COVID 19 and Debt Crisis

in Developing Countries.

http://www.globalissues.org/article/35/foreign-aid-development-assistance#ForeignAidNumbersinChartsandGraphs
 Learning Objectives

1 2 3
Describe the impact Assess the role of Estimate the impact
of COVID 19 on the COVID 19 in of COVID 19 on the
economy of the exacerbating the developing
developing nations. development countries.
issues.
 Additional Readings

Lora Jones, Daniele Palumbo & David Brown. Coronavirus:

A visual guide to the economic impact. 29 June, 2020
https://www.bbc.com/news/business-51706225

Bundervoet, Tom & Davalos, Maria .In developing countries, the COVID-19 crisis
has not affected everyone equally. APRIL 06, 2021
https://blogs.worldbank.org/voices/developing-countries-covid-19-crisis-has-not-
affected-everyone-equally
 Videos

Coronavirus: impact on Global Economy - BBC News

https://www.youtube.com/watch?v=9nrZwjcjS1A&feature=youtu.be

COVID-19 and the debt crisis

https://youtu.be/o_Zlns6anJg

Is a global debt crisis coming? | CNBC Explains

https://www.youtube.com/watch?v=_Cf7o_YlH5M&t=92s
 Causes of Debt Crisis
The legacy of colonialism — for example, the developing countries’ debt is partly the result of
the unjust transfer to them of the debts of the colonizing states, in billions of dollars, at very
high interest rates.

Odious debt, whereby unjust debt is incurred as rich countries loaned dictators or other
corrupt leaders when it was known that the money would be wasted. South Africa, for
example shortly after freedom from Apartheid had to pay debts incurred by the apartheid
regime. In effect, South Africans are paying for their own oppression.

Mismanaged spending and lending by the West in the 1960s and 70s
 Debt in Developing Countries

Developing Of this, about $3.5

countries have trillion is for
about $11 trillion principal
in external debt. repayments.
 Debt in Developing Countries
https://www.worldbank.org/en/news/factsheet/2020/05/11/debt-relief-and-covid-19-coronavirus

Under normal circumstances, principal amounts are refinanced in global

capital markets.
In Coronavirus times credit markets have tightened and many countries are
faced with very large reductions in foreign exchange revenues.

iFrom April 2020 through June 2021, the World Bank committed $36.3 billion
in financing for countries participating in the G-20 Debt Service Suspension
Initiative (DSSI)—of which $11.8 billion was in the form of grants.
Impact of
Coronavirus on
Economy
 Impact of COVID-19
https://sdg.iisd.org/news/world-bank-projects-subdued-prolonged-global-economic-recovery-from-pandemic/

The COVID-19 pandemic is inflicting high Necessary protection measures are

human costs worldwide. severely impacting economic activity.

The World Bank Group’s Global Economic

Prospects report notes that although the
global economy is expected to recover
from the COVID-19-induced recession, International Monetary Fund (IMF)
progress will be slow and subdued. declared it “the worst economic fallout
since the Great Depression.”
Global growth is projected at 4% in 2021,
but another spike in cases could reduce it
to 1.6%.
 Impact of COVID-19
The global economic downturn will have a disproportionate impact on developing and emerging
economies. They will take the hardest hit, as they have “less resources to protect themselves
against this dual…health and economic crisis.” The United Nations Development Programme
(UNDP) projects that developing countries will lose at least $220 billion in income.

World Bank warned that the global recession could set back decades of progress in developing
countries, stating that the COVID-19 pandemic would lead to higher infant mortality rates and
stunted growth for children.

The economic impact of COVID-19 could push 100 million people into extreme poverty in 2020 –
the first increase in global poverty since 1998, according to the World Bank.
 Impact: Decline in Foreign Direct Investment (FDI)
https://www.usglc.org/coronavirus/economies-of-developing-countries/

Foreign direct investment – a critical source of financing for emerging and

development economies – is projected to decline by 30 percent to 40 percent.

Developing countries saw more than $100 billion flowing out from the region in
March and April – more than three times the amount during the global financial crisis.

This has led to major emerging market currencies depreciating by 15 percent and
forcing people to pay more for imported goods.
 Impact: Decline in Oil Prices and Tourism

The decline in oil prices and tourism will further hamper

emerging and developing markets’ access to foreign
exchange to pay their debts. The coronavirus oil shock is
projected to wipe out emerging markets’ oil and gas
incomes by between 50 percent and 85 percent and
shrink the tourism sector as much as 80 percent in 2020 –
affecting many that have relied on commodity exports and
tourism as their main source of incomes.
Impact: Decline in Remittances
Remittances – money that migrant
workers send to their families at
home – are estimated to fall by 20
percent in 2020. Remittances are a
vital source of income for developing
countries and second most
important source of external finance
to developing countries after foreign
direct investment.
 Areas Impacted
The World Bank projects that sub-Saharan Africa will experience its first economic recession in 25
years with the economy declining by 3.2 percent. With the African Union estimating a loss of up to 20
million African jobs, the pandemic will force between 5 million and 29 million people into extreme
poverty— living on less than $1.90 a day.

For the first time in 60 years, East Asia’s economic growth is expected to stall – growing by a mere 0.5
percent in 2020 – and the pandemic could drive 11 million people into poverty.

Latin America and the Caribbean will experience the worst economic contraction in the region’s
history with the economy declining by 7.2 percent. With unemployment expected to reach 13.5
percent, the economic downturn could push 28 million people into extreme poverty.
Why Developing Countries Have Been
Hit Hard by Coronavirus?
Why?

Developing countries tend to be poorer, their

infrastructures aren't as the developed world.
They rely on primary sector roles–– activities
that consist of exploiting natural resources,
like agriculture, mining, and forestry––and so
they are particularly impacted by disrupted
supply chains and lower demand for their
goods.
Service sector which supports remote work
forms a small part of the economy of the
developing countries.
 Fewer Coronavirus deaths in the Developing World
Death rates in Developing Countries (DC) are not as bad as in USA – but economic impact
more extensive.
Of the G-20, India’s economy was the worst-hit in Q2,
followed by UK, Spain & Mexico. China & Korea performed better

Source: IMF, Sept. 2, 2020

 Peru’s recession quite bad
Taiwan, South Korea suffered least.
 Why differences across continents in Covid-19?

Why has Latin America • Big densely populated cities, informal workers, internal
been hit so badly ( ½ migrants;
• Inequality, inadequate public health systems.
global summer deaths)?

• In part: cultural willingness to wear masks or quarantine;

Why have East & South • Recent experience with epidemics, (H1N1, SARS etc.)
East Asia done better? good habits of response,

Why has Africa • Experience with epidemics, habits of response

apparently done better • Low population density
• Youth population – large population under 25.
than expected?
 Spending (fiscal) response in Developed Countries
https://www.atlanticcouncil.org/blogs/econographics/coronavirus-versus-financial-crisis-us-policy-responses-compared/
Low-income Countries Lack Social Safety Net

“A sigh of relief, a gasp for breath,” The Economist, August 1, 2020.

Projections
 Potential Impact of COVID-19
https://unctad.org/system/files/official-document/gds_tdr2019_covid2_en.pdf

Sudden stop of activity -

income loss in the
manufacturing and
Broad agreement that services sectors with
Projections of the impact on investment
potential impact of the the global economy will
contract. confidence,
Covid-19 shock on international trade and
economies around the commodity prices.
world vary widely.
Addressing the Debt Issue
 Addressing the Debt Issue
IMF Lending During the Pandemic and Beyond

The IMF has provided financial assistance

to about 80 countries (Sept 2020)
mainly through emergency lending -
Catastrophe Containment Relief Trust and
precautionary lending tools.
 Role of IMF
More than 90 developing countries have sought emergency
funding and financial assistance from International Monetary
Fund (IMF).

24 of the IMF's low-income member countries are benefiting

from immediate debt relief so far.

IMF is calling for the temporary suspension of debt

payments to banks for the poorest developing countries.
 IMF and SDR
https://unctad.org/system/files/official-document/gds_tdr2019_covid2_en.pdf

Special Drawing Rights (SDRs) are the IMF’s unit of account and a potential claim on
holdings of freely usable and available international currencies. They are best thought
of as a virtual reserve asset created by the IMF and valued daily as the weighted linear
combination of the market prices of five international lead currencies. SDRs are
allocated to IMF member states participating in its SDR department in line with their
IMF quotas. Member states can then make use of SDRs as a means of payment
between them and to obtain hard currency.

Following the CORONA virus crisis - IMF member states agreed to an allocation of
Special Drawing Rights (SDRs) of $ 183 billion SDRs (or $ 287 billion).
 Debt Service Suspension Initiative (DSSI)

DSSI allows countries to pause debt repayments to creditors willing to participate.

If all eligible countries take up the deal, it will free up about $11 billion for social
spending by governments. It gives countries “a little bit of breathing space”
But the DSSI also has some strings attached: Any country signing up to the repayment pause is expected to
open up its books and reveal the full extent of its debt, and it mustn’t take on any more commercial loans on the
side.

This may not meet with compliance.

 Conclusion

Internationally - strong
Effective policies are Economic fallout is multilateral cooperation
essential to forestall the acute in specific sectors is essential to overcome
possibility of worse so policymakers will the effects of the
outcomes, and the need to implement pandemic, including to
necessary measures to substantial targeted help financially
reduce contagion and fiscal, monetary, and constrained countries
protect lives are an financial market facing twin health and
important investment in measures to support funding shocks, and for
long-term human and affected households and channeling aid to
economic health. businesses domestically. countries with weak
health care systems.