As prepared for delivery
WASHINGTON, July 18, 2020 - World Bank Group President David Malpass released the following remarks for today’s virtual G20 Finance Ministers and Central Bank Governors Meeting:
The pandemic has triggered the deepest global recession in decades, and what may turn out to be one of the most unequal in terms of impact. People in developing countries are particularly hard hit by capital outflows, declines in remittances, the collapse of informal labor markets, and social safety nets that are much less robust than in the advanced economies. Adding to the inequality problem, growth and investment prospects are weak and the dominant stimulus in advanced economies is through massive central bank asset purchases, which provides selective support to higher rated bonds and bondholders in their own markets.
For the poorest countries, poverty is rising rapidly, median incomes are falling, and growth is deeply negative. Debt burdens – already unsustainable for many countries – are rising to crisis levels.
Meanwhile, investors are reaching for yield, as interest rates look set to be low-for-long. This provides short-term support for some governments, but with economic fundamentals deteriorating, it risks complacency and a downward spiral into a new debt crisis that is likely to go beyond the poorest countries. If this proceeds, it will weigh for decades on people in developing countries.
The World Bank is substantially increasing the pace of our grants and loans for developing countries as they respond to the crisis, but it won’t be enough. We expect the development challenges to deepen and become even more severe over the next year.
Today, I’m going to focus on debt suspension, debt reduction, debt resolution, and debt transparency. We’re recommending several actions that will be key factors in responding to the crisis and strengthening the recovery.
I urge you to extend the time frame of the Debt Service Suspension Initiative (DSSI) through end 2021 and commit to give the initiative as broad a scope as possible. We’ve made a great deal of progress with DSSI in a short period of time, but more needs to be done.
Eligibility of official bilateral claims should extend to all external long-term public and publicly guaranteed debt, including the external debts of SOEs with either explicit or implicit government guarantees.
To maximize much needed support to eligible countries, all official bilateral creditors, including national policy banks, should implement the DSSI in a transparent manner.
For example, full participation of the China Development Bank as an official bilateral creditor is important to make the initiative work.
This type of broad scope for DSSI can help achieve large benefits for the poorest countries. To give you a rough quantification, borrowing countries participating in DSSI have identified $8.4 billion in eligible savings in their 2020 debt service payments, but data provided to the G20 by creditors have identified only $5 billion in debt service deferrals, a $3.4 billion gap or shortfall in debt relief.
We urge the G20 to request the disclosure of the terms of the rescheduling of any DSSI eligible debt. Creditors need comparability of treatment. Paris Club creditors see the benefit of this, but some major creditors are not participating fully. For DSSI to be fully effective, there should be a standard minimum set of debt-restructuring information. This will avoid the secretive reschedulings that are underway in some countries, such as Angola and Laos, often with undisclosed grace periods and terms. This fragmentation disfavors other creditors and the people in the debtor country.
Comparable treatment needs to extend to commercial creditors of DSSI-participating governments. They should discontinue their collection of payments from the poorest countries, particularly from those IDA countries at elevated risk of debt distress that receive IDA grant resources. I’ve been disappointed by the lack of progress so far in the midst of a global emergency, and urge the commercial creditors to form an effective group to help discontinue their collections from the poorest countries.
Even with these immediate steps – a longer suspension of debt payments; a DSSI scope that includes more debt and more official bilateral creditors; participation by commercial creditors; and the World Bank’s large positive net flows – many of the poorest countries won’t be able to make the resulting debt burdens sustainable in the medium term. The economic repercussions from the pandemic are expected to inflict lasting scars on growth through lower investment, erosion of human capital, and the retreat from global trade and supply linkages.
I urge the G20 to open the door to consultations about the debt overhang itself and effective ways to reduce the net present value of both official bilateral and commercial debt for the poorest countries.
We also need to improve the debt resolution process. The sovereign debt environment has expanded in size – the debt overhang – and also in fundamental ways that create great challenges for debt resolution. For example, private creditors to sovereigns are playing a growing role; and much of the official bilateral credit comes from outside the Paris Club.
Looking longer term, creditors’ rights frequently take precedence over the people in the debtor countries, adding to the difficulty of debt resolutions. The international community needs to recognize this imbalance if we are going to achieve effective debt resolutions or adjust the process in a way that encourages good outcomes.
Debt transparency, including the transparency of debt restructurings discussed earlier, is of course the starting point for more balanced debt resolutions.
In addition, strengthening debt resolution practices and putting a framework in place to support countries with weak capacity would help. Key jurisdictions in which debt disputes are frequently resolved need to consider the significant shifts in the way poor countries have contracted debt in recent years. Legal measures could be put in place to prevent application of inflated penalty rates of interest; and to inhibit, under certain clearly defined terms, the excessive attachment of assets of poor countries in debt distress.
And while a lot of attention has been focused on external financial liabilities of government, we also need to make progress in helping countries with long-term contractual commitments related to restrictive purchase agreements that result in long-term financial burdens. These long-term commitments can pose a crushing burden on the poor and become a permanent obstacle to our goal of broad-based growth and shared prosperity.
The final area I wanted to discuss is debt transparency. Debt transparency is critical for several reasons: creditors need to fully assess the debt sustainability of their potential borrowers, citizens need to be able to evaluate their leaders for the debt they take on, and borrowers need to design strategies based on a clear understanding of their debt.
In June 2020, the World Bank further strengthened our initiative to enhance debt transparency by announcing five key transparency principles and by publishing additional public debt data from the Debtor Reporting System (DRS).
Transparency needs to extend to the terms, conditions and nature of public debt and to the legal aspects such as confidentiality clauses and collateral. The lack of transparency in all these areas impedes investment and often leaves the people in the borrowing country with poor outcomes.
Transparency should extend to debt like instruments, including long-term bilateral deposits and central bank “swap lines.” These are sometimes used as multi-year funding sources. Such long-term commitments can obscure the true level of indebtedness and should be fully disclosed and, as appropriate, included in the analysis of debt sustainability.
We’re working well with debtor countries on transparency and want to go further in the G20 to allow reconciliation of the debt data and provide transparency when there are gaps. By October 2020, we will publish our new DRS dataset that includes 2019 data, and we are working hard toward clarifying some of the data gap.
We encourage borrowing countries to publicly report more debt data and creditors to disclose details on their official loans. The World Bank fully discloses the objectives, conditions, and terms of every loan when it is made, and think this is important in getting good development outcomes. When countries enter into debt-creating contracts, they should make them public. Transparency in this area would help both debtors and creditors protect their rights, which in the end is critical to increasing both the quantity and quality of investment.
There is substantial resistance to this degree of transparency because many parts of the current system rely on asymmetric information, where one party or another takes advantage as the contract is written. That cycle is hard to break, and there is noticeable reluctance of creditors, and even debtors, to go in the direction of balanced debt resolutions and transparency of debt and investment contracts. Balancing the built-in protection of vested interests will be hard, but it is critical for better development outcomes.
In conclusion, the situation in developing countries is increasingly desperate. Time is short. We need to take action quickly on debt suspension, debt reduction, debt resolution mechanisms and debt transparency.