Examine Debt Service Suspension Initiative
Prime Minister Mia Amor Mottley has called on low and lower middle-income countries to examine the Debt Service Suspension Initiative (DSSI).
Though she welcomes this agreement established by the G20 to help countries tackle the COVID-19 crisis, she cautions that it is inadequate.
In all, 72 countries are eligible for a temporary suspension of debt service payments owed to their official bilateral creditors. The suspension period, originally set to end on December 31, 2020, has been extended through June 2021.
“The inadequacy of the DSSI is something for us to reflect upon. This has been the centrepiece of the international community’s response to COVID – this Debt Service Suspension Initiative really needs to be examined by us,” she told the 53rd Session of the Conference of African Ministers of Finance, Planning and Economic Development held in Addis Ababa, virtually on Monday.
“While the advanced economies have added near $11 trillion of new debt, the relief that the 72 low-income countries eligible for relief under the Debt Service Suspension Initiative, will be in the vicinity of $11 billion – 1,000 times smaller than the $11 trillion of new debt to the advanced economies. And while we welcome it, 80% of countries eligible for DSSI will receive relief worth less than 1% of their GDP.
“Let me be very clear, the DSSI initiative is welcome. But to spend much time debating whether we should extend it by a few months, will not address the crisis that we face today, and it will not save us from what is coming next. The ingredients are now in place regrettably, for a debilitating emerging market debt crisis – the kind that plunged Latin America into a lost decade when these ingredients were last in place,” she warned.
Prime Minister Mottley, who is also Chair of the Joint World Bank-International Monetary Fund Development Committee, said that because of the cost to the pandemic, and cost related to the climate crisis, such as the outbreak of locusts across several East African countries in 2019, the debt as a percentage of GDP in over half of the countries has jumped from high, before COVID, to the edge of sustainability today.
“The credit rating agencies are jittery, as we would have expected them to be. They have already put several African countries on credit watch for participation in the DSSI, rising thereby their cost of capital,” she pointed out, also noting that over the past decade, the amount of government or government-guaranteed debt in Africa to private creditors has grown from negligible proportions to 43%.
“This debt is primarily in US dollars and is set on the basis of US interest rates. Unless we act fast, proportionately and comprehensively, a strengthening US dollar and rising US interest rates can be the trigger that turns this health into a debt crisis. That is the problem the world is facing; the DSSI does not solve it, it requires a greater, more systemic effort.”
The Prime Minister is therefore seeking support for a recycling of $500 billion of Special Drawing Rights (SDRs) that better match the problems being faced.
To scale up the resource transfer needed to address COVID and Climate Change, she said rich countries will be called upon to pledge half of their new and unused SDRs to recapitalise development banks like the African Development Bank, the Inter-American Development Bank, World Bank, and the Asian Development Bank.
“They must use this capital to leverage more lending to those heavily impacted by COVID. The current resources available to the regional development banks is not fit for the purpose of an economy-stopping pandemic. But it is not just the level of lending that matters, but speed.”
However, cognisant that more lending on its own is problematic given high levels of debt, she charged that the new lending by the regional development banks must, as much as possible, involve partnerships and funding with the private sector and off public sector balance sheets.
“But it is also essential that the corollary of any plan for new resources is a plan for debt reduction that does not scare the bondholders,” she stressed, further proposing that “rich countries pledge the other half of their additional and unused SDRs to developing countries if they use the new and unused SDRs to buy back their debts denominated in the currencies that make up the SDR”.
She assured that this will yield three benefits. “First, there would potentially be a significant debt reduction that will likely forestall a drop in credit ratings, appropriately recycled the new SDR allocation is formidable.
“Second, if all developing countries use their SDRs to offer to buy back their debt at or just below par, this offer by itself, without any resources being spent, would increase the liquidity in debt. And third, all of the countries whose currencies are in the SDR are currently engaged in substantial quantitative easing: the US, China, the Euro-area, Japan, and the UK, to a combined $6 trillion in 2020 alone.”