G7 needs to provide debt relief, SDRs and aid for COVID-19 recovery and climate goals in low-income countries

The debt burdens of low- and middle-income countries have become so great due to COVID-19, they are unsustainable and threaten to delay recovery from the economic effects of the pandemic and the introduction of measures to address climate change, according to new research from IIED.

The report 'Whose debt is it anyway?' found the average debt-to-GDP ratio in Africa is expected to increase in the short term to over 70%, from 60% in 2019. The COVID-19 pandemic has caused a surge in public financing needs as governments spend more to mitigate the socioeconomic consequences of the pandemic.

The G7 leaders meeting this weekend needs to act to increase debt relief as part of a package of measures to help low-income countries withstand the economic shock inflicted by COVID-19 that also includes financial support through the reallocation of special drawing rights (SDRs), protecting aid budgets and increasing capital of multilateral and regional development banks.

IIED director Andrew Norton said: “Doing too little too late to support low-income countries to deal with the economic shocks of COVID-19 risks lost decades of development leaving people struggling to make a living, without access to decent healthcare and vulnerable to climate shocks.

“The G7 needs to show international leadership by supporting debt relief, helping with access to vaccines, and promoting a green and fair economic recovery.”

Even before the pandemic hit, debt levels had grown with the World Bank lending almost US$26 billion per year between 2014 and 2019 and China, the largest bilateral creditor, exposed to over $16 billion per year over the same period. China has more than doubled its exposure to low-income countries’ debt in the decade to 2019.

Although the World Bank and International Monetary Fund have promoted a debt service suspension initiative to free up countries’ financial resources to combat and recover from the COVID-19 pandemic, it doesn’t go far enough.

SDRs could be used to allow countries to cancel debt, free up money for vaccines and address the challenges of climate change and biodiversity loss. To reap the maximum benefit, these SDRs should be additional to and not replace existing aid commitments.