[Reuters] In a report, UNCTA estimates that developing countries’ liquidity and financing requirements due to the pandemic at about $2.5 trillion.

Around $1 trillion of debt owed by developing countries would be cancelled under a global deal proposed by the United Nations Conference on Trade and Development (UNCTAD) on Thursday to help them overcome the impact of the coronavirus pandemic.

In addition to the rapidly increasing debt burden, the world’s developing economies are facing a record global recession which some expect to be akin to the 1930s Great Depression. The increase in public expenditure to fight the COVID-19 pandemic has placed an added strain on finances.   While some developing countries will benefit from the falling oil prices, those that depend on revenues from oil exports are feeling the pinch. The commodities market, exports and local currencies are also taking a hit.

The economies are facing the dilemma of spending money (that they do not have) on healthcare and protecting their economies.  Some governments are already in the position where they cannot meet monthly commitments such as payment of salaries. Many countries are currently spending more on debt repayments than their health systems, according to UNCTAD.

“This is a world where defaults by developing nations on their debt is inevitable,” Richard Kozul-Wright, director of UNCTAD’s Division on Globalisation and Development Strategies, said during a video conference with journalists.

In a report calling for a plan to relieve developing countries’ debt burden, UNCTAD estimated their liquidity and financing requirements due to the pandemic amount to at least $2.5 trillion.

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High-income developing countries have debt service obligations of between $2 to $2.3 trillion for 2020 and 2021 alone, while middle and low-income countries’ obligations is $700 billion to $1.1 trillion.

Last week, the Group of 20 wealthy nations (G20) agreed to suspend the bilateral debt service payments by the world’s poorest countries until the end of the year.

“It’s kicking the can down the road,” Kozul-Wright said. “You extend the problem and you pretend it’s going to go away in two- or three-years’ time if growth picks up in the world economy. We don’t think this is credible.”

UNCTAD calculated the G20’s debt moratorium would cover $20 billion of public debt to official bilateral creditors. An additional $8 billion would be included if all private creditors joined the initiative, and a further $12 billion if all multilateral creditors did as well.

That has little impact on the developing world’s overall debt burden, the agency said, and the money would need to be paid back with interest at the end of the suspension. Instead, it called for a “Global Debt Deal” that would grant initial one-year debt standstills on request, which could be extended after a review and would include a stay on all creditor enforcement actions.

Debt relief and restructuring programmes would follow to ensure long-term debt sustainability, a process that would require significant debt cancellation.

Using as a benchmark the case of post-war Germany, which saw about half its debt cancelled, UNCTAD calculated the figure for developing economies would be around $1 trillion.

An independent debt authority would oversee the process instead of the International Monetary Fund and World Bank, which are among poor countries’ leading creditors and therefore not impartial, according to UNCTAD.

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Kozul-Wright said it was in the interest of wealthy nations to support a plan allowing developing countries to concentrate their resources on fighting the new coronavirus rather than their external debt.

“This is not a charity exercise,” he said. “The health pandemic will eventually hit much of the south. If that happens there will be a blowback in terms of health to countries that thought they had somehow conquered this virus. That’s almost inevitable.”

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