Debt Service Suspension saved poorest countries against coronavirus - 1st Deputy Governor

Dr. Maxwell Opoku-Afari, First Deputy Governor of the Bank of Ghana, has noted that the Debt Service Suspension Initiative (DSSI), launched by the G20, to assist countries deal with the ravages of the coronavirus pandemic, provides scope for additional resources for the world’s poorest countries to mitigate the impact of pandemic.

He said by freezing external debt service payments until the end of 2020 from all official bilateral creditors, it is estimated that a debt ‘standstill’ of roughly $11.5 billion in emergency liquidity support could be available to eligible countries in 2020, equivalent to about 40 per cent of total projected public external debt service.

Dr Opoku-Afari was speaking during as Debt Sustainability Panel, CGD Conference on Financing Low-Income Countries on the theme “Towards Realistic Aspirations and Concrete Actions in a Post-Covid 19 World” on Monday October 5.

He explained that the COVID pandemic is still evolving with considerable uncertainty. The magnitude of the shock has prompted extraordinary responses — first to secure lives, and, second, to reduce the social and economic burden from the pandemic on the vulnerable segments of the population.

Massive fiscal response packages and supportive monetary policy measures have been implemented in many countries to deal with the fallouts from the crisis. However, in most low-income countries (LICs), the situation has been complicated as most LICs are confronting the crisis under conditions of elevated debt profiles and high debt service payments.

Initial International Monetary Fund (IMF) and World Bank Debt Sustainability Analyses (DSA) from the onset of the crisis show that external government debt service payments in LICs will be much higher in 2020 and remain elevated in the medium term.

“This has constrained policy responses to the crisis and amplified vulnerabilities across most LICs. The Fund and other multilateral institutions as well as some bilateral partners have responded with some financial support.

“Although the scale of the crisis requires massive additional financial support to safeguard progress towards the SDGs, elevated debt levels and the accompanying high debt service payments means that much of the support will rather fund debt obligations and limit the ability of LICs to respond to the crisis. This has necessitated calls for suspension of debt obligations and debt forgiveness in some instances and there are major risks inherent in this approach.

“The Debt Service Suspension Initiative (DSSI), launched by the G20, for instance provides scope for additional resources for the world’s poorest countries to mitigate the impact of pandemic. By freezing external debt service payments until the end of 2020 from all official bilateral creditors, it is estimated that a debt ‘standstill’ of roughly $11.5 billion in emergency liquidity support could be available to eligible countries in 2020, equivalent to about 40 per cent of total projected public external debt service (World Bank, 2020).

“As one would naturally conclude, the DSSI is a step in the right direction, and designed to help countries respond to the crisis. For example, some analysts have argued that the emergency support by the IMF/World Bank and the announcement of the DSSI programme have contributed to the significant reductions in the sovereign bond spread for most of the emerging market economies, including even those that did not participate in the programme.

“However, risk perception levels remain high and above the pre-COVID levels. It thus appears that the pandemic would leave behind some medium to long-term shocks to fiscal and financial settings of these economies such that their fading would require more than what the DSSI would seek to solve,” he said.

He added that several limitations of the programme have been identified. These include adverse impact on market access countries since it may send the wrong signal about the country’s credit worthiness, Potential unintended legal ramifications from possible contravention of some of the legal clauses/agreement, Heterogeneity of debt composition potentially implies that countries with low official multilateral and bilateral debt under consideration may not benefit much from the initiative; and other creditor participation remains largely uncertain, and Restrictive conditionality may hurt more — especially for countries with sizable access to international capital market funding – since countries accessing the DSSI will have to comply with IMF /World Bank ceilings on non-concessional borrowing.”