SYDNEY and KUALA LUMPUR, Mar 30 2021 (IPS) – COVID-19 has set back the uneven progress of recent decades, directly causing more than two million deaths. The slowdown, due to the pandemic and policy responses, has pushed hundreds of millions more into poverty, hunger and worse, also deepening many inequalities.

Anis Chowdhury

Development setbacks
The outlook for developing countries is grim, with . Compared to pre-pandemic trends, the expected 8.1% loss by end-2021 will be much worse than advanced countries dropping 4.7%.

COVID-19 has further set back progress towards the Sustainable Development Goals (SDGs). As progress was largely ‘not on track’ even before the pandemic, developing countries will need much support to mitigate the new setbacks, let alone get back on track.

The extremely poor, defined by the World Bank as those with incomes under US$1.90/day, increased by in 2020, and are expected to rise by another 143-163 million in 2021.

Fiscal response constrained
, plus low interest rates, liquidity injections and asset purchases by central banks, have helped. Nonetheless, the world economy during 2020–2025 due to the pandemic.

Government responses have been much influenced by access to finance. Developed countries have accounted for of total pandemic fiscal responses costing US$14tn. Rich countries have deployed the equivalent of a fifth of national income for fiscal efforts.

Meanwhile, emerging market economies spent only 5%, and low-income countries (LICs) a paltry 1.3% by . In 2020, increased spending, despite reduced revenue, raised of emerging market and middle-income countries (MICs) to 10.3%, and of LICs to 5.7%.

Government revenue has fallen due to lower output, commodity prices and longstanding Bank advice to cut taxes. Worse, they already face heavy debt burdens and onerous borrowing costs. Meanwhile, private finance in 2020.

Jomo Kwame Sundaram

Developing countries lost in the first five months. Foreign direct investment (FDI) flows to emerging and developing countries also in 2020. Meanwhile, bilateral donors between 2019 and 2020.

Meanwhile, the liquidity support, debt relief and finance available are woefully inadequate. These constrain LICs’ fiscal efforts, with many even , worsening medium-term recovery prospects!

Debt burdens
In 2019, the International Monetary Fund (IMF) assessed as being at high risk of, or already in debt distress – more than double the 2013 share. Debt in LICs rose to from 47% in 2010.

Thus, LICs began the pandemic with more debt relative to government revenue, than high-income countries. And now, greater fiscal deficits of projected for 2021 imply more debt.

Debt composition has with more commercial borrowing, particularly with foreign currency bond issues far , especially official development assistance (ODA) and multilateral lending.

More than half of LIC government debt is non-concessional, worsening its implications. External debt maturity periods have also decreased. Also, interest payments cost in 2018, compared to under 7% in 2010.

Riskier financial flows
Developing economies have increasingly had to borrow on commercial terms in transnational financial markets as international public finance flows and access to concessional resources have declined.
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Low interest rates, due to unconventional monetary policies in developed countries, encouraged borrowing by developing countries, especially by upper MICs. But despite generally low interest rates internationally, LIC external debt rates have been rising.

– net of repayments of principal – from OECD countries fell in 2017 and 2018. Such flows have long fallen short of the financing needs of . Instead of giving 0.7% of their national income as ODA to developing countries, as long promised, actual ODA disbursed has .

Although total financial resource flows (ODA, FDI, remittances) to least developed countries (LDCs) increased slightly, ODA remained well short of their needs, from 9.4% of LDCs’ GNI in 2003 to 4.3% in 2018. Meanwhile, FDI to LDCs from 4.1% of their GNI in 2003 to 2.3% in 2018.

There has also been a , including multilateral financial institutions and rich country members. Some donor governments increasingly use aid to promote private business interests. ‘’ was to turn billions of aid dollars into trillions in development finance.

But the private finance actually mobilised has been modest, about – well below the urgent spending needs of LICs and MICs, and . Such changes have further reduced recipient government policy discretion.

Inadequate support
The 2020 IMF cancellation of in debt service payments due from 25 eligible LICs was welcome. But the G20 debt service suspension initiative (DSSI) was grossly inadequate, merely . It did not cancel any debt, with interest continuing to accrue during the all-too-brief suspension period.

The G20 initiative hardly addressed urgent needs, while private creditors refused to cooperate. Only meant for LICs, it did not address problems facing MICs. Many MICs also face huge , with upper MICs alone having US$2.0–2.3tn in 2020–2021.

World Bank President David that any change to normal debt servicing would negatively impact the Bank’s standing in financial markets, where it issues bonds to finance loans to MICs.

The Bank Group has made available for the period April 2020 to June 2021, but with its (PEF). By the time it paid out US$196m, the amount was deemed too small and contagion had spread.

Special Drawing Rights
Issuing US$650bn worth of new special drawing rights (SDRs) will augment the IMF’s US$1tn lending capacity, already inadequate before the pandemic. But US$650bn in SDRs is only half the new SDR1tn (US$1.37tn) considers necessary given the scale of the problem.

To help, rich countries could transfer unused SDRs to IMF special funds for LICs, such as the and the , or for development finance.

Similar arrangements can be made for the Bank. A World Bank version of the IMF’s CCRT could ensure uninterrupted debt servicing while providing relief to countries in need. Investors in Bank bonds would .

Hence, issuing SDRs and making other institutional reforms at the Spring meetings in April could enable much more Fund and Bank financial intermediation. These can greatly help finance urgently needed pandemic relief, recovery and reforms in developing countries.