India has recorded its highest daily rise in new infections and the death toll in Latin America has passed 100,000 as countries from Croatia to Iran and Portugal to Bulgaria stepped up efforts to contain ongoing and fresh outbreaks of COVID-19
International Chamber of Commerce Chairman Paul Polman speaking at a top level UN Summit last week noted that a $ 5 trillion of trade financing capacity will be needed in 2021 to restore global commerce to its pre-COVID-19 trend. The Secretary General of the UN has noted, many multiples of the $ 8 billion already pledged will be required to ensure universal access to tests, treatments and vaccines.
The coronavirus pandemic, which has caused havoc to the global economy, governments in both the developed and low-income world have intervened decisively to soften the economic blow. Most governments have borrowed big to try to limit the economic and social impact. Low-income countries, with significant existing foreign debt and facing collapsing oil and commodity prices and tourism, have been hard hit. The positions of emerging and low-income countries differ significantly.
Some countries have substantial debt, but also substantial external reserves. Some countries have mostly borrowed in their own currency, while others have primarily borrowed in foreign currency. Some have borrowed from private creditors; others have borrowed from other governments. In general, countries that have borrowed in foreign currency from the private market could face severe financial stress. Many of the so-called frontier market countries would need to watch their capital flows.
A broader set of countries may struggle to raise the funds to fight the pandemic successfully. But borrowings is only of half the problem; export revenue also matters.
Many of the countries in big trouble are Ecuador, Gambia and Zambia, for example – have substantial external debt and rely on oil and commodity export such as copper, or tourism for export proceeds. For countries in Africa whose debts have been rising even before the pandemic the situation will be very challenging and daunting and will require help from the developed world.
The global debt load is currently $ 264 trillion. Countries with large amounts of debt could be in a state of distress, depending on how the pandemic pan out in the long term. China’s external foreign currency debt is roughly 10% of its gross domestic product (GDP). The external foreign currency assets of China’s banks and its government account for close to 42% of China’s GDP. Chinese state-owned firms and Chinese local governments have substantial internal debt. However a few Chinese companies have borrowed from abroad. China is now a big global lender. Therefore China could obviously contribute significantly to stabilise the situation in many low-income countries that have borrowed substantial sums from them.
African countries in particular have borrowed over $ 100 billion from Beijing. Many African countries owe more to China than they owe to private bond holders. In dollar terms, Angola has been the biggest borrower – it has over $ 20 billion worth of outstanding loans to China.
Djibouti, an extreme case, owes China more than 70% of its GDP. At a meeting of Group of Twenty (G20) finance ministers, China has agreed to reschedule debts falling due in 2020. China would be expected to do more by rescheduling payments due in 2021, or provide financial relief to a broader set of countries. And depending on how the global economy evolves, China may need to write off, not simply agree to defer payments until 2020.
The WHO Director General on 24 June said that the infected people are expected to reach a total of 10 million within the next week. Therefore protecting lives and livelihoods in the context of the COVID-19 pandemic and the need for continued fiscal intervention to help small businesses weather the crisis and ensuring developing economies have sufficient fiscal space protect lives and livelihoods in the face of the virus and mitigate against the risk of economic collapse should now be the priority for G 20 leaders.
The scale of the disruption means that further fiscal interventions will inevitably be needed to enable developing countries to weather the crisis. The scale of public financing required in this regard should not be underestimated.
It is unlikely commercial markets can satisfy this need without appropriate public support. Most businesses can access the credit needed to trade internationally once demand returns to the economy. While the priority for any government is to protect the immediate wellbeing of its citizens, this does not obviate the need for forward-looking international cooperation in the face of a virus that knows no borders.
Therefore leadership is urgently required as pointed out by Paul Polman, the International Chamber of Commerce Chairman from the G20 – and, more broadly, members of the WTO – to establish a cogent roadmap to ensure that the access to a future vaccine is not artificially restricted by asinine trade and economic restrictions.