COVID-19 is not just a health crisis, but a massive economic crisis costing the global economy more than US$300 billion a month — roughly US$10 billion a day — over six years. Government finances have been hit hard due to strict lockdowns, and dramatic declines in global trade, commodity prices, and tourism. While every country is affected, not every country has equal means to respond. Many wealthy countries moved swiftly to keep their economies afloat through stimulus packages worth nearly US$10,000 on average for every citizen. But the least developed countries (LDCs) were only able to mobilise spending equivalent to US$17 per person, nearly 580 times less than spending in developed countries.
Economic progress at risk
Developing economies are facing a liquidity crisis, and the needs are immense. The World Bank and IMF estimate that Africa is facing external financing needs of about US$1.2 trillion for 2020-2023, with roughly half of this expected to be used to service debt. The pandemic is threatening to wipe out decades of economic progress and development gains. COVID-19 could push between 143 and 163 million people into extreme poverty — those living under US $1.90-a-day — around the world in 2021 (see World Bank chart below). This includes nearly 50 million people in sub-Saharan Africa. Alarmingly, more than 270 million people are facing acute food insecurity.
Why prolong the pandemic?
Furthermore, vaccine hoarding by wealthier countries is prolonging the pandemic and could cost the world up to US$9.2 trillion in 2021 alone, with rich countries incurring up to almost half of this cost. For Africa, where countries aren’t likely to reach widespread vaccination until 2023 at best, GDP losses are estimated to exceed -6% (compared to -2.5% in advanced economies). On the flip side, quick and concerted action to end the pandemic will benefit everyone and raise global income cumulatively by US$9 trillion over 2020–25, including around US$4 trillion for advanced economies.
In order to put an end to the pandemic and ensure an equitable global recovery everywhere, ONE is asking for the G20 to agree on an economic response package for vulnerable countries. The IMF has warned that an incomplete global recovery will endanger the entire global financial system. If all countries do not have access to vaccines or the liquidity needed to address COVID’s impacts, this will affect all countries through a prolonged global pandemic, disruptions to travel, supply chains, and global trade.
Urgent leadership required
Global leaders must gather the same ambition and urgency they have put into their national response to support a robust economic response package for vulnerable countries. This should include:
- A rapid new allocation of up to US$650 billion in Special Drawing Rights (SDRs), with a redistribution mechanism to support countries in need. SDRs are an international reserve asset of the IMF that provide immediate foreign exchange support during financial crises. They were used effectively during the 2008/09 financial crisis, helping to bolster economies and prevent more widespread damage. A new SDR issuance could provide the liquidity needed for the global economic response while protecting stretched G20 budgets. Alongside a general allocation, countries must agree a swift mechanism to transfer excess SDRs from wealthy countries, to be used by vulnerable countries for pandemic response.
- An extension of the G20’s Debt Service Suspension Initiative (DSSI) to 2022. Thirty-one countries are either in debt distress already or at high risk of distress, with the potential for significant negative impacts on G20 economies, and impeding their ability to combat COVID-19 effectively. Finance ministers have already shown leadership in suspending debt service payments via the DSSI. Extending the DSSI could save countries a total of US$15 billion in bilateral debt repayments in 2021 alone. If multilateral creditors participated, this could save an additional US$13.7 billion, and US$12.5 billion could be saved from private creditor participation.
- A comprehensive and transparent debt restructuring agreement, which brings all creditors to the table. Some countries are facing an insolvency crisis. Restructuring debts before a country defaults has great advantages, reducing the economic impact and cutting the time to reach an agreement. The Common Framework is an important step in the right direction. The G20 now needs to go further to improve debt and public financial transparency, and ensure that all creditors (particularly private creditors) participate in debt restructuring for a fair deal. Acting fast now could prevent a wave of defaults down the line.