A cautionary tale of debt relief
Debt relief will free up essential funds but could be more punitive than helpful.
Many governments in the emerging world are facing a difficult conundrum: how to balance the near-term health risks of Covid-19 against the long-term impact of lost livelihoods.
Underdeveloped healthcare systems and fragile economies mean that many of these countries do not have the fiscal firepower to fight the disease or the economic downturn.
A suspension of debt payments will free up vital funds to fight the crisis and this looks increasingly likely after private and official creditors agreed to collaborate on a debt standstill beginning May 1. The Debt Service Suspension Initiative (DSSI) will apply to 77 countries, which have outstanding debt payments amounting to $140 billion.
But the process is complex and unless solutions are developed to guarantee debt sustainability and continued access to capital markets in the future, it could do more harm than good.