LONDON – Like most developing countries, Pakistan was alarmingly short of doctors and medical facilities long before anyone heard of Covid-19. Then the pandemic overwhelmed hospitals, forcing some to refuse patients. As fear disrupted daily life, families lost their livelihoods and struggled for food.
Across the world in Washington, two organizations with deep pockets, the World Bank and the International Monetary Fund, have vowed to spare poor countries from despair. Their economists warned that immense relief was needed to avert humanitarian catastrophe and profound damage to global prosperity. Emerging markets represent 60% of the global economy, a IMF measured. A blow to their fortune inflicts suffering on the planet.
Wages sent back to poor countries by migrant workers – a vital artery of finance – have shrunk. The closure of tourism has punished many developing countries. The same is true of the fall in demand for oil. Billions of people have lost the means to buy food, increasing malnutrition. By next year, the pandemic could push 150 million people into extreme poverty, the The World Bank warned, in the first increase in more than two decades.
But the World Bank and IMF have failed to translate their concern into meaningful support, economists say. This has left poorer countries struggling with limited resources and unsustainable debt, prompting their governments to cut spending just as needed to strengthen health systems and help people suffering from lost income.
“A decade of lost growth in large parts of the world remains a plausible prospect in the absence of an urgent, concerted and sustained political response,” concluded a recent report of the Group of 30, a gathering of international financial experts, including Lawrence Summers, former economic adviser to President Barack Obama and Secretary of the Treasury to the Clinton administration.
The richest nations have been written off by extraordinary credit surges triggered by the central banks and public spending collectively estimated at more than 8 trillion dollars. Developing countries have yet to receive aid of this magnitude.
The IMF and the World Bank – forged at the end of World War II with a mandate to support countries in times of financial distress – staged a relatively anemic response, in part because of the predilections of their largest shareholder, the states. -United.
At a virtual meeting of the two organizations in October, the US Secretary of the Treasury, Steven Mnuchin, called for caution. “It is essential that the World Bank manages financial resources wisely,” he said, “so as not to burden shareholders with premature calls for new funding.”
The World Bank is headed by David Malpass, who was actually a person appointed by President Trump under the gentlemen’s agreement that has for decades granted the United States the right to choose the head of the institution. A longtime government finance official who worked in the Trump administration’s Treasury Department, he showed contempt for the World Bank and the IMF
“They spend a lot of money,” Malpass said during testimony to Congress in 2017. “They are not very effective. They are often corrupted in their lending practices.
Under his leadership, the World Bank demanded that borrowers deregulate domestic industry to favor the private sector as a condition for lending.
“There is an ideological attitude here, a more conservative attitude of ‘Well this will be money that gets wasted,’ said Scott Morris, senior researcher at the Center for Global Development. In the midst of a crisis caused not by lavishness but by a pandemic, he added, “this is a very wrong attitude.”
World Bank officials have said the institution has expanded lending at an historic rate, while defending Mr Malpass’s demand for stricter conditions on lending as responsible stewardship. “He wants to have good national results,” said Axel van Trotsenburg, managing director of World Bank operations. “He wants to make sure the programs reach people.
The IMF is headed by a Managing Director, Kristalina Georgieva, a Bulgarian economist who previously worked at the World Bank. She is accountable to the shareholders of the institution. The Trump administration has resisted calls to increase IMF reserves, arguing that most of the benefits would flow to richer countries.
In April, as concerns about poor countries mounted, world leaders issued elaborate aid pledges.
“The World Bank Group intends to respond forcefully and massively,” said Malpass. At the IMF, Georgieva said she would not hesitate to tap into the institution’s $ 1 trillion lending capacity. “This is humanity’s darkest hour in my lifetime,” she said.
But the IMF only lent $ 280 billion. This includes $ 31 billion in emergency loans to 76 member states, of which nearly $ 11 billion goes to low-income countries.
“We have really stepped up the rapid disbursements so that we can support countries in need,” Ceyla Pazarbasioglu, director of the IMF’s policy and strategy review department, said in an interview.
The World Bank more than doubled its lending in the first seven months of 2020 compared to the same period a year earlier, but was slow to distribute the money as disbursements increased by less than a third over this period, according to research of the Center for Global Development.
The limited spending by the IMF and the World Bank appears to stem in part from over-reliance on a widely hailed initiative that aimed to relieve poor countries of their debts to foreign creditors. In April 2020, at a virtual summit of the Group of 20, world leaders agreed to suspend debt payments until the end of the year.
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World leaders have presented the program as a way to encourage poor countries to spend according to their needs, without worrying about their debts. But the plan exempted the largest group of creditors: the global financial services industry, including banks, asset managers and hedge funds.
“The private sector has done nothing,” said Adnan Mazarei, former deputy director of the IMF and now senior researcher at the Peterson Institute for International Economics in Washington. “They didn’t participate at all.
Concerns about the debts of developing countries were based on the fact that many were spending a huge chunk of their income on loan repayments even before the pandemic.
Since 2009, Pakistan’s payments to foreign creditors have increased from 11.5% to 35% of government revenue, according to data compiled by the Jubilee Debt Campaign, which advocates debt cancellation. Ghana’s payments increased from 5.3 percent to over 50 percent of government revenue.
As the pandemic spread, Pakistan increased its spending on health care, but reduced support for social service programs as it prioritized debt payments.
The debt suspension was a short-term reprieve at best, delaying loan payments while piling them on overdue bills.
Some 46 countries, mostly in sub-Saharan Africa, have collectively received $ 5.3 billion in debt relief through immediate debt repayment. This represents about 1.7% of the total international debt payments owed by all developing countries this year, according to compiled data by the European Network on Debt and Development.
Mr. Summers recently described the debt suspension initiative as “a water gun facing massive conflagration”.
But the program proved powerful in one respect: it gave the feeling that the problems of the poorest countries were contained.
“Part of the reason so little was done is that there was a mistaken expectation that you could provide all the support low-income countries need just by delaying paying their debts,” Brad said. Setser, a former US Treasury official and now a senior member of the Council on Foreign Relations in New York.
In October, the G20 extended the program until the middle of next year. Ms Georgieva criticized private creditors for sitting on the sidelines.
Private creditors have been reluctant to propose debt suspension in part because of uncertainty over who will reap the benefits. Many developing countries have borrowed aggressively from Chinese institutions in a process that is both opaque and uncoordinated. If the American or European institutions give up on collecting their debts, the money can simply be transferred to a Chinese lender rather than increasing health care spending.
Private creditors argue that poor countries have not asked for relief, acknowledging that rating agencies may view debt suspension as default – a status that compromises their future ability to borrow.
“They don’t want to lose market access,” said Clay Lowery, executive vice president of research and policy at the Institute of International Finance, a trade association representing financial companies around the world.
But this fear has been actively fomented by creditors, discouraging poor countries from seeking relief.
“The private sector is often very aggressive and deceptive in suggesting that debt restructuring will cut countries off for good and complying with their wishes will get them money very soon,” Summers said in an interview.
Some argue that anything other than debt restructuring, in which terms are renegotiated and creditors absorb losses on loans, only increases the pain, for borrowers and lenders alike.
Critics of the IMF say its handling of the pandemic displayed the same trait that has long defined its mission – a bias to ensure that creditors are paid, even at the expense of drastic spending cuts in poor countries.
Since the start of the pandemic, the IMF has allocated $ 500 million to cover the costs of debt suspension, while providing more than $ 100 billion in new loans. More than $ 11 billion of the loan proceeds have repaid private creditors, according to a report of the Jubilee Debt Campaign.
“International financial institutions will leave countries in a much worse state than before the pandemic,” said Lidy Nacpil, coordinator of the Asian Peoples’ Movement on Debt and Development, an alliance of 50 organizations based in Manila. “Their interest is not primarily in these countries getting back on their feet, but in getting these countries back into the debt business.”