A new UNDP study has revealed that debt vulnerabilities of 72 developing economies to remain elevated for years and not return to pre-pandemic levels before 2024-2025.
Although debt relief efforts by the G20 group of rich nations to debt vulnerable economies last year was necessary. However, it has been largely insufficient, the report notes.
So far, 46 of 73 eligible countries have signed up for the initiative. Yet it has delivered only about one-quarter of its relief potential.
According to the report, two-thirds of external ‘debt service at risk’ is not covered by current relief initiatives. Hence, this risks jeopardizing years of progress on poverty and strains resources needed to deal with climate change.
The report therefore calls for bold new mechanisms to tackle the debt service risks of low- and middle-income countries. Furthermore, the study resonate a call by the UN Secretary-General for more aggressive moves to fight debt distress in countries lacking resources to manage it.
The Study, released yesterday, April 1, 2021, ahead of the World Bank-International Monetary Fund Spring Meetings next week, analyses debt vulnerabilities across 120 countries. The study finds 72 countries vulnerable, among which 9 countries are ‘severely vulnerable’.
Study’s findings
Based on the study’s findings, a minimum of US$598 billion of external public debt service payments are at risk across the 72 countries from 2021-2025. Out of this US$311 billion is owed to private creditors.
Nonetheless, the most significant danger, the report finds, is not a series of defaults. But the possibility of a prolonged debt crisis that leaves countries with unsustainable debt burdens for years. This foreseeable threat may prevent governments from making critical investments; to improve the lives and livelihoods of their people as well as address the climate crisis.
UNDP Administrator, Achim Steiner intimated that:
“This year, close to US$1.1 trillion is due in debt service payments. Just 2.5 percent of that amount would be enough to vaccinate 2 billion people under the COVAX initiative. The service of public debt crowds out room for the investments developing countries must plan to achieve a green and equitable recovery.
“We must address both liquidity and solvency issues through broader debt relief now to avoid a devastating cost to development.”
Achim Steiner, UNDP Administrator,
Analysis of SDR’s and debt restructuring schemes
Accordingly, the report finds that of the minimum estimated $598 billon of “debt service at risk” low-income countries constitute 6 percent and middle-income countries 94 percent.
Meanwhile, only 49 of the 72 vulnerable countries are eligible to receive support under existing debt suspension and restructuring schemes. While leaving about two-thirds (US$387 billion) of “debt service at risk” uncovered.
Recent efforts to support developing countries include a new IMF allocation of US$ 650 billion in Special Drawing Rights. Out of this amount, US$224 billion would go directly to low- and middle- income countries.
The 72 high debt vulnerable economies would receive US$51 billion, an amount equivalent to close to 8.6 percent of total external public debt service payments for 2021-2025. However, variation exists among countries. Such that some would have received just about the amount required to service their debts, while for others only 5 percent of debts would be covered.
Indeed, debt vulnerable countries need access to stable, cheap financing, in addition to debt restructuring for some, the report argues.
In the medium to long term, redirecting expenditures, increased spending efficiency, and boosting domestic revenue collection are essential to bounce back on the path of progress.
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