THE decision of G20, a group of the world’s 19 richest nations and the European Union, to extend its debt relief initiative for heavily indebted countries for another six months to end-June next year is a good move. It will support the depressed economies to fight off the adverse impact of Covid-19 on their people, finances and healthcare systems. The relief has helped countries like Pakistan divert savings from the initiative for social protection and to take measures to tackle the fallout of the global illness on small businesses and livelihoods as their economy contracts. Additionally, the initiative has somewhat lifted pressure on the external sector of the economies by strengthening their meagre foreign currency reserves and reducing their servicing requirements amid shrinking trade and investment inflows. Announced in May this year, the Debt Service Suspension Initiative was to originally last till December 2020. According to the World Bank, Pakistan is estimated to have saved $2.7bn owing to the suspension of its debt-servicing payments. The estimates of the size of the potential savings that Islamabad will accrue because of the rescheduling of its bilateral loans following the extension in the initiative are not immediately available. But the relief is expected to be significant. There is a good chance that G20 may further extend the initiative for another six months should the group feel the need for it.
There is no doubt that the G20 action is assisting many struggling economies not only in their fight against the pandemic but also in their recovery from the latter’s harmful effects on the poorer segments of their populations and small businesses. Yet the relief amounts to a short-term postponement of the bilateral debt of the participating nations at the end of the day. Most of the economies considered eligible for relief, especially ones like Pakistan requiring more bilateral and multilateral loans for paying off their old, outstanding debt, are unlikely to recover fast enough to be able to start servicing their foreign liabilities without burdening their people and businesses. It is time that G20 and multilateral lenders like the World Bank and IMF started working on ways to help these countries through cancellation of their existing debt to create space for a quicker economic turnaround. It may not be possible for bilateral and multilateral lenders to write off the entire debt. Even a partial cancellation will help. Alternatively, the debt payments of vulnerable economies may be suspended for a longer period of, say, 10 years.
Published in Dawn, October 16th, 2020