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IMF: How developing countries can avert debt crisis

The International Monetary Fund (IMF) has called for the extension of the G20’s Debt Service Suspension Initiative (DSSI) into 2021, among other measures to prevent what it describes as a “developing country debt crisis.”

The IMF made the call in a new blog post written by its Managing Director, Kristalina Georgieva, and two of its Directors. According to the IMF, an extension of the DSSI is necessary to prevent its current recipients from being compelled to resort to austerity measures in order to be able to resume debt service, a situation, the Fund said, would worsen the human suffering already caused by the coronavirus (COVID-19) crisis.

In response to a call by the World Bank and the IMF to grant debt-service suspension to the poorest countries to help them manage the devastating impact of the COVID-19 pandemic, the G20, on April 15, announced the DSSI, which is aimed at offering relief to 73 eligible low-income countries on official bilateral debt-service payments (principal and interest) due between May and December 2020.

Specifically, the payments covered are suspended, not forgiven, with a repayment period of three years and a one-year grace period. Focusing on the looming debt crisis in its latest blog, which was titled, “Reform of the international debt architecture is urgently needed,” the IMF said that the pandemic has so increased debt levels to new heights, as average 2021 debt ratios are projected to rise by 20 per cent of GDP in advanced economies, 10 per cent of GDP in emerging market economies, and about seven per cent in low-income countries, compared to the levels at the end of last year, that urgent additional steps are required to prevent a “developing country debt crisis.” The Fund stated: “No debt crisis has happened yet, thanks to decisive policy actions by central banks, fiscal authorities, official bilateral creditors, and international financial institutions in the early days of the pandemic. These actions, while essential, are fast becoming insufficient. “First, the initiatives taken so far are temporary by design.

The G20 Debt Service Suspension Initiative, which was a highly welcome response to a call by the IMF and World Bank, expires at the end of this year. The IMF has also provided about $31 billion in emergency financing to 76 countries, including 47 lowincome countries, as well as debt-service relief to the poorest countries under the Catastrophe Containment and Relief Trust. With needs projected to remain high, developing countries will require additional lowcost financing in 2021 and beyond.

“Second, most of the measures so far have focused on liquidity – maintain countries’ access to finance, both from official and market sources. But as the crisis continues, solvency problems – the inability to repay debts – increasingly come to the forefront.” Calling for the extension of the DSSI as a first step towards averting a debt crisis among poor countries, the Fund said: “The DSSI must be extended into 2021.

If not, its current recipients will be forced to resort to austerity measures to be able to resume debt service, compounding the human suffering already caused by the crisis. “The extension of the initiative should provide incentives to tackle unsustainable debt problems early. For example, the length of the extension could be linked to IMF and World Bank programmes designed to reduce debt vulnerabilities.”

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