Understanding global debt: Relieving the COVID-19 impact on the most vulnerable
The novel coronavirus continues to wreak havoc on lives around the world, and while it’s still too soon to comprehend the full impact of COVID-19 in terms of capital flows and debt, it’s clear that this crisis will inevitably add to the burden of the poorest countries and push 71 million to 100 million into extreme poverty, measured at the international poverty line of $1.90 per day.
In an effort to mitigate the impact of the pandemic, the World Bank Group (WBG) and the International Monetary Fund (IMF) stepped up to financially support developing countries. In response to a joint call for action by the WBG and IMF, the G20 finance ministers announced that official bilateral creditors will allow IDA countries that request forbearance to suspend their debt service payments, beginning May 1, for the remainder of 2020. Bilateral debt service suspension is a powerful measure that can bring real benefits to people in poor countries, particularly countries that don’t have the financial resources to respond to the COVID-19 crisis , while avoiding a liquidity crisis and debt defaults.
During this fluid situation, it’s critical to be able to accurately quantify these debt liabilities. Since 1952, the World Bank has maintained a Debtor Reporting System (DRS) which includes historical quantification, methodologies, and aggregate debt information. To support the proposed debt relief efforts, the World Bank’s Development Data Group built a detailed data profile of debt stocks and flows for countries eligible to receive relief under the Debt Service Suspension Initiative.
The profile identifies the annual and monthly debt service payments projected to come due during 2020 and 2021, to the multilateral and bilateral creditors that may be called upon to relieve debt burdens as needed. The basic data elements used to calculate the future payments were the lending terms of individual creditors and creditor groups. These projections were based on debt stock as of the end of 2018, for individual debt instrument (i.e., loans). These profiles will facilitate validation and reconciliation of debtor and creditor records at a much more granular level. More information are provided in the Debt Service Payments Projections: What do we measure note.
What do the data show?
From the debt data exercise, we’ve learned that the public sectors of IDA-eligible countries remain heavily dependent on official concessional sources of financing: more than 80% of the debt stock is owed to multilateral and bilateral official creditors. Most IDA countries have gained market access with bond issuance, and other private sources of financing also account for an important share of public and publicly guaranteed debt: about 17% of debt accumulation and 24% of total debt services obligations for 2020 and 2021.
One important observation has been a shift in the external financing of low- and middle-income countries, known as ‘South-South’ flows, or lending by middle-income to low-income economies, as highlighted recently in articles in the Diplomat and the Economist. Of the G20 group of countries, nine have one or more official export credit agencies and at least half have an active aid program or mechanism for extending concessional financing. Bilateral lending by low- and middle-income countries is often driven by the need to finance, facilitate and promote international trade as well as to further their own development agenda. Consequently, a large share of the external financing provided takes the form of export credits and guarantees tied to the procurement of goods and services in the lending country.
This interactive dashboard helps visualize the monthly debt service payments projected to come due during 2020 and 2021 for DSSI-eligible countries.
What definitions and classifications do we use?
The DRS relies on established taxonomies for the definitions of the categories of debtors and creditors. These are in line with international standards, specifically with the System of National Accounts (SNA2008) serving as the root of the ontology framework, followed by the Balance of Payments and International Investment Position Manual (BPM6).
Unlike the narrower definition of public debt, typically the one including only the government, the DRS defines the public sector to also include incorporated or unincorporated non-financial and financial entities wholly owned by the governmental sector, including official development banks or financial intermediaries that make long-term loans, but do not accept monetary deposits. Debt created from their borrowing is categorized as public debt.
Based on this definition, a lending country’s public sector is referred to as a bilateral creditor. In addition to governments, the public sector includes aid agencies that provide concessional loans, such as the United States Agency for International Development (USAID), or the financing window of a specific government ministry or department, such as the United States Department of Agriculture, as well as an official export-import bank or export credit agency such as the Export-Import Bank of the United States.
For more details on the established concepts and definitions used to measure debt for the DRS, check out the recently published DRS: What it Measures note.
What caveats should we keep in mind?
The fast-changing landscape of financial markets, the proliferation of complex debt instruments, as well as rising debt vulnerabilities have underscored the importance of improving the quality and transparency of debt statistics. The quality of the data depends on various factors, including clearly establishing debt concepts and definitions, a functional debt recording and management system, an effective organizational structure, and strong staff capacity. Our Debt Statistics Team has been able to support significant improvements to debt statistics in client countries by sharing information during economic assessments and country missions as well as by emphasizing the importance of external debt reporting obligations.
Nonetheless, these debt data are still subject to limitations, such as the gaps created by the under-reporting of debt obligations. While under-reporting limits debt transparency, it is often the result of inadequate country capacity to collect this information for their own debt management operations, as well as due to limitations in the legal framework. As we continue working to support debt relief efforts during the ongoing coronavirus pandemic, we will continue exploring and reconciling data against creditors’ declarations to fill these gaps.
We’re working to further maximize the benefits of information captured in the course of this coming crisis, to ensure that debt analyses are predicated on the most comprehensive and accurate accounting of existing public debt stock and debt service obligations. We also plan to push the transparency further and publish the level of disaggregation in the data profiles of DSSI-eligible countries for all DRS countries in our upcoming publication International Debt Statistics 2021. And as always, we’re continuing to work to enhance the coverage, quality and timeliness of public and external debt statistics. Among other things, we’re supporting country capacity to accurately capture debt instruments, to increase coverage beyond government levels, as well to address the most challenging aspects of debt recording—such as new terms of lending, properly accounting for unconventional lending/borrowing, and the increasing complexity of private sector non-guaranteed borrowing in the international market. Our hope is to support countries to increase the transparency of their debt data as well as their borrowing and lending decisions, in order to enable them to prevent and/or mitigate a debt crisis.