THE G-20 countries have decided to give relief on the bilateral debt repayments for the poorest countries to help them focus on the fight against the novel Coronavirus. The pandemic has frozen the international economy and people are confined to their homes for the quarantine. The International Monetary Fund calls it “The Great Lockdown”. The situation caused the markets to crash and asset values to fall, pushing fund managers to liquidate their positions. The price of oil has fallen which forced the Arab and Russian oil powers to once again negotiate a supply cut. The world is at a two-front war, one is the pandemic and the other is the recession. At first, it feels very encouraging that poor countries are given a fighting chance in the war against the virus but when you take a closer look at this deal you realize that it’s nothing but a joke. G-20 has given relief on the bilateral debt to the poor countries and the international financial institutions such as the World Bank and International Monetary Fund were seen clapping behind them. Sooner or later the debt has to be paid off but the wobbly economic output and huge debt burdens will create a quagmire.
Italy and Spain were the two worst-affected countries from the virus in the European Union. The two countries have been struggling with the debt crisis for some time, Italy has a debt to GDP ratio of 134.8% and Spain has a debt to GDP ratio of 97.6%. The Italian Prime Minister Conte requested the EU to issue “Corona Bonds” to help them fight the financial crisis that has risen as a result of this pandemic but the idea of paying off those bonds by all member states was opposed by The Netherlands and Germany. The Italian Premier asked for medical help to the European Union via the Emergency Response Coordination Centre, the call for help was forwarded to all member states. Surprisingly the response from the neighbours was very cold. A very exasperated Mr Conte told in an interview with BBC that the European leaders are “facing an appointment with history”. In 2018, Sweden had a wildfire and the country requested the Emergency Response Coordination Centre, the response was phenomenal. All the member states stepped forward and helped Sweden fight the wildfires. It was evident that the EU is more than just an economic alliance and the relations go far beyond that but this time the message is completely different.
After the initial call for help from Rome, on the 11th of March, help did arrive but surprisingly not from Brussels but Beijing. A Chinese airplane landed on 12 March with 31 tons of medical supplies and nine medical experts. Russia also stepped forward in helping with a heartfelt message “From Russia with Love”. The EU doesn’t have good relations with the two countries yet Moscow and Beijing extended help to the member of an organization that considers Russia and China hostile. The crack in the EU was once again visible, so the President of the European Commission recently offered an apology to Italy. According to a recent survey, 88% of the Italian felt that the EU has failed them. The apology from the European Commission is not enough and if the EU fails to help their member nations then the Union might fall. The decision of delaying the repayments is not a long-term solution to the problem. The borrowing of lower-income countries has increased manifolds in the past decade and currently the public debt is at an unsustainable level. Countries like Pakistan that is borrowing more money from the International Monetary Fund to fight the pandemic will show an increase in their debt to GDP ratio which is already well over 80%. Italy will have a debt burden of 150%, Spain 108% and Portugal 128%. The estimated loss of 2 trillion rupees has already battered Pakistan’s economy. It will take a substantial amount of time to recover from the concomitant effects of the pandemic and the recession which according to the IMF is the worst economic condition since the Great Depression.
The issue right now is not just about the unstable chunk of the debt which countries can’t pay off but also the lack of solidarity. Mark Dowding Chief Investment Officer at BlueBay Asset Management, said in his comments to Financial Times that “what matters to the market is the sense that we are not seeing solidarity at the time of the crisis, it’s every man for himself.” The least affected countries are least bothered to help those who are severely hit by the pandemic. Ray Dalio, a Hedge Fund Manager and Chief Investment Officer of Bridgewater, believes that the lessening of the wealth gap can help the economy to recover from this recession. Historically debts were used to be forgiven every 50 years which was called the Jubilee year. With the passage of time, the practice was forgotten and the debt started to accumulate. Even after the Second World War 50% of Germany’s debt was written off and the rest was required to be paid from the trade surplus. That helped make Germany the economic power it is right now, interestingly countries who helped Germany in that write off, included Pakistan, Spain, Italy and Greece, all are now burdened under the pile of debt. According to a report 64 countries, including Pakistan, were spending more on external debt payments than on their health care. Islamabad spends $10billion to $12billion on debt servicing each year which is a huge chunk of outflow for a lower-income economy. What the world needs at this hour of crisis is an action of financially and non-financially solidarity. Writing off debt will provide fiscal space to countries to spend more on health-care and capital improvements rather than debt servicing, failing to do so will not only have dire consequences’
but will change the landscape of the world forever.
—The writer is freelance columnist, based in Karachi.