Why the Global Debt of Poor Nations Must Be Canceled?

The New York Times, Abiy Ahmed

ADDIS ABABA, Ethiopia — On April 15, Group of 20 countries offered temporary relief to some of the world’s lowest-income countries by suspending debt repayments until the end of the year. It is a step in the right direction and provides an opportunity to redirect financial resources toward dealing with the coronavirus pandemic.

But if the world is to survive the punishing fallout of the pandemic and ensure that the economies of countries like mine bounce back, this initiative needs to be even more ambitious.

At the very least, the suspension of debt payments should last not just until the end of 2020 but rather until well after the pandemic is truly over. It should involve not just debt suspension but debt cancellation. Global creditors need to waive both official bilateral and commercial debt for low-income countries.

These steps need to be taken with a sense of urgency. The resources freed up will save lives and livelihoods in the short term, bring back hope and dynamism to low-income economies in the medium term and enable them to continue as the engines of sustainable global prosperity in the long term.

In 2019, 64 countries, nearly half of them in sub-Saharan Africa, spent more on servicing external debt than on health. Ethiopia spends twice as much on paying off external debt as on health. We spend 47 percent of our merchandise export revenueon debt servicing. The International Monetary Fund described Ethiopia as being at high risk of external debt distress.

The dilemma Ethiopia faces is stark: Do we continue to pay toward debt or redirect resources to save lives and livelihoods? Lives lost during the pandemic cannot be recovered; imperiled livelihoods cost more and take longer to recover.

Immediate and forceful action on debt will prevent a humanitarian disaster today and shore up our economy for tomorrow. We need to immediately divert resources from servicing debt toward responding adequately to the pandemic. We need to impede a temporary health crisis from turning into a chronic financial meltdown that could last for years, even decades.

Ethiopia must spend an extra $3 billion by the end of 2020 to address the consequences of the pandemic, while our balance of payments is set to deteriorate. Increasing health care spending is essential, irrespective of debt levels, but we have less money on hand, and much of it is due to creditors.

A moratorium on bilateral and commercial debt payments for the rest of this year will save Ethiopia $1.7 billion. Extending the moratorium till the end of 2022 would save an additional $3.5 billion.

Low-income countries can use the financial resources freed up by cancellation or further deferment of debt repayments to invest in our battle against the pandemic, from providing necessary medical care to our citizens to ameliorating our financial difficulties.

In October, the I.M.F. reported that the five fastest-growing economies in the world were in sub-Saharan Africa, which includes Ethiopia. In early April, the World Bank reported that sub-Saharan Africa would face its first regionwide recession in over 25 years and the region’s economy could shrink by as much as 5.1 percent.

This is not a result of bad policies, mismanagement or any other ill typically associated with developing economies. The recession will be the product of the coronavirus outbreak.

Preventing or at least minimizing the recession is critical to maintaining years of hard-won economic gains across the continent. The current moratorium in bilateral debt collection until the end of the year will help, but it won’t be enough, given the gravity of the challenge we face.

The moratorium must be extended until the coronavirus health emergency is over or canceled altogether. The creditors need to do this unconditionally.

Official bilateral creditors are no longer the principal source of external debt financing for many developing countries. Private-sector creditors, including investment banks and sovereign funds, are. They should play their part in the effort to rescue African economies from permanent paralysis with a sense of solidarity and shared responsibility. It would help avoid widespread sovereign defaults and chaos in the market.

And it would be morally indefensible if resources freed up from a moratorium in bilateral debt collections were to be used to pay private creditors instead of saving lives.

Most of our countries managed to borrow funds on the back of solid economic performance and highly promising and evidence-based development programs and trajectories. Nobody foresaw this promise being derailed by a once-in-a-century event such as the coronavirus pandemic.

Under these circumstances, there is no room for traditional arguments such as moral hazard. Low-income countries are seeking relief not because we squandered the money but because we need the resources to save lives and livelihoods.

It is in everybody’s enlightened self-interest that the borrowers be allowed breathing space to get back to relative health. The benefits of rehabilitation of the economies of the hardest-hit countries will be shared by all of us, just as the consequences of neglect will harm all of us.

Abiy Ahmed is the prime minister of Ethiopia. He was awarded the Nobel Peace Prize in 2019

Source The New York Times