Reduce debt, increase incentives, develop together

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.

Railway project in Tanzania with IDA loan. Photo: RAILWAYPRO

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 is to generously fund the World Bank’s International Development Association (IDA). This is the largest source of concessional finance for development projects, including loans, grants, and other types of financing at below-market interest rates. In fact, it is the last lifeline for the 75 poorest countries on the planet, providing low-interest finance when these countries 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 GDP per capita rankings, and 19 are now contributing to IDA themselves. But that has not been enough to lift recipient countries out of crisis. Contributions replenish IDA funds every three years, with the latest at the end of 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.

Finance for growth

Another problem is that even if IDA donations increase, recipient countries will struggle without broad 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 study it to avoid global debt crises.

In early 2024, a Paris-based think tank, in a report by the Finance for Development Lab, proposed a “bridge program.” 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 the debt crisis, Western governments and international financial institutions can unlock more funding for innovation and development, especially in Africa. The promised support could 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