Learn how the World Bank Group is helping countries with COVID-19 (coronavirus).Find Out
Public debt in emerging markets has surged to levels not seen in 50 years, and many developing countries have increasingly taken on debt on non-concessional terms—from private lenders and non-Paris Club members.
As the COVID-19 pandemic wreaks havoc on the global economy, poorer countries who will be hardest hit by the virus will also face a debt crisis.
Debt service suspension is a powerful, fast-acting measure that can bring real benefits to people in poor countries, particularly countries that don’t have the financial resources to respond to the coronavirus (COVID-19) crisis.
The G7 has also indicated that it would suspend debt obligations of the poorest countries.
How the World Bank is Helping
As countries around the world work to contain the spread and impact of coronavirus (COVID-19) the World Bank Group (WBG) is taking broad, fast action to help developing countries strengthen their pandemic response and health care systems:
The World Bank Group and other Bretton Woods institutions are ramping up financial support to IDA countries to enable them to overcome the crisis. As always, we first assess the country’s overall financial picture, including the debt profile and repayment implications.
The World Bank Group will deploy as much as $160 billion between April 2020 and June 2021. Between April and the end of June 2020, the World Bank committed $32 billion and disbursed a total of $17 billion—including $9 billion for the poorest countries. During that time, the Bank disbursed $4.7 billion to countries that are participating in the DSSI—nearly 10 times the $500 million in debt-service repayments it received from those countries.
This support will be tailored to the health, economic and social shocks countries are facing. We are currently assisting more than 100 countries—home to 70 percent of the world’s population—with COVID-19 responses.
In addition to ongoing health support, operations will emphasize social protection, poverty alleviation and policy-based financing.
We provide grants—rather than loans—to most IDA countries at high risk of debt distress. For IDA countries—like those in Africa—the interest rates on World Bank lending is extremely low and the maturities and grace periods are long.
Half of IDA countries already receive at least half—if not all—of their IDA resources on grant terms, which carry no re-payments at all.
IDA automatically adjusts terms of assistance. IDA recognizes that debt sustainability is a key concern for many low-income countries. For this reason, when countries face increasing difficulties in servicing their external debt, including because of a major crisis, IDA automatically adjusts the terms of its assistance so that countries can continue to access further funds and technical assistance without increasing their debt.
IDA recycles all of the debt service payments it receives into new financial assistance for the poorest countries. These resources are needed to fund critical new COVID-19 health projects, bundling financing with expert technical assistance. Continued operation of IDA on its existing terms will best allow IDA to meet client needs during the current crisis.
Non-concessional debt on average accounted for 55 percent of the debt of low-income countries in 2016, the latest year for which data are available.
50 percent of IDA countries are at high risk of debt distress or already in debt distress.
Countries at high or moderate risk of debt distress are disproportionately Fragile and Conflict-affected States, commodity-dependent countries, and Small States.
Which countries would the G-20 debt service suspension apply to?
Eligible countries would include all IDA countries and all least developed-countries (as defined by the United Nations) that are current on debt service to the IMF and the World Bank. This means 72 active IDA borrowing countries plus Angola. In principle, all of them would be free to ask for a suspension of debt payments—but each beneficiary country will be required to commit:
to use the created fiscal space to increase social, health or economic spending in response to the crisis. A monitoring system is expected to be put in place by international financial institutions (IFIs) for this purpose.
to disclose all public sector financial commitments (debt), respecting commercially sensitive information. Technical assistance is expected to be provided by the IFIs as appropriate to achieve this.
to contract no new non-concessional debt during the suspension period, other than agreements under this initiative or in compliance with limits agreed under the IMF Debt Limit Policy or WBG policy on non-concessional borrowing.
How much do highly-indebted countries owe in bilateral debt?
Our preliminary estimates suggest that official bilateral debt service payments alone in these countries total almost $14 billion in 2020, including interest and amortization payments. Less than $4 billion of this is owed to Paris Club members, so it will be critical to have broad and equitable participation of all official bilateral creditors to make a difference. The G-20 has also called on commercial creditors to participate on comparable terms.
High levels of debt were a problem before COVID-19. What will you do now to ensure that the problem doesn’t get worse?
For highly-indebted countries, it is critical that sources of finance are concessional, or in the form of grants. The fiscal space spent on debt service needs to be redirected to spending for the response to the pandemic, including the economic response. Otherwise a significant government spending response could mean big increases in already unsustainable government debt.
The World Bank will help countries devise customized fiscally sustainable policy responses that support weathering the crisis in the short term and economic recovery in the medium term.
How will the World Bank ensure that emergency funds are being spent on critical public services and not diverted to repay creditors?
Emergency financing provided by the World Bank is subject to the same high level of safeguards as regular financing. This includes adhering to existing policies, reporting requirements, and oversight, as well as the high transparency available in all World Bank financing.
What is the WBG’s reaction to the G20’s request that MDBs explore debt service suspension options?
Our shareholders through the G20 and Development Committee asked that the Bank further explore options for suspending debt service payments while maintaining IBRD’s and IDA’s financial capacity, ratings, and low cost of funding. We will review options quickly and report back to our Board. Over the next 15 months, the World Bank Group will be providing up to $160 billion of financing to developing countries to tackle the health, economic and social impacts of COVID-19, including $50 million of IDA resources on grant and highly concessional terms.
President Malpass and IMF Managing Director Kristalina Georgieva welcomed the G20 decision in a joint statement and President Malpass said in his remarks to the G20 that the World Bank and IMF will do everything possible to support the debt initiative.