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Measures Taken To Prevent Debt Crisis In Developing World Amidst COVID-19 Pandemic

The entire world has taken a serious hit by the COVID-19 pandemic. And it is not only the health of a country’s population that is in danger. Governments are forced to lock down entire cities and shut down all business for months on end. Due to this situation, there has been a rapid rise in borrowing costs. Hence, commodity exports are being affected. Rapid action is required to prevent a new debt crisis in the poorest and developing countries.

According to a recent report by the United Nations, the economic crisis caused by the pandemic is going to be much worse for developing countries. They appealed for a $2.5 trillion aid package to save the lives of around 6 billion people of these countries.

The United Nations trade and development body UNCTAD reported that in the upcoming 2 years, countries whose economies depend on commodity exports will go through a $2 trillion-$3 trillion falls in investment from overseas. 

The economic situation was already bad for these vulnerable countries. Even before the virus outbreak that started last December in central China. This was clear since the last quarter of 2019, said UNCTAD. 

The health crisis is still yet to reach the majority of developing countries. But, if the crisis reaches these countries when their economies are already in a precarious state, it can lead to a disastrous situation. 

Immediate actions need to be taken to strengthen the healthcare system and the service sector of these developing countries, said  Richard Kozul-Wright, the UNCTAD director of globalization and development strategies.

Upcoming Crisis

The world’s weakest nations are being severely affected. The double impact of increasing debt interest and the decreasing price of oil and other raw materials are the major source of worry. Although the central banks of the developing countries have been cutting down the interest rates. This is to deal with the current financial situation caused due to the coronavirus pandemic, the borrowing costs for the poor countries are rapidly rising. For low, to middle-income countries, the interest rate has risen on average by 3.5% points. This has been the case since mid-February. The new borrowing cost was 10%. Simultaneously the commodity prices have taken a plunge.

The Bloomberg commodity price index is at the lowest level since 1986. Since the beginning of 2020, it has dropped by 27%. The commodity index measures the prices of a box of metal, oil, and food. Since the starting months of 2020, the prices of raw material such as copper has gone down by 21%. 

This is also the case with oil. Prices of oil have gone down by 61%. Small countries, with economies depending on tourism, are also being greatly affected due to the lesser number of foreign visitors.

Poor and developing countries will need years before they can recover from this socioeconomic hit, said the UNDP (United Nations Development Programme). They also warned about the possibility of almost half of all the jobs in Africa being lost.

Recession on the Horizon

Mr Kozul-Wright also warned that the recession will hit the global economy this year. If this prediction comes true, it will mean serious trouble for all the developing countries. 

Part of the issue for developing countries is that the majority of their workforce is made up of informal workers. This increases the difficulties in crisis response, according to UNCTAD.

Help from the IMF and the World Bank

The two leading financial organizations have called on official bilateral creditors to provide immediate debt relief to the developing countries. They also gave instructions to activate emergency programmes offering grants and loans. 

The president of the world bank David Malpass said that the only way the more vulnerable countries can try to fight the consequences of the COVID-19 pandemic is by debt relief. He also stated that the bank has already started emergency operations in 60 countries. 

The board has agreed upon a 1$4 billion fast-track facility for immediate healthcare funding. They are in the process of considering the first 25 projects, valued at approximately $2 billion, under this facility.

Amidst all of this chaos, conservative party member and chancellor of the Exchequer, Rishi Sunak promised funding. He said the UK  will be giving out 150 million pounds to the IMF’s fund. This contribution is for cancelling the debt payments of the developing and poor countries.

The “Four-Pronged” Strategy by UNCTAD

UNCTAD has created a “four-pronged” strategy that needs a $1 trillion investment funding for fragile economies. This investment would come from the International Monetary Fund’s “special drawing rights”. 

The second step of the strategy is a debt freeze for the weaker economies. This also includes an immediate stop to the sovereign debt payments and will be followed by sufficient debt cancellation. It is being assumed that almost $1 trillion in debt is going to be cancelled this year.

The third phase aims at a $500 billion investment in health systems and related social relief programmes for the poor countries. Finally, the UNCTAD urges the governments to implement capital control to manage already rising capital outflows in these developing countries. This measure will help to reduce a cash shortage and stop currency and asset values from falling.

G20 economies have stated that they will do “whatever it takes” to keep their economy safe from heavy-loss of income. And, if they keep their promise of  “a global response in the spirit of solidarity”, then there must be equal measures taken for the people of the poor and developing countries.


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