Finding inclusive green solutions to manage post-pandemic debt
Economic crisis has shadowed the COVID-19 pandemic. As revenues declined and governments responded with programs to support households and businesses, the world’s public debt rose to historically high levels.
The International Monetary Fund (IMF) reported in April 2021 that public debt in emerging-market economies had climbed from 54.7% of gross domestic product (GDP) in 2019 to 64.4% of GDP in 2020, and that levels in low-income countries had jumped from 44.3% to 49.5% of GDP in the same period.
While advanced economies carry debt averaging close to 100% of GDP, they can finance it through historically low interest rates. Developing nations, however, risk credit downgrades and defaults and face urgent funding trade-offs between their health systems and economies, as highlighted in IDRC-supported research in Africa led by the South African Institute of International Affairs. In November 2020, Zambia became the first African country to default on its loans during the pandemic period.
The cascading impacts of climate change, biodiversity loss, and growing inequalities resulting from COVID-19 are further compounding economic stress in developing countries. In looking towards recovery, international lenders and debtor nations are exploring ways to relieve debt burdens while meeting global climate-change commitments and sustainable development goals — including for gender equality.
In 2020, IDRC partnered with the International Institute of Environment and Development (IIED) and the Partnership for Economic Policy to explore the overlapping crises of debt, climate, and inequalities and identify ways to address them. A series of online events and recently published studies sheds light on the changing nature of debt, lessons from past debt-relief efforts, and the gender-differentiated impacts of the pandemic. They also explore how debt could be restructured to encourage investment in more resilient and inclusive economic development pathways.
The new debt reality
The premise behind the IIED paper, “Whose debt is it anyway? A sustainable route out of the crisis for low-income countries”, is that any solution to the intersecting crises must reflect how debt has evolved and is currently structured. Only then is it possible to ensure that debt-relief measures are targeted, at the right scale, and involve all relevant parties.
The pandemic-related spike in public debt follows a decade of rising debt levels in developing countries. The paper’s authors explained that most of this credit has come from multilateral finance institutions, such as the World Bank and the African Development Bank, but that there have been important shifts in the sources of credit. For example, a growing portion of lending comes from China. Also, private debt is gaining in importance for lower-middle-income countries, although it is less common in low-income countries. In Africa, the share of loans from countries of the Organisation for Economic Co-operation and Development that make up the “Paris Club” has shrunk by nearly half since 2000, to just over one-quarter of external debt in 2019.
The changing nature of debt means that any solution must involve this diverse and growing set of creditors. According to co-author Stephanie Griffith-Jones, emeritus fellow at the Institute of Development Studies and director of the financial markets program at the Initiative for Policy Dialogue, bringing these various partners to the table will not be easy. “Securing relief from private creditors,” she said, “will take both carrots and sticks.” Equal treatment will be needed “to avoid part of debt relief coming from public creditors being used to service private creditors.”
These new players also bring different terms and conditions to the table. Much of Africa’s debt to China, for example, is in the form of resource-financed infrastructure, whereby new construction is paid for with future revenues from resource projects. This form of repayment can make restructuring debt very difficult.
Swapping debt for climate action and conservation
Debt swaps are gaining attention as a way to address debt in lower-income economies while also advancing goals for sustainable development. In a debt-for-climate-and-nature swap, a creditor agrees to reduce or write off a portion of debt in exchange for investments in poverty-reducing measures that curb climate change, increase climate resilience, or protect biodiversity. The Seychelles, for example, concluded a debt swap focused on marine protection — preserving its coral reefs, lagoons, and coastal mangroves, which are vital to tourism and fisheries.
Research by IIED shows that low- and lower-middle-income countries are the least able to manage climate stresses and their economic growth depends heavily on climate-sensitive sectors such as agriculture, forestry, and fishing. At greatest risk are the small island states of Antigua and Barbuda, Tonga, and Solomon Islands, as well as Guyana, while several others rank high in terms of their potential loss of biodiversity.
The issue of climate change “is arguably putting a bigger burden on African countries even than COVID-19,” said Jean-Paul Adam, director for technology, climate change and natural resources management at the United Nations Economic Commission for Africa. “On average, we expect 2 to 5% of GDP to be lost in African countries by 2030 and that’s based on conservative warming estimates,” Adam stated at the IDRC and IIED webinar on managing debt, climate, and nature in the pandemic recovery.
IIED researcher Sejal Patel underscored that it is vital that debt solutions address climate vulnerability in low-income countries: “If you focus just on the debt burdens, the nature and climate crises could undermine the recovery and the resilience of economies.”
A second IDRC-supported IIED paper offers lessons for debt-relief measures from the Heavily Indebted Poor Countries (HIPC) Initiative, established 25 years ago by the World Bank and the IMF.
Debt-management efforts that support gender equality
COVID-19 has hit women particularly hard and they will be doubly burdened if debt is financed through social spending cuts. Jayati Ghosh, professor of economics at the University of Massachusetts at Amherst, contends that any effort to manage post-pandemic debt must take gender differences into account or risk deepening existing inequalities and derailing recovery.
In an April 2021 webinar on making gender equality central to COVID-19 recovery, Ghosh outlined the effects of the pandemic on women. For example, women have been much more likely to lose their jobs or face lower wages during the pandemic, while unpaid domestic care work has greatly increased with the closure of schools and daycares.
Despite their essential role in caring for families and communities during the pandemic, women are bearing the brunt of cuts to social spending, as countries look to reduce debt. Between March and September 2020, Ghosh found, IMF loans to 81 countries involved cutting public expenditures. These cuts directly threaten public health-care systems and pensions, imposing wage freezes and cuts on doctors, nurses, teachers, and other public-sector workers, while reducing unemployment benefits and sick pay. Women are often the ones who are directly affected by these cuts and they are left to fill the gap when public services are lost.
“Debt relief packages of the past have been effectively anti-women,” Ghosh explained, because they rely on a gendered division of labour, and due to the fact that women’s unpaid and underpaid work will cushion fiscal austerity.
“Obviously this is bad from an equity, welfare, and justice point of view, but I would argue that […] it results in worsening material conditions, and it lowers the chances of stable and sustainable recovery from the debt crisis," he said.
Informing international collaboration on debt solutions
The idea of linking climate action, inclusive development, and debt relief is gaining momentum, with the IMF, the World Bank, and other major lenders actively exploring options. While IDRC-supported research highlights the value of linking these issues, it also underscores what should be learned from past efforts at debt relief. Lessons include the need to tackle debt systemically, bringing all creditors to the table and avoiding a gender blindness that would cause additional harm to women.
Relief that is tied to development objectives, and that enables debtor countries to decide how best to build their economic recovery and climate resilience, will have the greatest chances of success.
Developing-country debt is soaring to new heights, fueled in part by COVID-19.
Solutions must reflect the complex reality of external debt today, with private lenders and China playing a larger role.
Debt-relief efforts should link to investments in climate-change resilience, preserving biodiversity, and reducing inequalities.
Debt should not be financed by austerity measures that increase the burden on women.