In certain circumstances, common morality says that creditors should not force their borrowers to pay interest and principal fully and on time. The COVID 19 pandemic and the global economic collapse it has caused are just such circumstances, for both persons and governments. For the poorest countries harmed by the crisis (e.g., Guinea, Haiti, Nepal), the International Monetary Fund (IMF) has developed a mechanism to free governments from debt servicing payments to the IMF. The principle is right, but the country coverage is far too limited and the period of relief too short.
Barry Herman, Senior Fellow in the Graduate Program in International Affairs at The New School in New York City stated that the IMF is trying to mobilize funds from donor governments to extend its debt relief program although they themselves have huge crisis-related domestic spending needs. However, donor governments do not have to fund poor country debt relief from their fiscal budgets. There is another resource available. hey can tap long-unused reserve assets available at the Fund called “Special Drawing Rights” (SDRs). Not only can Special Drawing Rights fund relief from debt owed to the IMF, they can also fund relief from debt due to the World Bank and the major regional development banks. Here is how it could be done:
According to Barry Herman, in 2015, in the wake of the Ebola crisis, the IMF created the Catastrophe Containment and Relief Trust (CCRT). The Catastrophe Containment and Relief Trust is designed to pay the interest and principal due on debt owed to the IMF by low-income and vulnerable countries hit by catastrophes, freeing up government resources for more urgent uses. To receive the benefit, a government requests assistance from the IMF Executive Board. If the Board approves, the Catastrophe Containment and Relief Trust pays the Fund on behalf of the indebted government. Interest and principal payments continue to be made, just not by the debtor country. Moreover, unpaid debt servicing is not postponed and added to debt-servicing payments due in the future. It is cancelled.
Using Special Drawing Rights to fund IMF special programs for low-income countries was suggested by United States Treasury Secretary Steven Mnuchin in April 2020. The important point is that Special Drawing Rights have real value, mostly unused by the richest countries who have most of them. When governments use Special Drawing Rights, it is usually to cover shortfalls in external payments due. However, they must first exchange the Special Drawing Rights for dollars or euros or another freely usable currency. Countries with large reserves simply draw on their foreign exchange holdings.
Barry Herman noted that the countries that the IMF classifies as “advanced” held 126 billion Special Drawing Rights in their reserves at the end of 2019, valued at about $177 billion. Special Drawing Rights could be tapped for the pending enlargement of the Catastrophe Containment and Relief Trust to $1.4 billion to provide two years of relief instead of six months, as currently. The Catastrophe Containment and Relief Trust could well be further expanded to fund comparable relief for middle-income countries hit by the pandemic, such as Ecuador and Pakistan, or hurt by other disasters, natural or otherwise.
Holger Schmieding, Chief Economist at Berenberg Bank in London stated that the World Bank and regional development banks have no facility comparable to the Catastrophe Containment and Relief Trust, but nothing prevents their governing bodies from creating them. Moreover, they are all “prescribed holders” of Special Drawing Rights, meaning that governments can transfer Special Drawing Rights to them. Unlike the IMF, development banks need to exchange the Special Drawing Rights deposited in their trust funds into the currencies of their loans. This would be straightforward as the trust would sell Special Drawing Rights to the country whose currency it needed, e.g., to the United States Treasury’s Exchange Stabilization Fund.
Then, each development bank would pursue its policies on which countries to help and to what extent. On May 28, World Bank President David Malpass, reacting to debt-relief proposals from the Group of 20, expressed his fear that any change to normal debt servicing would negatively impact the Bank’s standing in financial markets, where it issues bonds that finance its loans to middle-income countries. But if the World Bank emulated the IMF’s Catastrophe Containment and Relief Trust, it would ensure uninterrupted debt servicing while providing relief to countries in crisis. Investors in the Bank’s bonds would appreciate that distinction.
According to Holger Schmieding, it is not clear why these proposals have not already been taken up. Perhaps the problem is that Special Drawing Rights are thought about, if they are thought about at all, by monetary authorities rather than by development cooperation ministries. Or perhaps it is inertia. Many governments and the IMF Managing Director support a global increase in Special Drawing Rights which is fully warranted, but will take time.
As Barry Herman noted, a substantial increase in multilateral relief can be organized now, with existing Special Drawing Rights. It is not a lot of money, but the relief it would provide and the distress it would offset is incalculable. For the G20 finance ministers, it is time for them to act.
Debt relief for poor countries
“What A Difference a Day Makes…”
August born singer, pianist and self-crowned “Queen of Blues” Dinah Washington, popularized the song with timeless lyrics, “What a diff’rence a day made, Twenty-four little hours…”. August 15th, is one of those days with great historic and personal meaning to me. It is the day India, my father’s homeland, gained independence after 200 years of British rule. Despite the sometimes-dubious relationship with Indians in Africa, seen by some as beneficiaries of colonial legacies in countries like Kenya and Uganda, the narrative of Ethio-India relations dates back over 2,000 years based on trade which flourished during the 1st century of the ancient Axumite Empire. In the 20th century a large number of Indian teachers were also invited to educate children in remote areas of Ethiopia by Emperor Haile Selassie I. To date bi-lateral relations have grown exponentially, however, it’s the compelling writings of historians J.A. Rogers and Runoko Rashidi that reveal the deep roots between Ethiopia and India which formed the ties that bind.
August 15th also marks the independence of the Republic of Congo (Brazzaville) after 80 years of French control. The fight to end colonial rule in Congo peaked in July 1960 with 3,500 ONUC troops arriving in the Congo. Over 10% of the assembled army were Ethiopian forces known as the “Tekil Brigade”. ETHIOPIA AND CONGO A Tale of Two Medieval Kingdoms by Fikru Gebrekidan provides deeper insight into the similar 16th century parallel kingdoms of Solomon and Bantu, which had diverging paths due to colonialism. Congo Seffer, located in Addis Abeba, diplomatic capital of Africa, is a remnant of that time; best known to have housed families of former fighters who aided in Congo’s independence.
August 15th 1974, is also the birth date of Prime Minister Dr. Abiy Ahmed. Most Ethiopians know his attempts, accomplishments and accolades, including the Nobel Peace Prize which turned the “world’s most powerful leader” green with envy, but that’s another story. Dr. Abiy, a bright-eyed boy from Beshasha, one of 13 siblings, was known as Abiyot, (revolution). He hailed from a dynamic and diverse spiritual legacy with a Muslim Dad and Orthodox Mom surrounded by indigenous practices in the rural region of Oromia. He found his faith as a Protestant and is said to have preached a bit on his journey to the highest office in the land, notwithstanding his military and political positions. It’s no surprise that he would marry Zinash Tayechew, gospel singer and mother of his 4 children based on his well -known love for the both the arts and his faith. Dr. Abiy’s focus on the future has caused a great gap between those who love and support and those who abhor and undermine. What else is new? This is the load that leaders bare, especially in Ethiopia; not for the faint of heart as history recalls. That doesn’t stop us armchair analysts from prescribing a range of calculated to café style advice, if followed to the tee, would provide a “walk in the park” for the Prime. Not!
One of my wise Rastafari Elders, Ras Sam Brown, who bucked the system in Jamaica garnering 100 votes for PM under the Suffering People’s Party in 1961, often reminded us that the exact thing one loves you for is the exact thing another will hate you for. But Leos, (cue rolling of eyes at the astrological reference), center stage, shining under the sun sign with fire and the lion as symbols; believe all things are possible. For woke Leo leaders – July 23rd to August 22 – love, peace, power, control, generosity, kindness, regimentation, freedom and happiness is ALL the order of the day. They will spend every hour of the 24-hour day planning and working to make it so. Dr. Abiy has these traits and will never accept anything less than peace and prosperity for all, building towards what skeptics say is a utopic legacy.
Full disclosure: I too am born on August 15th in 1961 and reserve the right, much like Dinah Washingston’s self-proclamation, to develop my rare insight and connection to the PM, unbeknownst to him. (LOL) My presumptuously amusing testament is based on our joint birthday and other inflated factors. For instance, I gave birth to 10 children with triple that number in my clan. We were one family with common bonds yet individual identities, personalities and aspirations. Much like my family, aka DestaNation, the PM’s betaseb, Ethiopia, require 24 hour a day attention to address the well-being of over 80 ethnic groups. Imagine, I spent 156 months pregnant and nursing 10 babies, followed by decades of care, and I am still unable to get them to agree on one dish for dinner, even the identical twins. Yet we demand that in our PM’s short 28 months of service he should have gone further in advancing and reconciling the best interest of 110 million+ people. Seriously? At least Dr. Abiy can probably get 100 million Ethiopians to agree on mealtime injera while I still hold out hope for my 10. This is all a stretch and in good humor but with a purpose. Suffice it to say my birthday wish for Dr. Abiy is continued patience and fortitude, sensitivity and strength; seeded in faith and humanity, recalling the old adage for every day, ‘…when man on earth has done his best God will do the rest.’ Make every count.
Dr. Desta Meghoo is a Jamaican born
Creative Consultant, Curator and cultural promoter based in Ethiopia since 2005. She also serves as Liaison to the AU for the Ghana based, Diaspora African Forum.
