Scott Morris, Center for Global Development

PRO

World Bank debt service suspension? No. World Bank debt relief? Yes. But donor governments will have to step up.

Scott Morris, Center for Global Development (CGD)

Multilateral institutions like the World Bank, IMF, and African Development Bank are among the largest lenders to poor countries globally. Yet, they are not participating in the G20’s Debt Service Suspension Initiative (DSSI), an effort to provide short term debt relief through the suspension of 2020 debt payments to external lenders. As a result, when a highly distressed poor country like Sierra Leone applied for DSSI relief, it found that 85 percent of its repayments due in 2020 would not be eligible for the suspension. In fact, most of Sierra Leone’s international loans come from just two lenders: the IMF and World Bank.

How is it possible that the very institutions charged with promoting economic growth and development would refuse to join other lenders in suspending debt service payments from the world’s poorest countries as they grapple with the devastating health and economic effects of the pandemic?

A closer look reveals a more nuanced picture. When it comes to the World Bank and other multilateral development banks (MDBs), it is important to recognize two features of their financing model. First, their lending to poor countries generates interest and principle payments that support future lending to the same countries. The World Bank is not a commercial lender. It is not generating profits to distribute to its shareholdings in the form of dividends. As a result, suspending the flow of repayments has a direct impact on the ability of the bank to pursue new financing.

The second important feature of MDB financing is that terms adjust according to the debt risks of the borrowing countries. Countries at high risk of debt distress receive grant financing from the World Bank on a dollar for dollar basis equivalent to a loan a low debt risk country would receive. Consider Sierra Leone again, which became a high-risk country well before the current crisis hit. In 2020 Sierra Leone has so far received $312 million in new commitments from the World Bank, all of it in the form of grants.

And as more countries move into the high-risk category due to the current crisis, most of the bank’s support for poor countries could take the form of grants. Even with no change to the World Bank’s stance on debt service suspensions, it will strain the institution’s capacity to fully honor its commitment to provide grants where and when they are most needed.

That said, it is equally clear that payments Sierra Leone is required to make to the World Bank on earlier loans detract from the country’s ability to mount a fiscal response to the pandemic. In 2020, Sierra Leone will pay the World Bank $25 million in principle and interest on past loans, money that could be usefully spent on protective equipment, educational support, or cash transfers to households suffering in this crisis.

So what solution is there that would allow the country to redirect these payments to address the current crisis without jeopardizing the World Bank’s ability to offer new financing for Sierra Leone and other poor countries?

Here, the IMF’s approach may point to a path forward for the MDBs. While it is technically true the IMF is not participating in the G20 debt suspension initiative, it is actually going one step further by canceling (rather than suspending) debt payments owed by many of its low income borrowers. Of the $29 million that Sierra Leone was due to pay the IMF this year $18 million were cancelled through a donor-financed trust fund. Critically, the IMF did not simply cancel these payments and take the hit on its own balance sheet. The institution relied on country donors to make the debt service payments on behalf of the distressed IMF borrowers.

As the scale of the debt problem becomes clearer in low income countries, coordinated solutions that go beyond short term debt service suspensions will be needed. For countries most in need of debt forgiveness, all lenders will need to come forward, including the World Bank and other MDBs. But their ability to cancel debt in a way that does not jeopardize their on-going support for all low-income countries will depend critically on country donors. Otherwise, the ultimate cost of debt relief for a debt distressed poor country will be borne by other poor countries.

Donors, and particularly G20 country donors, hold the key to the next steps on this debt crisis. It would be a misguided effort to focus on MDB participation in short term debt service suspensions. The focus now needs to be on identifying countries most in need of deeper debt relief and figuring out how best donors can pay for it.

Iolanda Fresnillo, Eurodad

CONTRA

The World Bank is failing in its duty by denying debt relief

Iolanda Fresnillo, European Network on Debt and Development (Eurodad)

The Covid-19 pandemic and the need to tackle the debt crisis pose a clear challenge to the World Bank. The Bank has been very supportive of the G20 Debt Service Suspension Initiative (DSSI), however, it is not participating, arguing that providing debt relief would damage its credit rating. As a consequence, developing countries are diverting vital resources away from the fight against the pandemic and the resulting economic downturn, in order to continue paying the Bank.

Do as I say, but not as I do

“Debt service suspension is a powerful, fast-acting measure that can bring real benefits to people in poor countries”. This quote is not from a civil society statement, but an extract from the World Bank factsheet on debt service suspension and Covid-19. Yet the institutional support that the World Bank has given to the DSSI and to the need for further debt cancellation contrasts with the reluctance of the Bank to itself participate in a debt standstill. The argument is that this would jeopardise the credit-worthiness of the institution.

From May to December 2020 – the period in which, for now, the DSSI is applicable for bilateral creditors - the cancellation of payments from the World Bank would free up US$2.46 billion. This would grow to more than 4 billion of additional resources if the cancellation was extended in 2021 (as it is being discussed at present at the G20). These resources could be made available immediately, however, the Bank continues to prioritise good terms with the financial markets.

Alliance with financial markets at the top of the Bank’s priorities

For president David Malpass, delivering a debt standstill to developing countries would harm the Bank’s rating, and as a consequence reduce its ability to front-load assistance. The International Bank for Reconstruction and Development (IBRD) - the arm of the Bank that lends to low- and middle-income countries - has had a triple-A credit rating since 1959, which allows it to borrow capital at low rates. This history indicates that previous participation of the Bank in debt relief efforts, such as the Multilateral Debt Relief Initiative (MDRI) in 2005, didn’t change its credit rating.

The Bank could explore, together with the International Monetary Fund (IMF), possibilities to protect their concessional lending capacity, such as creating a trust fund similar to the IMF Catastrophe Containment and Relief Trust (CCRT) or to the Debt Relief Trust Fund set up for the MDRI. This could be paid for by a combination of funds from a Special Drawing Rights issuance and reallocation, IMF gold reserve sales, use of the Bank reserves, and donor grants additional to existing ODA commitments.

But the World Bank seems more comfortable reinforcing the excessive power of credit rating agencies than challenging it. Instead it could argue that a fair and efficient debt relief today, taking debt levels down to a more sustainable level, would improve countries’ capacity to deal with their overall debt payments. Moreover, the key issue is whether the obsession with retaining the World Bank AAA rating is compatible with its development mandate.

Market focused lending vs. non-conditional debt relief 

The Bank also argues that, by not participating in the initiative, it could provide ‘net positive financial flows’ to countries in need. However, in many cases, the non-conditional resources liberated by debt relief could have a much more positive impact on development than the market-focused World Bank lending policy. Given the track of the Bank on promoting austerity policies and privatisation strategies, which have undermined public health and education systems and held back progress on universal social protection, it might be wiser to free up the resources today, making sure there is no conditionality attached.

The World Bank assertion that both they and the IMF will “do everything possible to support the debt initiative” loses all credibility when they keep on denying the possibility of a multilateral participation in debt standstill and cancellation initiatives. Many civil society organisations, governments like Pakistan and China, and institutions, including the UN, as well as the G20 back in April, have been calling on the World Bank to provide debt payments’ suspension on similar terms to that provided by bilateral lenders. By not doing so, the World Bank is depriving those most impacted by the economic and social consequences of the pandemic, of vital resources.

About the authors

Scott Morris is a senior fellow at the Center for Global Development, director of the center’s US Development Policy program and co-director of the Sustainable Development Finance program. His research addresses development finance issues, debt policy, governance issues at international financial institutions like the World Bank and IMF, and Chinese development finance. Morris previously served as deputy assistant secretary for development finance and debt at the US Treasury Department during the Obama Administration.

Iolanda Fresnillo has been working as a senior policy and advocacy officer on debt justice for Eurodad for over a year. Over the last two decades, she has been closely involved in local, national and international social movements and she has campaigned on development finance, debt, human rights, feminism and environment. She has worked for more than 10 years as a researcher, campaigns and communications manager at Observatori del Deute en la Globalització, as a research consultant at Eurodad, Medicos Sin Fronteras-MSF and Transnational Institute, and as a public policy consultant for several local institutions in Spain. She holds a MA in Development and Cooperation and a BA in Sociology, both from the University of Barcelona.

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