Debt relief must be fast, effective and sustainable
Comment by Dr Celine Tan, Reader in Law, School of Law, University of Warwick
"Calls to drop the debt owed by developing countries to their sovereign and private creditors to free up financial resources needed to address the COVID-19 pandemic must be taken seriously and urgently by the global community. As research by the Jubilee Debt Campaign (JDC) has shown, 64 countries spend more on debt service than on public healthcare expenditure, and before the crisis, 40 countries were already classified by the International Monetary Fund (IMF) as in or at high risk of debt distress.
"Debt relief will go a long way towards alleviating the financial pressures faced by countries in tackling both the immediate health, social and economic impacts of the pandemic and the longer-term recovery measures once the crisis abates. But the terms of this debt relief and the instruments used to deliver such relief must be fair, effective and sustainable under the circumstances.
"Pandemic debt relief must include formal debt write-downs and cancellation of debt stock owed to both sovereign and private creditors. Temporary suspension of sovereign debt repayments to official creditors, such as those supported by the G20 and international financial institutions, will be ineffective for the majority of indebted states in the longer term as it only postpones debt repayments while allowing them to accumulate more debt through pandemic-related loans from the IMF, World Bank and other financiers. Without outright debt cancellation and the inclusion of private sector debt, financial resources will be ultimately deployed to service debt repayments rather than on social, including health-related, and economic expenditure.
"Debt relief must be additional to existing official development finance, including concessional overseas development assistance (ODA), extended to developing countries, especially low-income and highly indebted countries. Debt relief must not be funded out of existing aid budgets or through debt swaps without any forthcoming new resources as is common under previous and current debt relief initiatives, such as the Heavily Indebted Poor Countries Initiative (HIPC). Debt relief must also not be accompanied by the same economic reform programmes that usually accompany these arrangements, particularly the promotion of structural and macroeconomic conditionalities that have exacerbated the vulnerabilities of developing countries to health epidemics and economic crises in the first place.
"Importantly, alongside calls for ad-hoc debt relief, there needs to be a concerted parallel effort to work towards reforming the international financial architecture, especially the development of a comprehensive mechanism to deal with sovereign debt at the international level which includes provisions on temporary debt standstills and a fair and transparent process of dealing with debt restructuring involving official sector and private sovereign creditors.
"The current ad-hoc system of dealing with sovereign debt and financial crises involving an emergency triage by the IMF and major creditor states and large-scale deployment of financial packages by institutions controlled by developed countries is neither sustainable nor equitable for developing countries and their communities in the longer term. The international community has to do better than this."
14 April 2020
The IEL Collective (2020), ‘International Economic Law and COVID-19’, 24 March 2020, The IEL Collective Medium Publication, https://medium.com/iel-collective/international-economic-law-and-covid-19-d46e17fdcd3f?source=collection_home---4------2-----------------------
Tan, Celine (2016), ‘Shifting Sands: Interrogating the Problematic Relationship between International Public Finance and International Financial Regulation’, in Bungenberg, M et al (eds), European Yearbook of International Economic Law 2016: Critical Perspectives of International Economic Law Vol 7, Springer.
Tan, Celine (2014), ‘Reframing the Debate: the Debt Relief Initiative and New Normative Values in the Governance of Third world Debt’, International Journal of Law in Context, Vol 10, No 2.
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