The Global Shock Absorber We Need

Globalisation has contributed to a convergence of income between countries and divergence within countries. Today, over 75% of the world’s poor live in countries classified as middle-to-high income and so not eligible for concessionary finance from the World Bank and other international donors. Under the International Development Association (IDA) rules followed by the World Bank and most donors, countries eligible for ultra-low interest rates and long repayment periods are those with a gross domestic product (GDP) per capita of less than $1,145. India “graduated” from eligibility in 2014. Few of the countries not eligible, but where the vast majority of the poor live, have the fiscal or monetary space to address a pandemic or natural disaster and protect the poor. The threat to a country’s solvency presented by an enormous catastrophe narrows that space further. The pressure is acute for countries that rely on their access to international financial markets. Many of those who will be tipped into poverty by the pandemic live in these sometimes market-access, middle-to-high-income countries.

When the crisis hit, the Group of Twenty (G20) global leaders quickly came up with the Debt Service Suspension Initiative (DSSI): a DSSI covering the bilateral public debts, but only for countries eligible for borrowing under IDA rules. This limited move was necessary to gain speedy agreement, but it proved inadequate to the scale and the reach of the crisis. This problem goes far beyond India’s plight. Of the 20 countries with the most significant contraction of GDP during 2020—all between four- and seven-times India’s contraction, only one was eligible for the DSSI, and none could muster much fiscal and monetary response to the crisis. While the DSSI provided liquidity of up to $12 billion (bn), developing countries where the poorest live had $1 trillion (tn) of debt service to meet over 2020 and 2021, almost two-thirds of which is to private sector creditors. There is a solution to this mismatch of scale, and I am asking India’s leaders to support it in Rome at the next G20 meeting at the end of October.