G7 countries back debt relief for poorest nations
G7 finance ministers and central bank governors have backed debt relief for low-income countries to help cushion their economies from the economic consequences of the coronavirus pandemic, in a sign of the growing concerns about financial stability in emerging markets.
The support for debt relief came in a virtual meeting held on Tuesday morning and chaired by Steven Mnuchin, the US treasury secretary.
However the economic officials made their backing conditional on the G20 group of nations, which includes China, reaching agreement on the plan; G20 officials are in the final stages of talks on a compromise.
“Ministers and governors noted that a number of the most vulnerable and poorest countries will face acute health and economic challenges related to the fallout of Covid-19,” a summary of the discussion provided by the US Treasury said.
G7 officials said they were “ready to provide a time-bound suspension on debt service payments due on official bilateral claims for all countries eligible for World Bank concessional financing, if joined by all bilateral official creditors in the G20 and as agreed with the Paris Club”.
“This initiative would provide liquidity support to help these countries deal with the health and economic impacts of the crisis,” the G7 central bankers and ministers added.
The G20 has been discussing a debt suspension plan covering about $18bn of payments and there are hopes that a deal could be reached this week during the spring meetings of the IMF and World Bank, which have strongly backed the effort.
The G7 ministers and central bankers also said they supported efforts by the G20 and the Institute for International Finance to ask “private creditors to provide comparable treatment, on a voluntary basis” to poorer nations.
The G7 agreement came a day after the IMF granted an estimated $214m in debt relief to 25 of the world’s poorest countries by cancelling repayments owed to the fund for the next six months, allowing them to use the money to fight coronavirus instead. Most of the countries covered by the grant are in sub-Saharan Africa, with others in Asia and the Caribbean.
Kristalina Georgieva, IMF managing director, said: “This provides grants to our poorest and most vulnerable members to cover their IMF debt obligations for an initial phase over the next six months and will help them channel more of their scarce financial resources towards vital emergency medical and other relief efforts.”
The IMF did not say how much money was involved, but the Jubilee Debt Campaign, a charity, calculated from IMF data that the countries would be spared repayments of $214m over the period.
Sarah-Jayne Clifton, director of Jubilee Debt Campaign, said: “This debt cancellation helps keep money in countries so it can be used for urgent health spending and social protection. Crucially, the payments are being cancelled rather than rolled into the future.”
However, she called on the IMF to go much further and cancel debts owed by a larger group of developing countries in the coming year.
During the G7 meeting, the economic officials, who have launched big fiscal stimulus measures and interventions in financial markets in recent weeks, reiterated their pledge to do “whatever is necessary” to support the global economy.
“The scale of this health crisis is generating unprecedented challenges for the global economy. Ministers and governors recognise that an extraordinary and well-coordinated international response is critical to reducing the depth of the crisis,” they said.
In addition to their support for debt relief, the G7 officials also endorsed giving the IMF greater firepower as it deals with the fallout from the pandemic, including a “temporary expansion of access to rapid-disbursing emergency financing instruments and proposed introduction of a short-term liquidity line”.
However the officials did not agree on the issuance of special drawing rights by the IMF to struggling countries, another tool that is being considered by the fund.
The IMF debt relief announcement involves grants to 25 countries from a catastrophe trust, the CCRT, which funds IMF repayments by poor countries hit by natural disasters. The CCRT can provide a maximum of $500m, including a recent $185m pledge by the UK and $100m from Japan — and the G7 officials called for “more and urgent contributions” to the trust.
Such assistance is dwarfed by other debt repayments which will fall due in the coming months.
Analysts estimate that 76 of the world’s poorest nations, which are eligible to receive the bank’s International Development Association funding, are due to make repayments of about $40bn to external creditors this year. Of this total, repayments to the IMF, World Bank and other multilateral lenders are estimated to represent about $13bn.
The IIF estimates that lower income nations will owe repayments of a further $130bn on domestic debts this year.
The IMF and World Bank have access to $260bn in emergency funding that they can make available to IDA countries. So far the IMF has approved loans totalling $3.4bn to 12 countries in sub-Saharan Africa and eastern Europe to tackle the Covid-19 pandemic, and requests from another six including Nigeria, Pakistan and Colombia are pending approval.