Heaping debt upon disaster: how the pandemic affects what developing countries owe

22 Sep 20

Developing economies have some breathing space to deal with Covid-19 thanks to intervention by global financial institutions. But will piling up debt make recovery prospects even more precarious?


Governments are scrambling to pay for their response to the Covid-19 crisis. The pandemic has created an obvious need for higher healthcare spending, along with increased demand for social assistance programmes as unemployment rocketed. This rise in responsibility also came with drastically reduced tax revenues, as lockdown measures strangled economic activity. Sales of commodities, on which many developing countries rely, plummeted.

With less ability to raise revenues but more people and businesses needing support, governments have turned to debt to finance their response. For poor countries, a high proportion of the new loans are from multilateral institutions such as the World Bank and the International Monetary Fund. “We don’t have numbers yet, but most of the financial support to developing and middle income countries has been made up of loans,” says Iolanda Fresnillo, a policy and advocacy officer working on debt justice at Eurodad, the European Network on Debt and Development.

The IMF has loaned $87.35bn to 78 low- and middle-income countries in emergency financial assistance, and the World Bank has committed up to $74bn – some in the form of grants or concessional lending, some from redirecting previous commitments – in the few months since the pandemic began. In the whole of 2018-19, the IMF lent a total of just over $70bn, and the World Bank disbursed $62.3bn in loans, grants, guarantees and equity investments.

Even before the pandemic, developing world debt was causing concern. Research from the Jubilee Debt Campaign in April showed that, between 2010 and 2018, external debt payments as a percentage of government revenue grew by 85% in low- and middle-income countries, from an average of 6.6% to 12.2%.

The trend was particularly acute in sub-Saharan Africa, where the proportion more than doubled, from 4.56% to 10.8%. And in several countries, including Angola, Djibouti, Jamaica, Lebanon, Sri Lanka and Ukraine, at some point between 2014 and 2018 more than 40% of government revenue was being used to service external debts.

Eurodad found that, in most cases, this was the result of increased payments rather than decreased revenue. And in heavily indebted parts of the world, spending on public services dropped – by 15% in sub-Saharan Africa and by 18% in Latin America between 2014 and 2018. A World Bank report from December 2019 found debt in developing and emerging economies reached $55trn in 2018, marking an eight-year surge that was “the largest, fastest and most broad-based in nearly five decades”.

Poorer countries find it hard to cope with debt, explains Oxfam International’s debt policy lead Jaime Atienza, because their revenue is relatively unreliable. “Debt is effectively the commitment to pay the lender with future taxes a country raises,” he says. “Countries with large and reliable economies are less vulnerable than smaller economies, which have a low capacity for tax collection.”

This is why many people criticise the orthodox measure of debt – as a percentage of GDP. By this metric, Japan is the most indebted country in the world, with a national debt of about 240% of its GDP. But because it has a large, reliable economy, it can borrow cheaply, and because it raises more taxes than many developing countries, even relative to the size of their economies, its repayments are sustainable and take up a relatively small proportion of its budget.


By comparison, Ghana’s total government debt is 64% of GDP, but owing to its small government revenue as a percentage of GDP (16% to Japan’s 34%), more than one-third (36%) of its revenue is spent on interest payments, compared with just 4% of Japan’s. Atienza suggests that a more useful metric would be debt payments compared with revenue, and Tim Jones, head of policy at the Jubilee Debt Campaign, says it would “really show that there is far more debt in the global South”. The IMF found in January that half of all African countries were in a debt crisis or at risk of being so.

“For the past decade, African economies have relied on external debt instead of increasing taxation to raise money for spending,” says Atienza, blaming pressure from international development banks, private lenders and the Chinese government. “They spent a lot of this money on infrastructure projects, but a lack of good results meant debt repayments forced countries to cut spending on areas such as health and education.”

That problem has only been exacerbated by Covid-19, with the IMF predicting that African government revenues will fall between 20% and 30%. Many developing countries rely on income from areas that have been all but wiped out by the pandemic, such as remittances, tourism and exports of raw materials.

Jones warns that IMF loans might not even help countries deal with the crisis. “When that money doesn’t come with a restructuring programme, the burden of the crisis isn’t being shared with the lender, which effectively incentivises lenders to behave recklessly,” he says.

Research by Jubilee found that $11bn of IMF loans have gone to 28 highly indebted countries that are still paying back private loans. This, Jones says, effectively bails out lenders, swallowing up any new money to deal with the pandemic.

IMF chief spokesperson Gerry Rice defends the fund’s crisis loans for their “unprecedented speed”, adding that “without IMF support, countries would often have cut back on other spending in order to continue to meet their debt obligations”.

“Helping a country deal with severe external payment problems is complicated,” he says. “It [can] involve dealing with private sector obligations, without having the country fall into default, which would incur a host of other problems.”

“The debt service suspension initiative was fast and welcome, but it underestimated the impact of the crisis and the economic and social pain that was coming to developing countries” – Jaime Atienza, Oxfam International

In April, the IMF approved debt relief for 25 of the poorest countries – 19 in Africa – worth about $500m. Eurodad’s Fresnillo calls this a “symbolic gesture” to the G20 finance ministers, who met in the same month and endorsed the debt service suspension initiative – the largest coordinated effort to give indebted countries a lifeline as they deal with Covid-19. Through the initiative, 73 low- and middle-income countries are eligible to ask to have a total of about $12bn of their debt payments to other countries suspended until the end of 2020. So far, 42 have asked, saving about $9bn this year. But research from Oxfam, Christian Aid and Global Justice Now found these countries are still paying $2.8bn a month – $92m a day – including $11.6bn to private lenders and $13.8bn to multilateral institutions.

“The DSSI was fast and welcome, but it underestimated the impact of the crisis and the economic and social pain that was coming to developing countries,” Oxfam’s Atienza says. “This means they aren’t using that $92m each day for health or social protection investments and to boost their recovery. We need the initiative to become binding for both private lenders and multilateral creditors.” Cancelling the debt would be “the best thing to do” in many cases, he says. Fresnillo warns that the consequence of letting the debt crisis go unaddressed is “another lost decade in development, when we could be making progress on development goals and working on solving problems such as poverty and inequality”.

Alongside debt cancellations, she adds that the DSSI should be extended to struggling middle-income countries. Many such Caribbean countries are not eligible to have their payments suspended, but tourism has all but disappeared. “These countries are among the most at risk from climate change, and we are just heading into peak hurricane season,” she says, warning that they will need more than debt suspension to recover.

“There’s a narrative about ‘building back better’ after Covid-19, but, if there is nothing the international community can come up with that is more ambitious than debt suspension, building back better is impossible. Some countries are getting some breathing space, but it’s only pushing the crisis down the road. Not even taking new debt into account, the eligible countries will have to pay £195bn in 2023-24.”

The G20 finance ministers met again in July, but made no progress on extending the DSSI, either in scope or duration. Atienza deemed the lack of progress “as irresponsible as it was underwhelming”.

Even if, when they reconvene in October, the ministers extend the initiative into 2021, Fresnillo says such “temporary solutions are insufficient when we need systemic changes”. “We need to look seriously at debt cancellation, taking into account human rights, climate vulnerabilities and what countries need to fulfil the UN’s sustainable development goals by 2030 – not [just] what they need to be able to repay their debt,” she says.

Fresnillo believes an international mechanism offering countries with unsustainable debts a standard process to restructure commitments, taking into account development needs, is necessary to allow them to fully recover. “If we don’t advance that, we will be in the same situation in the near future – or even next year,” she says.

Jones agrees with the need for such a mechanism, although he acknowledges that it is “politically difficult to achieve”. Transparency will be key, he says. “It’s generally very hard for civil society to find information on loans to governments and government debt.” He recommends the creation of one place for all such information to be held and made public.

Whatever happens in the near future with Covid-19, the extraordinary hit to public finances came at a time when many poor countries were on a shaky footing. Already high debt burdens have now become higher, and not enough is being done to protect those countries in the medium term.

As usual, it is the developing world that hurts the most in a time of crisis, and, without bold action from those with the necessary power, it will continue to suffer for years to come. 

Image credit | Getty

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