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Factsheet July 28, 2021

Debt Service Suspension and COVID-19

Background

  • 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.
  • With the encouragement of the WBG, IMF and others, G20 economies are allowing the world’s poorest countries to suspend repayment of official bilateral credit on May 1. This initiative will do much to safeguard the lives and livelihoods of millions of the most vulnerable people.
  • The G7 has also indicated that it would suspend debt obligations of the poorest countries.

How the World Bank is Helping

  • Between April 2020 and June 2021, the World Bank Group deployed a record $157 billion to help developing countries fight the pandemic’s health, economic, and social impacts. As countries around the world work to contain the spread and impact of COVID-19, we are taking broad, fast action to help to help developing countries strengthen their pandemic response and health-care systems:
    • We 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.
    • From April 2020 through June 2021, the World Bank committed $36.3 billion in financing for countries participating in the G-20 Debt Service Suspension Initiative (DSSI)—of which $11.8 billion was in the form of grants. We have already disbursed $20.9 billion—including $5.6 billion in grants—to these countries. The total disbursement amount is roughly seven times the $3 billion in debt-service repayments received from DSSI 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.

Fast Facts:

  • Public debt in low- and middle-income countries totaled 51 percent of GDP in 2018—up 5 points since 2013.
  • In 2018, global debt reached a record high of about 230 percent of global GDP in 2018 and total Emerging Market Developing Economy debt reached an all-time high of almost 170 percent of GDP, an increase of 54 percentage points of GDP since 2010.
  • 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.

Q&A

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.

Why isn’t the World Bank suspending debt-service payments for IDA borrowers?   

  • COVID-19 has massively expanded the financing needs of IDA countries, which will need to receive rising financing flows not only through 2021 but also far beyond. In a time of global crisis, we and our shareholder countries believe it’s imperative that we maximize the potential benefits for IDA countries in every dollar we invest. This is crucial to add to countries’ fiscal space and boost their ability to respond to the crisis without adding to debt vulnerabilities. 
  • IDA offers one of the best available vehicles for maximizing benefits to the poorest countries. IDA is supporting countries with what they need in a crisis: access to “positive net flows” of robust and sustainable levels of financial support on highly concessional or grant terms.
  • That means providing more in financial support to these countries than they are spending on debt-service payments to the World Bank. IDA is accelerating its financing to help countries tackle the effects of the pandemic far beyond what these countries owe to IDA: every $1 in low-cost IDA loans that is repaid will on average be offset by $11 in new low-cost IDA financing flowing to the poorest countries.
  • This is possible given the generous support of IDA donors and, critically, our strong standing with financial markets. If the Bank were to simply provide a temporary suspension on IDA debt-service payments, the fresh financing we could provide would be significantly reduced. It could also hurt our ability to provide low-cost funding to IDA countries over the long term.
  • That potential harm is widely recognized. As the Center for Global Development has noted: “If IDA were to suspend debt payments, it could undermine its ability to mount and sustain a large COVID-19 financing. Calls for IDA payment relief also ignore the existing mechanism that IDA employs to ease debt burdens for high-risk countries. IDA’s objective should be to maximize net new financing.” Save the Children UK noted that “Failure to expand the flow of financial resources to IDA countries will leave governments and communities fighting the equivalent of a human development forest fire with small buckets of water.”
  • We and our shareholders have concluded that the best thing we can do for the poorest countries is to continue to provide “positive net flows” of low-cost financing along with strong technical assistance on debt management. As the G-20 cited in its new Common Framework for Debt Treatments, we and other multilateral development banks will continue to “develop options for how best to help meet the longer-term financing needs of developing countries…while protecting their current ratings and low cost of funding.”