EB leads multilateral debt relief amid global pandemic

Illustration by Elisabeth Schettle
Illustration by Elisabeth Schettle

By Warren Wilson

As the novel coronavirus initially swept the globe this spring, governments took on new healthcare and social expenses as their revenues plummeted. With dwindling resources, many developing country governments still faced high payments on their foreign debt, much of it borrowed from the People’s Republic of China (PRC) over the last decade.

To provide poor countries with financial space to respond to the pandemic, the Bureau of Economic and Business Affairs (EB) and the U.S. Department of Treasury negotiated the Debt Service Suspension Initiative (DSSI) with global lender nations. DSSI allows 73 low-income countries to suspend as much as $15 billion in 2020 debt payments to Group of Twenty (G20) governments, including the United States and PRC, and to Paris Club governments until at least 2022. Governments will be able to redirect the funds to COVID-19-related health and social needs. 

DSSI also improves transparency, a top U.S. priority, by requiring beneficiaries to inform the Internal Monetary Fund and World Bank about all government debt. Poor debt transparency practices have enabled opaque, unsustainable borrowing in recent years, heightening economic risks, and fostering corruption. Greater transparency empowers citizens, promotes sustainable economic development, and discourages corruption and risky borrowing.

As of mid-July, approximately 40 countries have applied for DSSI debt relief. Country teams, regional bureaus, EB, and the interagency have so far worked closely with six countries to defer nearly $150 million in debt payments to the U.S. government. EB is helping to ensure that all lender countries—especially PRC—implement transparent debt relief on equal terms and in line with their G20 commitments. The U.N. secretary general and others have called for broader debt relief to protect the global economy. Economists forecast that COVID-19-related economic shocks could still force a number of governments to default on their debt. Paris Club and G20 countries, led by the United States, may extend DSSI debt relief into 2021, and are considering other options to aid vulnerable countries and prevent financial crises.

Warren Wilson is a financial economist in the Office of Monetary Affairs.