By Marc Jones
LONDON (Reuters) – Debt experts, charities and investors on Wednesday welcomed the announcement that the world’s poorest countries would receive new IMF funds and COVID-19 debt relief, but they have also warned that for some this would still only be a quick fix.
A new allocation of $ 650 billion of IMF quasi-currency known as Special Drawing Rights (SDRs) will provide more than $ 20 billion in financing, while an extended holiday on loan repayments from rich countries of the G20 will temporarily save an additional $ 7 billion.
The $ 20 billion share of the SDR increase alone is more than all the emergency money provided by the IMF in Africa https://www.imf.org/en/Topics/imf-and- covid19 / COVID-Lending-Tracker last year and in relative terms, those who experience the most stress will benefit the most.
Zambia’s share in the document – SDRs are allocated roughly based on the size of economies – will double its international reserves. It will raise those of Argentina, Ethiopia, Ecuador, Kenya, Ghana and Sri Lanka by at least 10%.
Additional assistance could also be provided. Discussions have already started that richer countries donate or recycle some of their new SDRs, either directly or at IMF emergency facilities where they could be put to good use.
It would add significant additional support, but some think even that might not be enough for those in the deepest funk.
The European Network on Debt and Development (Eurodad), which includes 50 non-governmental organizations, estimates that the average debt-to-GDP ratio of nearly 70 countries under the Debt Service Suspension Initiative (DSSI) of the G20 will exceed 60% this year against 52% pre-pandemic and 46% in 2015.
In sub-Saharan Africa, interest payments absorb nearly 50% of government revenue for Ghana and about 30% for Nigeria and Angola, calculates S&P Global.
Zambia, Mozambique, Republic of Congo and Angola have all seen their debt burdens soar above 100% of GDP, while Morgan Stanley reported concerns over Cameroon, Kenya, Costa Rica , El Salvador, Tunisia, Sri Lanka, Laos and the Maldives.
“This SDR issue will help countries that weren’t in bad shape entering this crisis to cope,” said Ravi Bhatia, sovereign analyst at S&P. “But for others who already had very high debt levels and have large payments to make, this will not be enough.”
Carmen Altenkirch, sovereign emerging markets analyst at Aviva Investors, shares a similar view. She believes that Zambia, Pakistan, Ghana, Argentina and Bahrain will benefit the most from the SDR increase, while Pakistan and Angola will benefit the most from the DSSI extension.
“Pakistan is a prime example of a country that could have failed,” she said. However, this will not solve the underlying problems of the most indebted countries and the rising interest charges.
Chart: Debt-to-GDP ratios of DSSI countries with sovereign bonds: https://graphics.reuters.com/AFRICA-DEBT/qzjvqmlllvx/chart.png
The poorest countries are also lagging far behind in immunization programs, which means that the crisis will be prolonged for many. World Bank and IMF research estimates that Africa alone will need around $ 12 billion for vaccines, roughly what it will have so far deferred under the ISD.
World Bank President David Malpass said on Monday that this week’s DSSI extension would likely be the “last or final”.
It urges countries to move towards the so-called G20 “common framework”, under which countries would completely restructure their debts rather than just postpone payments for a year or two under the DSSI.
So far, only Chad, Ethiopia and Zambia have said they will take this route. It has become a hot potato for governments as the framework also encourages them to restructure their private sector debt, which would be a default in the eyes of major credit rating agencies.
This could trigger ripple effects and make borrowing in international markets more difficult and expensive in the future.
“I don’t think it’s going to be enough,” said Richard Cooper, partner and debt specialist at law firm Cleary Gottlieb, of increasing SDR and expanding DSSI.
The problem is that with so many emerging countries that took on more debt during the COVID pandemic and global interest rates are currently rising, there will be more restructuring in the next 2-3 years.
“It’s kind of like a ticking time bomb,” Cooper said.
Chart: Share of $ 650 billion SDR allocation to reserves: https://graphics.reuters.com/IMF-SDR/nmopazjywva/chart.png
(Reporting by Marc Jones; editing by David Evans)