Debt Reduction The Best Way To End “Poverty Trap” For Some Countries – World Bank President

The Group of 20 major economies should extend a freeze on official bilateral debt payments by the world’s poorest countries through 2021, and permanently reduce the debt load of some of the most heavily indebted ones, World Bank President David Malpass said on Wednesday.

Merely delaying debt payments would not solve the problems of countries that were already facing high levels of debt before the coronavirus pandemic, Malpass told G20 finance officials and commercial creditors.

“In such cases, we need to not merely reduce debt service today, but reduce debt service tomorrow and permanently,” Malpass said.

“This will create light at the end of the debt tunnel for the poorest countries. For some of the hardest hit, a systematic reduction of sovereign debt stocks is the only way to restart growth, make new investment possible and profitable, and avoid an even longer poverty trap,” he said.

Economists warn that developing countries and emerging markets face dire economic consequences from the pandemic given their lack of good healthcare systems, inadequate fiscal resources to offset the impact of widespread lockdowns and, in some cases, a collapse in commodity prices.

Malpass emphasized the need for increased transparency about lending and said all official bilateral creditors, including policy banks such as China’s Development Bank, should participate in the G20 debt relief initiative.

The G20 initiative approved in April should cover all external long-term public and publicly guaranteed debt, including loans made by state-owned enterprises, if they had implicit government guarantees, he said, an apparent reference to China’s many state-owned companies and their key role in its Belt and Road infrastructure initiative.

He also cited concerns about confidentiality clauses in official loan contracts, and the lack of clarity about debt-like instruments such as long-term bilateral swap lines that are often used as funding sources by countries such as Mongolia.

Long-term contractual commitments for electricity purchases also posed a crushing burden on poor countries, he said.

Source: Reuters