The issue of debt relief for developing economies is becoming increasingly urgent in the context of foreign debt threatening to wipe out common development achievements. This is also a hot topic at meetings of the United Nations, the International Monetary Fund (IMF), the World Bank (WB) and the Group of 20 leading developed and emerging economies.
Increase preferential loans
In seeking solutions, these organizations have always considered prioritizing low-cost capital for countries that do not have access to it. One of the best ways to do this is to generously fund the World Bank’s International Development Association (IDA). This is the largest concessional source of finance for development projects, with loans, grants, and other types of financing at below-market interest rates. In effect, it is the lifeline of last resort for the 75 poorest countries on the planet, providing low-cost financing when they are cut off from global markets and other development assistance has stalled.
Over its six decades of operation, IDA has helped countries improve health and education systems, create jobs, build infrastructure, and recover from disasters. IDA’s major donor countries, led by the United States (the largest contributor), Japan, the United Kingdom, Germany, France, and China, pledged $23.5 billion for IDA’s most recent replenishment in 2021. Thanks to its AAA credit rating, IDA can allocate $93 billion to low-income countries.
By 2022, 36 countries that had relied on IDA funding, including Angola, India and South Korea, had strengthened their economies enough to no longer need assistance. Twenty of these countries are now in the top half of the world GDP per capita rankings, and 19 are now IDA contributors themselves. But that has not been enough to lift recipient countries out of crisis. Contributions replenish IDA funds every three years, with the latest round coming later this year (2024).
World Bank President Ajay Banga has called on donors to increase their contributions by up to 25%. Asking for more money is difficult at a time when wealthy countries are facing their own financial constraints, but there is no better investment than improving the lives of the world’s poorest people. In many cases, access to cheaper loans will be enough for these countries to restore growth, leading to a more prosperous and stable world – an outcome that benefits everyone.
Funding for growth
Another problem is that even if IDA contributions increase, recipient countries will struggle without broad-based debt relief. The first step to achieving such relief is reform of the G20 Common Framework. So far, lenders have not agreed on how to share the cost of debt relief. International financial institutions also need to work on avoiding further global debt crises.
In early 2024, a Paris-based think tank proposed a “bridge program” in a report by the Finance for Development Lab. For example, countries facing liquidity challenges would commit to investing in a sustainable and inclusive growth program in exchange for additional financing from multilateral development banks, including IDA, creating a bridge to financial stability. The specifics would need to be worked out on a case-by-case basis, but the approach shows promise. It has also been endorsed by African presidents such as Ghana, Kenya, and Zambia.
If leaders of global financial institutions and rich countries fail to live up to their commitments, dozens of countries are likely to be left in dire straits for a decade or more. Meanwhile, with the right reforms and investments, debtor countries can boost growth and climb out of debt.
By helping poor countries escape their debt crises, Western governments and international financial institutions can unlock more funding for innovation and development, especially in Africa. The promised support can free up resources to build long-term resilience in health and food systems. Together, world leaders can write a new story – one that ends in a virtuous cycle of global growth.
HUY QUOC synthesis
Source: https://www.sggp.org.vn/giam-no-tang-uu-dai-cung-phat-trien-post761504.html
Comment (0)