The coronavirus pandemic is putting tremendous strain on countries around the world – not least those who already have relatively limited resources. In April, the World Bank Group and International Monetary Fund called on bilateral creditors to allow developing countries to suspend their bilateral debt service payments and focus resources on responding to the pandemic. The plan was called the Debt Service Suspension Initiative (DSSI), and G20 Finance Ministers quickly agreed to support it. In the latest episode of Expert Answers, the World Bank Group’s Global Director for Macroeconomics, Trade and Investment, Marcello Estevão, answers our questions on how the program works and just how effective it has been.
00:00 Introducing Marcello Estevão, Macroeconomics, Trade and Investment Global Director, WBG
00:43 The impact of the pandemic in terms of debt distress
02:59 The Debt Service Suspension Initiative (DSSI)
04:08 Why are some countries not participating in DSSI
05:41 How are countries using the funds that they're saving by participating in DSSI
08:04 Thanks Marcello for sharing your expertise!
00:00 [Host] Today on Expert Answers, we're talking debt. Specifically, the Debt Service Suspension Initiative or DSSI. It's a bit of a mouthful but in short, it's about helping poor countries suspend their debt repayments. so that they can refocus their resources on fighting COVID-19. It's an effort that's been championed by the World Bank Group and the International Monetary Fund. And to learn more I recently had the chance to talk to the World Bank Group's Global Director for Macroeconomics, Trade & Investment Marcello Estevão.
00:43 [Host] - Well, let's get started here. I have a ton of questions and I know your time is limited this morning. Can you explain the impact that this pandemic is having in terms of debt distress for the poorest countries? You know, take us back to some kind of basic fundamentals here. You know, my, my understanding is, is that even before any of us had heard of COVID-19, a lot of developing countries were already struggling with, with debt as a big issue for them.
[Expert] - No, indeed, Paul you're, right. Many developing countries had already been on a worrisome debt path, even before COVID hit. If you look at their average ratio of debt to GDP, for all the countries that borrowed from IDA the World Bank grant and concessional lending arm, we saw reductions till 2013 in that ratio, including because of past debt forgiveness, and high economic growth in the, in the first decade of the 2000s. But since then, as a group, that ratio has been increasing and the crisis exacerbated this trend because of the impact of the health crisis on the economy and thus the ability of countries to repay their financial commitments and the need that they have to deal with the crisis. The crisis affects country's ability to produce goods and services and export them, which had reduced fiscal revenues drastically. So there is also great pressure to spend more, to protect the most vulnerable parts of society. Fiscal spending has been rising, which increased financing needs for all countries. So there is a combination here of a past trend started say, depending on the account, but on average to 2013 of going up, that ratio that we follow to see, to track the ability of countries to pay their debt, with the crisis that hit fiscal revenues and then in growth. So that ratio, is going to continue to go up probably at a higher rate than you seen before COVID.
02:59 [Host] - It sounded like debt was already a pretty tough issue. If I'm understanding correctly, even before the crisis, crisis comes along, it's this sort of multidimensional problem that has all of these issues that sort of require investment in the response, the immediate response, making that original debt problem, even tougher. So that sort of brings me to the idea of DSSI, the Debt Service Suspension Initiative. It was endorsed by the G20 finance ministers back in April, that was three months ago. Is it working? Is it, is it effective?
[Expert] - It is helping, like I said, countries need to find a way to finance greater fiscal spending, especially in light of reduced tax revenues and exports. The declining exports also reduce the availability of foreign currency to finance purchase of like fundamental things like medicines, for instance, to deal with the, with the health crisis. So the Debt Suspension Initiative is a way to give developing countries more resources in that time they need it the most.
04:08 [Host] - You can, yeah. Folks at home can, they can search Google or their, their favorite search engine for that Debt Service Suspension Initiative. There's a table there kind of a dashboard, this data dashboard there. I was looking at it the other day and it allows anyone to see, you know, how many countries are participating, how much they could save if they did participate and suspend their repayments. It also, like I said, shows whether those countries are participating in the program. One of the things that struck me was there's a, you know, non-zero amount of countries that aren't participating. Why is that? Why are some countries not participating in DSSI?
[Expert] - Yeah, it's true. I mean, there are several reasons. First many of the countries that would really benefit from this initiative have already signed up. So that's, that's important to remark. This group of 39 countries accounts for about three fourth of the total official bilateral debt service due between May 1st and December 31st of this year, the period covered by the initiative. Among the countries that have not joined the initiative so far are countries that do not have much, if at all official bilateral debt due during this period. Some of the countries feel they have enough access to capital markets and the benefits of joining the initiative are not high enough to disrupt their well established financing plans. And there is a group of countries that they are simply working the mechanics of joining the initiative and may do so soon. So I would say it's quite successful so far. We are covering a large part of the official bilateral debt that is due during the period of the initiative, there's still more to go. Some may not join because, it's just they look at the benefits, you know, it's not so great. They already all planned for the year and they can fund their, their activities.
05:41 [Host] - The Bank and the IMF have been clear that the savings from participating in the DSSI in the Debt Service Suspension Initiative, those savings they must be used to respond to and recover from the pandemic. How, you know, in your research, in your analysis of, of what's happening over the past few months, how are countries using the funds that they're saving by participating in DSSI?
[Expert] - Yeah, no, as I said before, fiscal revenues are going down, but the needs are going up. The funds that countries who have paid in that service, can be used to plug some of these holes and fund transfer programs targeted to the most needy among the population. And that's what most are doing. And our economists can help authorities increase their capacity to target these funds. For instance, we have been working with tax administrations on ways to increase administrative efficiency and getting to know the tax payer universe better. That helps curb tax evasion, which is one program that you have here, but also could allow tax authorities to better target transfers, tax breaks to the needy. So the key here is to be able to target those to the people that are really suffering because of the crisis. Resources can also be directed to support viable firms that no for no fault of their own are facing hard times. And there is some of that happening as well. We have a large group here at the World Bank, that helps authorities think about how to do so. The name of the game is really to help people in firms to survive the spirit of weak economic activity, which is driven by the health crisis. So it's, it's, we are working to protect the productive capital and processes, so that firms and workers are ready to produce again when the health crisis dissipates and demand for projects and services return. What we don't want to happen is that the crisis dissipates there's an increased demand and people feel secure coming back to work and all that. But that process takes time because economic relationships that were established before got hurt by the crisis. And that will be a pity because the crisis is temporary. We are going to get out of this hole.
08:04 [Host] - Marcello, thank you so much for taking the time and I really appreciate the chance to sort of pick your brain about all the different stuff that, that is sort of happening on the ground as it relates to COVID-19 and as it relates to the DSSI initiative.
[Expert] - Great, thanks so much, Paul. And to all of you stay safe, stay healthy. Bye.
[Host] - I have to say, I always get super excited by the chance to get to talk to Marcello Estevão. He was the very first expert featured on this show back in November. If you didn't catch that episode, you can on the World Bank's Youtube channel. You can also learn more about what the World Bank Group is doing to respond to the coronavirus pandemic worldbank.org/coronavirus And you can send me and the team an email. Send us your feedback, your comments, your thoughts. firstname.lastname@example.org In the meantime, stay healthy, stay safe We'll see you back here again soon.
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