Developing world cries for help as it faces long Covid
The world economy is recovering strongly from the pandemic, but low and middle income countries are being left behind. They are looking to the North for vaccines, leniency on debt and fresh development financing
Finance ministers and development experts alike are raising the alarm about the lingering effects of Covid-19 on poorer countries, whose progress on catching up with rich states has gone into reverse.
“We’re witnessing tragic reversals in development,” said David Malpass, president of the World Bank Group, at his press conference on Monday. “Progress in reducing extreme poverty has been set back by years, in some cases a decade.”
Developing countries hold few cards, but four areas where they hope for progress are access to vaccines, help with debt distress, a reallocation of IMF Special Drawing Rights and the forthcoming replenishment of the International Development Association, the World Bank arm that lends to the poorest countries. The Bank hopes to raise $100bn from donors by year end (see World Bank looks for support for post-Covid agenda opposite).
The Bank’s latest forecast is for the world economy to bounce back by 5.7% this year and another 4.4% next year, although momentum is slowing amid supply chain bottlenecks.
However, per capita income is set to grow 5% in developed countries this year but only 0.5% in low income nations. By next year, output in developing countries will be nearly 4% below where it was projected to be before the pandemic.
Meanwhile, their debts are rising. The external debt of low and middle income countries grew 5.6% in 2020, to $8.7tr. But the 73 poor countries eligible for the G20’s debt service suspension initiative suffered a 12% rise, to $860bn. For some, the rise was 20%.
Finance ministers and central bank governors of the Group of 24 developing countries, which includes India, China, Brazil, Pakistan, South Africa and Nigeria, met in Washington on Monday.
The communiqué they issued was moderately worded, but blamed the continuing divergence between rich and poor countries on “uneven vaccine access, fiscal space and financial capacity to respond to the crisis”.
“I’ve never heard so many ministers speak up as today,” said Marilou Uy, director of the G24 Secretariat in Washington. “Normally five or six speak and reflect the views of others. Today it was almost 20.”
Emerging markets and developing countries will need 2bn more vaccine doses to have vaccinated 40% of their populations by the end of 2021, and nearly 4bn more to reach 60% by mid-2022.
Easing the financial strain is even harder. The World Bank’s latest International Debt Statistics report, published on Monday, shows considerable progress on one of Malpass’s top priorities — debt transparency — with unprecedented granular information.
But the picture is bleak. Net financial flows to developing countries fell for the second year running in 2020, to $909bn. Debt flows grew 9%, but equity — mostly foreign direct investment — declined 15%: a pattern that betokens rising risk.
Over half this money went to China, whose inflows grew 33%. In the rest of the world, foreign investment fell 26%. Over half of IDA countries are in debt distress, or at risk of it. The DSSI eased the burden during the pandemic, but expires at year end.
“The core problem is there is no international bankruptcy process to deal with countries where debt has become unsustainable,” said Malpass. The Bank is working with the IMF and G20 to “urge these efforts in future, including involving the private sector”.
Some G24 countries want the DSSI extended, but others disagree. “The DSSI just pushes out debt service, it doesn’t even reduce it,” said Uy. The Common Framework for Debt Treatment is meant to replace it, but needs to be “fast and expeditious”, she said. So far only Chad, Ethiopia and Zambia have applied for it.
Malpass criticised overseas aid budgets as “not large enough”. The UK is cutting aid by 25% this year.
Countries are negotiating reallocating the $650bn of Special Drawing Rights the IMF issued in August, mostly to rich members.
The IMF is working on a Resilience and Sustainability Trust to channel them. It could give 15-20 year loans, much longer than normal IMF financing.
“The question is how ambitious it will be and whether it can bring in middle income countries as borrowers,” said Uy. “Our advocacy is to include them.”
Measures such as this are small relative to rich countries’ coronavirus responses, but would make a big difference in the developing world.
“The way the recovery process is set up right now by the advanced economies, it concentrates resources at the top end,” said Malpass. “The prospects are that this inequality problem is going to extend, and it’s getting worse.”