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Let’s convert unpayable debt into investments for children

Article co-authored by Kevin Watkins (Chief Executive of Save the Children UK) and Henrietta Fore (Executive Director of UNICEF), first published in El País newspaper on Sunday 18th October

At the height of Africa’s debt crisis in the mid-1980s, Tanzania’s then President, Julius Nyerere, asked his country’s creditors a simple question: “Should we starve our people to pay our debts?” Finance Ministers from many of the world’s poorest countries attending the virtual IMF-World Bank Annual Meetings this week will be asking the same question.

Let’s hope they get a different answer to President Nyerere.

When the debt crisis overwhelmed governments across Africa and Latin America in the 1980s, western governments sat on their hands. Repayments were squeezed out of shrinking economies by austerity programmes overseen by international financial institutions. Children bore the brunt of a lost decade for development as budgets for health, nutrition, social protection and education were sacrificed, and poverty spiralled.

The COVID-19 pandemic has created perfect storm conditions for a new debt crisis across large parts of the developing world. Economic growth has slowed, export revenues have declined, currencies are depreciating, and reserves are shrinking. Unlike rich countries, who can borrow liberally in their own currencies and tap central bank largesse, developing countries are now struggling to pay back existing loans, finance new debt and respond to the pandemic.

Once again, debt is diverting resources from vital services. The world’s poorest countries are scheduled to pay $45bn to creditors this year and next. Meeting those payments will leave over 40 of them spending more on repayments to creditors than on health.

Behind every debt statistic are the human faces of children denied a chance to realise their potential. We estimate that the COVID-19 crisis will push another 117 million children into poverty this year alone. Severe malnutrition is rising. Meanwhile, the disruption of health services could result in an additional half-a-million deaths for children under 5, as killer diseases like malaria, pneumonia and diarrhoea go untreated. Out of school numbers have surged as children are forced by poverty into labour markets or, a fate hanging over millions of adolescent girls, early marriage.

Faced with a crisis of this order of magnitude, children—not creditors—should have first claim on national budget resources.

Organizations like UNICEF and Save the Children can support communities when they face crises. We can make a difference. But there is no protection against the historic disinvestment in children now in prospect, as mounting debts shrink the already limited fiscal space available to governments while households are forced to cut spending in critical areas, including food.

We can debate the roots of the debt problems of the poorest countries. Reckless borrowing and irresponsible lending certainly played a role. It is now clear that far too much debt was accumulated off-budget, in many cases collateralised against mineral exports, on repayment terms as opaque as they were onerous.  But surely there can be no debate over our shared responsibility to protect children from a crisis that jeopardizes their future.

The IMF and the World Bank have started to address the debt crisis. Last spring, they secured G20 agreement on a plan—the Debt Service Suspension Initiative—providing for a six-month moratorium on debt servicing to 74 of the world’s poorest countries. All creditors were asked to participate. 

Not all have heeded the call. While most official creditors have suspended debt collection, commercial creditors have yet to follow their lead. That matters because commercial creditors—mainly sovereign bondholders—account for almost one-third of the debt service bill.

Uneven participation in the DSSI is not the only problem. Some countries not eligible for the initiative face equally urgent needs. Moreover, the debt service suspension now on offer is the antidote to a temporary liquidity crisis. It is not a cure for solvency problems now facing many countries. Zambia recently asked creditors to restructure debts rendered unpayable by recession and the collapse of copper prices. Others are likely to follow.

Of course, debt relief is not a stand-alone strategy. Far more should be done to provide affordable finance to countries facing recession. But as recent research by the IMF has highlighted, delayed action on debt relief not only hurts vulnerable populations, it damages economies and delays recovery.

The time has come for a fundamental review of debt sustainability, followed by coordinated action covering all creditors to restructure and, where necessary, reduce debt. That review should look beyond narrow debt indicators to our deeper responsibilities. Almost all the world’s governments have signed the Convention on the Rights of the Child. We remind them that this carries an obligation to provide for the health, well-being of children “to the maximum extent of available resources…within the framework of international cooperation.”

Allowing debt repayments to hinder efforts to combat rising child poverty, malnutrition, preventable disease, and education disadvantage would be a violation of the spirit and the letter of a Convention that defines the best of our shared humanity. It would represent an act of intergenerational injustice.

We urge creditor and debtor nations to work together to convert today’s debt liabilities into investments in the children who represent the future of their nations. The initiative that brought down the curtain on Africa’s last debt crisis required governments to commit to direct savings on debt into poverty reduction. Making an explicit link between debt reduction and spending to protect children from the fallout of the COVID-19 pandemic and open opportunities would surely galvanise support across political divides, even in these polarised times.

Debt relief can work, as recent experience in Ecuador shows. Just a few months ago, bondholders agreed to restructure $17.4bn in debt, including a 10 per cent debt haircut. Ecuador’s credit rating has improved.  Surely the deeper risk for creditors and debtors comes not from orderly restructuring but from the dislocation that will follow a wave of disorderly defaults.

The debt crisis confronts the whole international community with tough questions. There are no easy answers. But in these challenging times let’s remember the ties that bind us as a human community – and there is no more powerful bond than our shared responsibility for children.

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