won't be unusual for China, there have been occasions when governments have asked China for relief on debt,” said Jones.