Felicity Hawksley, journalist

Low- and middle-income countries’ share of Covid-19 deaths relative to the developed world is small. But the numbers still threaten to overwhelm their health infrastructure. Even where the virus has not had a significant effect on public health, these countries are feeling keenly the rest of Covid-19’s intense economic ills, including lower exports, reduced levels of tourism and falling remittances.

The World Bank expects a permanent loss of productive capacity among low-income nations and has suggested there may be 150 million more people categorised as ‘extreme poor’ as a result of the pandemic.

Fiscal boost

With this in mind, the bank stepped into the breach in May, with its Debt Service Suspension Initiative (DSSI), to help countries with challenging levels of public debt to free up fiscal resources. The DSSI originally suspended the requirement for countries to service debt held by official bilateral creditors (other governments), allowing them to spend the cash in priority sectors instead.

The original programme has been extended to at least June 2021. The debt comes due in full in five years’ time (recently extended from three), with a year’s grace period. The programme is net-present-value neutral, meaning creditors will lose out on neither the value of the principal nor the interest.

Ratings agencies have suggested participants in the programme could suffer downgrades. Moody’s considered downgrading Cameroon from its B2 scoring

Of the 73 nations eligible for the DSSI, only 43 have applied – more than half of them at high risk of, or currently in, debt distress. So far, African nations top the list of applicants, although the list as a whole makes for diverse reading.

Relief to date stands at approximately US$5bn – around 75% of eligible official bilateral debt service for the period, according to the bank. But its overall impact was called into question by the European Network on Debt and Development, which suggested that the initial DSSI offer covered ‘only 1.66% of debt payments due in 2020 by developing countries’.

Reading the receipts

At least the monitoring regime does not seem onerous, despite the World Bank’s stated goal of using the DSSI as a springboard to generally increase transparency in public debt. The bank has done some of its own legwork, by publishing ‘detailed external public debt data’, which gives an overall view of the theoretical amount of funds available to each country eligible.

But in-play monitoring appears to focus on comparing overall fiscal and economic activity planned prior to the DSSI, with revised or supplementary budgets produced after debt service suspension. The bank’s existing rules for its Debtor Reporting System continue to apply, too, and it is also modelling public and publicly guaranteed (PPG) debt-to-GDP ratios – as well as external PPG-debt-service-to-revenue ratios – pre- and post-Covid-19, to keep an eye on solvency and liquidity pressures in participating nations.

According to a joint World Bank-International Monetary Fund note on the programme’s extension, ‘beneficiaries [of the DSSI] have devoted substantial resources to tackle the Covid-19 crisis’, funnelling on average 2.1% of GDP towards priority sectors, with the money aimed fairly equally at prevention, containment and management, and support to households, businesses, state-owned enterprises and government entities.

Despite the DSSI, the outlook for these countries is worsening. Revenues have declined sharply and beneficiaries have been forced to carry higher overall fiscal deficits (although this is also something the DSSI enables). While the bank has indicated that some distressed nations have had access to new sources of net borrowing – largely in the form of grants – the pressure on public debt even in rich, G20 nations is significant, and strained capital markets may balk at risky lending. 

Unexpected casualties 

As well as DSSI’s more obvious limitations, there are concerns about its unintended impacts. Ratings agencies have suggested participants in the programme could suffer downgrades. Moody’s considered downgrading Cameroon from its B2 scoring, writing in its research note that ‘the country’s participation in the…DSSI raises the risk that private creditors will incur losses’.

Moody’s note highlighted a key weakness in the programme: without participation by private creditors on similar terms, the impact of suspension of bilateral debt is greatly reduced, since multilateral and private debt held by these countries far exceeds bilateral debt, and countries are in most cases contractually obliged to continue servicing this debt.

There are concerns, too, that participating in the DSSI will also harm the cost of capital for low-income countries for many years. Projections suggest that an additional future debt burden due by 2025 will combine with a deadly cocktail of permanent revenue scarring, loss of productivity and diminished exports that will effectively finish low-income countries’ ability to raise funds cheaply, leading to increased reliance on the IMF and World Bank.

Both institutions may find themselves wedded to providing substantial assistance for some time to come.