October 11, (THEWILL) – The massive response by governments around the world to mitigate the impact of the COVID-19 pandemic on their citizens has increased the debt burden of the world’s low-income countries which rose to a record high of $860 billion in 2020, the World Bank has said.
In a release at the start of the World Bank/IMF annual meeting in Washington on Monday, the Bank stated that the massive fiscal, monetary and financial stimulus packages to cushion the impact of the pandemic on the poor has brought severe debt burden on the low- and medium-income countries, adding that urgent actions is needed to address the situation.
“Governments around the world responded to the COVID-19 pandemic with massive fiscal, monetary, and financial stimulus packages.
“While these measures were aimed at addressing the health emergency, cushioning the impact of the pandemic on the poor and vulnerable and putting countries on a path to recovery, the resulting debt burden of the world’s low-income countries rose 12% to a record $860 billion in 2020”, the World Bank said.
The Bretton Wood institution explained that many low- and middle-income countries were in a vulnerable position, with slowing economic growth and public and external debt that were considered to be at elevated levels before the COVID-19 pandemic.
Specifically, the Bank said that external debt stocks of low- and middle-income countries combined rose 5.3 percent in 2020 to $8.7 trillion, urging a comprehensive approach towards addressing the debt problem.
“We need a comprehensive approach to the debt problem, including debt reduction, swifter restructuring and improved transparency,” the World Bank Group President , David Malpass, was quoted as saying, adding, “Sustainable debt levels are vital for economic recovery and poverty reduction.”
The Bank revealed that deterioration in debt indicators was widespread and that it impacted countries in all regions leading to external indebtedness outpacing Gross National Income (GNI).
“Across all low- and middle-income countries, the rise in external indebtedness outpaced Gross National Income (GNI) and export growth.
“Low- and middle-income countries’ external debt-to-GNI ratio (excluding China) rose to 42% in 2020 from 37% in 2019 while their debt-to-export ratio increased to 154% in 2020 from 126% in 2019,” the World Bank stated.
The Bank recalled that the G20 launched the Debt Service Suspension Initiative (DSSI) to provide temporary liquidity support for low-income countries, in response to the unprecedented challenge posed by the pandemic at the urging of the World Bank Group in April 2020.
It said the G-20 countries agreed to extend the deferral period through the end of 2021.
“In November 2020, the G20 agreed on a Common Framework for Debt Treatments beyond the DSSI, an initiative to restructure unsustainable debt situations and protracted financing gaps in DSSI-eligible countries,” the Bank said.
Arising from this, the Bank noted that net inflows from multilateral creditors to low- and middle-income countries rose to $117 billion in 2020, the highest level in a decade.
According to the Bank, net debt inflows of external public debt to low-income countries rose 25 per cent to $71 billion being the highest level in a decade.
It disclosed that multilateral creditors, including the IMF, provided $42 billion in net inflows while bilateral creditors accounted for an additional $10 billion.
Hinting on the imminent debt distress, the Bank warned policymakers to prepare for a turn in fortune when market conditions turn less benign.
“Economies across the globe face a daunting challenge posed by high and rapidly rising debt levels,” Senior Vice President and Chief Economist of the World Bank Group, Carmen Reinhart, was quoted as saying.
“Policymakers need to prepare for the possibility of debt distress when financial market conditions turn less benign, particularly in emerging markets and developing economies,” he added.
The Bank identified greater debt transparency among other measures as critical in addressing the risks posed by rising debt in many developing countries.
“Debt reduction, restructuring, and transparency needed to help low- income countries overcome debt challenges,” the Bank said.