World Bank and IMF raise unorthodox demands

So far, 42 countries have taken advantage of the suspension of debt servicing that the G20 announced in view of the Covid-19 crisis. As the Financial Times reported in mid-September, the World Bank reckons that they have requested the combined deferral of payments worth $ 5.3 billion. Twice that amount had been expected.

World Bank President David Malpass has expressed disappointment,  moreover, because private-sector lenders have been very slow to join the G20 initiative. In his eyes, if government austerity reduces health and education spending excessively, there will be a “lost decade”. That term was used to describe the stagnation of over-indebted African and Latin American economies in the 1980s and 1990s.

Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), sees things in a similar light. Indeed, some countries have recently been piling up debt. That trend started before the Covid-19 pandemic, which is now compounding those problems.

The G20 initiative eases, but does not solve them. After all, debt servicing is set to begin again next year or at a later point should it be extend, as the World Bank and IMF demand.

The plain  truth, however, is that donor governments, and the international financial institutions (IFIs) they control, are less powerful than they used to be in previous financial crises. Two important reasons are:

• governments of newly industrialising nations, in particular China, have lent poor countries huge amounts, and
• commercial lending to both governments and private sector companies in developing countries has increased dramatically, driven to a large extent by low interest rates in advanced economies which made private investors look for higher returns elsewhere.

Civil-society organisations argue that debt problems are undermining many countries’ ability to invest in the achievement of the Sustainable Development Goals. Some call for some kind of international bankruptcy law to resolve issues of excessive sovereign debt (see Hans Dembowski in Monitor section of D+C/E+Z e-Paper 2020/03). Georgieva, the IMF chief, now agrees with them, as the FT reported in early October. The big question is whether she can convince the leaders of rich nations. Those governments have always rejected proposals of this kind in the past.

The IMF, moreover, wants rich nations to take advantage of low interest rates to borrow money and invest in infrastructure. Doing so could ease the Covid-19 slump and speed up the transition to sustainability at the same time.