Giving Compass' Take:
- At Brookings, Homi Kharas and Meagan Dooley lay out a strategy for improved debt servicing policies to mitigate COVID-19's economic damage in developing nations.
- How do current debt servicing policies fail to serve developing nations sustainably? What can we do to support research and data on effective, equitable debt mitigation?
- Learn about the importance of debt relief in battling COVID-19 in Africa.
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The economic outlook for developing countries is grim in the wake of COVID-19.
Sovereign debt levels are forecast to rise by 12 percentage points of GDP in emerging markets and 8 percentage points in low-income countries.
Only one sub-Saharan African country has been able to access the sovereign debt market since February. Thirty-six developing countries have been downgraded by one or more of the four largest credit rating agencies. There is every expectation that debt restructuring will loom large on the international policy agenda in 2021.
G-20 leaders, following a call from the African Ministers of Finance, have already agreed to a Debt Service Suspension Initiative (DSSI) for all International Development Association (IDA) countries and Angola to free up fiscal policy space for COVID-19 response efforts. The initiative initially covered all debt service due between May 1 and the end of 2020, and has since been extended to June 2021.
Policymakers must decide what to do. The lessons from past debt episodes are that interventions that are too little, too late result in inefficiencies and significant social and financial costs linked with large-scale debt overhang problems and repeated restructurings. Conversely, too rapid and too large an intervention generates a moral hazard, potentially throws good money after bad, and can seriously affect future access of countries to capital markets.
This paper provides a framework and some evidence for how to arrive at a Goldilocks solution. Debt problems are highly country- and context-specific, so we do not attempt a formal analysis or recommendation for any particular country. But we believe that a sketch of the debt servicing landscape for 2021 and 2022 will improve understanding of the differentiated policy response that will be needed.
Read the full article about debt servicing policies by Homi Kharas and Meagan Dooley at Brookings.