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For the South, all Roads in Global Economic Governance Lead to Inequality & Vulnerability

The IMF and G20 concluded their Annual Meetings without real solutions to debt crises, fiscal austerity and financing shortfalls across the Global South. Credit:

NEW YORK, Oct 19 2021 (IPS) - Last week’s annual meetings of the International Monetary Fund (IMF), World Bank and G20 finance ministers illustrated that despite a historic debt crisis sweeping across developing countries and their urgent need for external financing for health and economic recovery, global economic institutions governed by rich countries do not possess the political will to deliver meaningful solutions. The inadequacy of the G20’s debt relief framework, which has failed to restructure sovereign debt since its inception, stands without change or any fresh effort to mobilize private sector participation in debt relief.

Despite the broad call to recycle SDRs from rich to poor countries, the few countries that made commitments to do so are employing a conditional loan mechanism which will further drive fiscal consolidation measures in low-income countries.

Deprived of the policy independence and vaccines that allow advanced economies to enact massive fiscal stimulus programs and open their economies, many developing countries are facing a cycle of deflation and despair.

The IMF’s flagship World Economic Outlook (WEO) confirms the entrenchment of global divergence between North and South by reporting that developed countries will return to pre-crisis growth projections in 2022 while developing countries’ recovery will stretch to 2024, in a journey marked by “permanent economic scarring and revenue losses” for the South.

The WEO concludes that unemployment is a major driver of this gap and unemployment rates would be persistently higher if trouble with vaccinations leads to COVID-19 becoming ‘endemic.’

A brand new (and conditional) loan to recycle SDRs?

In the months preceding the largest ever allocation of $650 billion SDRs was issued by the IMF on August 23, a momentum to recycle SDRs from rich to poor countries was generated by a broad range of actors, including the UN, governments and civil society.

A milestone was achieved when G7 leaders committed to voluntarily channel $100 billion of their unused SDRs. Despite this amount falling short of the IMF’s own conservative estimate of the $200 billion financing shortfall in low-income countries between 2021 and 2025, the move was welcomed in light of the unequal distribution of SDRs based on IMF members’ quotas, where over 60% (or $400 billion) of the SDRs go to developed countries.

After France announced it will channel 20% of its SDR allocation to African countries, with a focus on vaccine donations, all eyes were on the Annual Meetings for announcements by other rich countries.

In a virtual panel last week, IMF Managing Director Kristina Georgieva said that the “100 billion number is very achievable,” alluding to several countries who had stated, but not yet committed exact amounts, their intentions to channel SDRs. Given the urgency of fiscal space and external financing across developing countries, more details were expected.

The Fund was tasked by the G20, G7 and IMF membership to design a mechanism to recycle the funds. In response, the IMF proposed two key pathways, that of scaling up the long-standing Poverty Reduction and Growth Trust (PRGT) concessional loan facility for low-income countries and establishing a new Resilience and Sustainability Trust (RST) that would be accessible to middle-income countries.

While both proposals were accepted by the G20 and the G24 group of developing countries in the IMF, years of critique looms over the PRGT for its fiscal consolidation conditions, including by the Fund itself. Empirical research has long illustrated how the PRGT shrinks public expenditure for indispensable social services and employees in health and education and promote regressive taxation measures that disproportionately hurt women and low-income communities.

Meanwhile, the RST, which is still being formulated and will be presented for approval to the Fund’s Board in 2022, is the first loan facility to address balance of payment risks stemming from climate change and pandemics, featuring conditionality related to climate or pandemic preparedness designed and monitored in coordination with the World Bank.

There are three key concerns that already emerge in the little that is currently published or known of the Fund’s design of the RST. First, access to the RST will be contingent on having a conditional IMF loan program already in place. According to one of the only published sources on the RST, it would likely ‘top up’ a regular IMF loan program.

Second, while many in the international community have asked the IMF to support countries with climate transition risks, including financing for a just transition, the RST should not be counted as climate finance. The latter is direct budget support for climate mitigation and adaptation, while the RST addresses budget distortions that may arise from climate change.

Third, it remains to be seen whether the RST’s stated objective of catalyzing private and other multilateral financing will involve creating an enabling environment for the vested interests of private finance in creating investible climate-oriented schemes that yield more for profit than for people.

In a letter to G20 finance officials and the IMF, over 280 civil society organizations and networks, including researchers and academics, called for a set of principles to govern the fair channeling of SDRs to developing countries.

These principles include, for example, avoiding the attachment of policy conditionality, accrual of more debt, double-counting of SDRs as aid, and ensuring access for middle-income countries that have been excluded from multilateral initiatives.

The letter stresses the importance of recycling SDRs through grant funding that facilitates budget support for public services and a fair recovery that supports climate justice, and tackles economic and gender inequality, including the unpaid care burden that women bear, and the pandemic exacerbated.

A critical opportunity to progressively alter the basic tenets of development financing in the current global financial architecture has been missed by the Fund and its rich country members.

G20 fails to address record high debt distress

As the G20’s wholly inadequate debt moratorium concludes at the end of 2021, the World Bank reports that the debt burden of low-income countries rose to a record $860 billion and half of the world’s poorest countries are in external debt distress as a result of the pandemic. And yet, the G20’s finance ministers again fail to advance real debt solutions such as debt relief, debt cancellation and fair restructuring mechanisms for countries requesting debt reduction.

Indeed, no new relief scheme or possibility of a debt standstill was announced by the G20 finance minister’s communiqué, even with the imminent closure of its Debt Service Suspension Initiative (DSSI).

Meanwhile, the G20 proved once again their lack of power to increase private sector creditor participation in debt reduction initiatives beyond mere reaffirmations. At the Spring Meetings in April 2021, Mohamed El-Erian, President of Queens’ College, Cambridge and Chief Economic Advisor at Allianz, said at a webinar that the Paris Club process of case-by-case debt treatments is “not enough to overcome coordination problems in the private sector; the Paris Club needs to impose more of a stick for the private sector.”

The inability to regulate the private sector into debt relief participation alludes to how the ‘chutzpah‘ of bondholders is a direct outcome of the way G20 leaders and their central banks have nurtured private finance to become so powerful that they now find themselves unable to curtail its might.

The Jubilee Debt Coalition stated in their press release that the G20 are asleep at the wheel as the debt crisis intensifies in low-income countries, pointing out that the DSSI has suspended less than a quarter of debt payments, while the G20’s Common Framework for Debt Treatments (CF) has restructured no debt.

In particular, private creditors received the largest amount of debt payments, $14.9 billion, and suspended just 0.2% of debt payments out of total debt suspended since the pandemic started. In early 2021, Chad, Ethiopia and Zambia applied to the CF for debt restructuring. So far, none have been successful, in large part due to private lenders refusal to take part in debt reductions. Meanwhile, the current rise in global interest rates will increase the cost of debt servicing, worsening debt crises and preventing indebted countries from both economic and health recovery while also triggering capital outflows and its attendant ripple effects of currency depreciation and financial instability.

Meanwhile, the current rise in global interest rates will increase the cost of debt servicing, worsening debt crises and preventing indebted countries from both economic and health recovery.

In response to the wave of debt distress sweeping across the South, the UN Conference on Trade and Development has called for substantive debt relief and outright cancellation. The counterfactual, they state, is another lost decade for development marked by developing countries using their vital public finances for debt payments rather than investing in pandemic and economic recovery.

Even the Fund’s Fiscal Monitor report highlights limitations of the international debt architecture to support orderly restructurings as a core risk for global pandemic recovery.

In stark contrast to the G20, several developing countries at the 76th UN General Assembly in September called for debt cancellation, comprehensive debt restructuring and debt relief linked to middle-income countries or to the UN Sustainable Development Goals (SDGs).

Small island and developing states called for debt relief in the context of a new vulnerability index for the provision of multilateral support. Against these segmented scales of political and economic power, a democratization of decision-making in the global debt architecture is increasingly urgent.

As long as the multilateral response to the debt crisis generated by the economic fallout of the pandemic is governed by creditor countries, the decades old imperative to establish a debt workout mechanism capable of carrying out timely and fair restructuring, including debt cancellation, will remain elusive.

Fiscal austerity continues to exacerbate global inequalities

In Georgieva’s policy agenda last week, she underscored that health spending is a priority and that where fiscal space is limited, “lifelines should be increasingly targeted toward the most vulnerable groups.” However, in her institution’s Fiscal Monitor, an explicit priority is placed on reducing deficit and debt levels, “undertaking structural fiscal reforms (such as pension or subsidies reform) … and committing to fiscal rules that lead to deficit reduction in the future.”

The IMF’s historical preoccupation with fiscal consolidation is a reflection of capital market and investor reasoning, in which the only path to securing access to low-cost borrowing for most developing countries is “strengthening the credibility of their fiscal policy.”

Embedded within a financial architecture shaped by a short-term and speculative logic, and pro-austerity bias, the South’s public budgets are subject to private interests that are in diametric opposition to equitable and rights-based development.

Consequently, the priority of securing the confidence of creditors is illustrated by Oxfam’s finding that out of 107 IMF loans, 90 require fiscal consolidation measures across 73 countries. Instead of facilitating public investment in health, education and social protection systems, medium-term policy advice in the loans cut and freeze public wage bills, through which public employees are financed, and increase or expand value-added and general sales taxes.

Unless the autonomy and impunity enjoyed by global finance is regulated, the potential of fiscal policy to play a role in sustained decent work creation and pursuing the right to equitable development is structurally constrained. Fiscal policy, when it invests in the public system that services communities, can open up political space to shift the balance of power between the market and the state in managing the economy and delivering long-term economic resilience through providing people with equity and access to public services and social systems.

Deepening inequality and poverty across the South is a direct result of the failure of effective multilateralism. Between 65 and 75 million people have been thrown into poverty, the gap between the top 10% and bottom 80% mushrooms, and achieving the SDGs by 2030 is rendered close to fantasy in many developing countries.

Women have been dealt the most unequal hand, experiencing at least $800 billion in lost income globally in 2020 while low-wage informal work and unpaid care work has increased beyond measure.

Ultimately, the principles of historical responsibility, distributive justice and interdependency of recovery must guide the centers of financial and economic clout to support rather than hinder health and economic recovery for the most vulnerable regions of the South.

Tinkering on the technocratic smokescreens of power and resource asymmetries created by centuries of colonial history, and more recently by four decades of neoliberalism that has institutionalized a pathologically unequal financialized world economy, will no longer suffice. Structural change is indispensable, precisely because the counterfactual may well be a lost decade for the vast majority of the human race.

Bhumika Muchhala is Senior Researcher and Policy Advocate on Global Economic Governance at the Third World Network.


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