TOPICS: COVID-19

 

Debt levels in 73 Gavi-supported countries1 increased by close to 50% between 2011- 2018, and governments spent almost as much on paying interest on these debts as they did on their healthcare systems. Although overall debt levels have been far from historical highs, almost a third of Gavi countries were, according to the International Monetary Fund (IMF), already at high risk of being unable to meet their debt obligations, even before the COVID-19 crisis.

A new study of debt dynamics in Gavi-supported countries reveals the extent and speed of this debt accumulation. With the economic shock caused by COVID-19 and the very significant drop in commodity prices observed in recent months – particularly oil – debt servicing may become untenable in many countries and may even jeopardise the delivery of health and other services if it crowds out government investments in the social sectors. As a result, many highly-indebted countries may seek a suspension of interest payments or outright debt relief, further expanding on the G20’s debt moratorium agreed to in April 2020.

While low-income countries (LICs) have tended to rely on credit from multilateral lenders, such as the World Bank, the IMF, and regional development banks, middle-income countries (MICs) have relied more extensively on the private sector. This could make access to borrowing, needed to respond to COVID-19 and any potential debt restructuring, if required, more complex and difficult. 

Increasing, and increasingly complicated, debt

Sovereign debt is an important tool for economic policymakers but can become a barrier to economic stability and development if not well managed or used excessively.2

In our analysis we looked at the levels and creditor composition of external sovereign debt owed by Gavi-73 countries between 2011-2018. External sovereign debt – the amount owed by national governments to foreign entities – increased by 47% over the period. Servicing debt obligations consumed a median of 6.7% of government revenues in 2018 in those countries, a 123% increase over the period. As context, the median level of domestic government health expenditure as a share of government revenue across Gavi-73 countries was also around 7% (in 2017, latest available data) but the increase over the same period was much smaller, less than 10%.

Figure 1: Median cost of debt servicing as a % of government revenue, and domestic government health expenditure as % government revenue, Gavi-73 countries

For MICs within Gavi-73, total debt more than doubled in the period, from US$ 424 billion to US$ 874 billion, and lending has become much more reliant on private creditors, particularly via issuance of bonds in capital markets which was responsible for 35% of all lending in 2018 (compared to 14% in 2011).

Table 1: Level and composition of externally sourced public and publicly guaranteed debt in Gavi-73 countries3
  Gavi-73 Low-income Gavi-73 Middle-income
  US$ billion Share US$ billion Share
  2011 2018 2011 2018 2011 2018 2011 2018
Multilaterals (excl. WB) 29.3 23.9 27% 21% 63.9 116.0 15% 13%
World Bank 37.7 39.0 34% 34% 96.7 147.7 23% 17%
Bilaterals 37.6 37.9 34% 33% 159.8 234.3 38% 27%
Private: Bondholders 0.0 2.6 0% 2% 60.2 303.1 14% 35%
Private: Commercial banks & other 4.7 11.1 4% 10% 43.5 74.8 10% 9%
Total 109.4 114.5 100% 100% 424.1 874.9 100% 100%
Total, median 2.1 2.9     3.4 8.4    

These higher debt levels are putting many Gavi-73 countries under high pressure. As of the end of 2019, eight Gavi-supported countries were already in debt distress and 16 others had accumulated debt levels that placed them at high risk of debt distress according to the IMF and the World Bank.

Within Gavi-73 countries, there are stark differences in the makeup of creditors. In LICs, multilateral institutions and the World Bank provide the largest share of total borrowing – 55% in 2018 – and private bondholders provide very little – a share of 2% in 2018 – especially compared to the 35% share in MICs.

The composition of creditor groups matters because it can affect the complexity and likelihood of any possible debt relief negotiations. Private and non-OECD bilateral lending may be significantly more difficult to coordinate and agree to debt relief given the multiplicity of lending terms, debt holders and interests. This is made more challenging because it can often be difficult to access information about private debt structures. Lack of debt transparency can become a major bottleneck for understanding the magnitude of sovereign debt and to develop, therefore, effective debt relief approaches.

Moreover, over the last two decades China has emerged as a major lender to LICs and MICs. Analysis by economists at Harvard University and Kiel Institute for the World Economy estimated that China has “lent about US$ 1.5 trillion in direct loans and trade credits to more than 150 countries around the globe. This has turned China into the world’s largest official creditor – surpassing traditional, official lenders such as the World Bank, the IMF, or all OECD creditor governments combined.” However, the authors estimated that only 50% of debt owed to China is captured by public statistics.

At the same time, China itself is a large external debtor – external debt owed by China reached US$ 2 trillion as of the end of 2018, or one quarter of the combined external debt of all low- and middle-income countries4. This may limit its ability to provide debt relief to developing countries that it lends to.

What now?

It is important to continue to closely monitor these trends over the coming months, particularly considering the COVID-19 economic shock. The pandemic is likely to affect access to capital markets, and also to significantly dampen economic growth, putting downward pressure on government revenues and decreasing the ability of countries to finance critical functions of government, including health service provision. 

Assisting countries to navigate this period of acute stress will be critical to mitigate the impact of COVID-19 and ensure the continued delivery of immunisation and other priority health services. Grants, such as those provided by Gavi and the Global Fund, will be a key component of the global community’s response. Equally important will be measures – spearheaded by the World Bank, the IMF and other multilateral development partners – to strengthen national social safety nets and jumpstart economic growth, as well as initiatives to improve debt transparency, without which efforts to identify and resolve debt crises in a timely manner are significantly hampered.


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