There are strong indications that the World Bank Group and the International Monetary Fund (IMF) would recommend to the G20, an extension of the Debt Service Suspension Initiative (DSSI) by low-income countries until the end of 2021.
This is according to a paper prepared by the staff of the two institutions and posted shared with the public, as the 2021 virtual Spring Meetings commenced yesterday.
The recommendation which will further provide relief from debt service under the COVID-19 pandemic initiatives requires the approval of the Executive Boards of the organizations to become their official positions.
According to the paper, the recommendation has become necessary as most debtor countries have been found to be struggling with the negative effects of the COVID-19 pandemic on their economies.
“As COVID-19 has continued to spread worldwide and the economic recovery remains exceptionally uncertain, a further extension of the DSSI up to end-2021 would help eligible countries meet their elevated financing needs and fight poverty.
“Worldwide cases have multiplied, and new, more contagious viral strains have emerged. At the same time, developing countries and vulnerable populations risk being left behind in the global vaccine rollout. Liquidity needs are expected to remain high in 2021 and debt sustainability outlooks have deteriorated further.
“The economic outlook remains exceptionally uncertain at a time when many DSSI-eligible countries already have protracted breaches of DSA debt indicators. The World Bank estimates that to attain levels of vaccination coverage to interrupt virus transmission, Africa would need about US$12 billion for vaccines and incremental costs for deployment, almost the same amount of official debt service deferred by current DSSI participant,” the staff said in the paper.
By the end of 2019 debt vulnerabilities were increasing in IDA countries to the point of a renewed global spotlight on this agenda a quarter of a century after the inception of the HIPC framework.
It was found that, as of end-December 2019, 51 per cent of International Development Association (IDA) countries were classified by the IMF and the World Bank as either in or at high risk of debt distress (under the joint Bank-Fund Debt Sustainability Framework for Low-income Countries, LIC DSF), several of which had benefited from comprehensive Highly Indebted Poor countries (HIPC) debt relief.
According to the paper, “In some IDA countries, the interest burden already exceeded pre-HIPC levels—and debt service burdens are highest in Sub-Saharan Africa. Overall external public and publicly guaranteed (PPG) debt-service-to-revenue ratios for IDA countries increased from 8.2 per cent to an estimated 11.8 per cent between 2017 and 2019. The situation deteriorated during 2020, with 54 per cent of IDA countries in or at high risk of debt distress
“In contrast to the early 2000’s, a significant number of IDA countries face high external debt service payments over the medium term, which could impede their ability to support the recovery. Debt Sustainability Analysis (DSA) for most IDA-eligible countries in an unsustainable or near unsustainable debt situation show large breaches of liquidity indicators (external debt service-to-export or external debt service-to-revenue ratios).
“Of 17 countries with protracted breaches of solvency indicators under the baseline (defined as breaches of solvency indicators over 5 years and more), 12 are also accompanied by protracted breaches of liquidity indicators (defined as breaches of liquidity indicators over 5 years or more). Five more countries have protracted breaches of liquidity indicators only.”IMF, World Bank may push for debt service suspension to end 2021
