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SPEECH: Preventing a great reversal for children

The case for a supplementary IDA budget and debt relief

Kevin Watkins (CEO, Save the Children UK)’s comments at International Development Association (IDA) Forum, 5 October 2020

Let me begin by thanking Aki Nishio (Vice President, Development Finance ) for inviting Save the Children to address this important meeting.

I also want to thank staff across the World Bank for the extraordinary efforts they have made in front-loading IDA disbursements. Your professionalism and commitment have made a difference in the lives of desperately vulnerable people.

To repeat what I suspect will be a common refrain in the Annual Meetings, we are collectively facing the greatest development challenge of our generation. After more than three decades of extraordinary progress in combating poverty, improving child health, and expanding access to education, we stand on the brink of what could become a great reversal in development.

When we celebrated the replenishment of IDA19 last year, all of us looked forward to making the 2020s a decade of delivery for the Sustainable Development Goals (SDGs). We are now faced with the collective challenge of preventing a lost decade and restoring hope.

Our success – or failure – in rising to that challenge will have a profound bearing on the lives millions of the world’s most deprived children.

While COVID-19 may pose the most immediate health threats to adults, it is children who will carry the deepest scars and bear the most protracted harm of the social and economic crises triggered by the pandemic. IDA has a critical role to play in protecting children from that harm.

As governments gather for the Annual Meetings, I urge them to reflect on what is at stake - and on the history of this organisation.

In 1946, Eugene Meyer opened the first Annuals Meeting with these words: “These institutions do not operate in a vacuum. They are part of a plan for general international organisation to improve the lot of humanity… Stability to be achieved must be desired and struggled for”.

Eugene was writing in the aftermath of the Second Word War. But his appeal to governments has a powerful resonance at this moment of global crisis – especially for the major shareholders with the power to make a difference.

Children on the frontline

We have already heard about the conditions facing the 74 IDA-eligible countries. Even before the pandemic, many of these countries were far off track for achieving the 2030 goals. Despite growth rates averaging 5 per cent between 200 and 2018, extreme poverty was falling too slowly to achieve the SDG ambition of extreme poverty eradication. Progress in child survival, education, gender equity and access to basic services was also lagging.

That was then. Now, with COVID-19, there is a risk that IDA countries, especially those affected by conflict and fragility, will be cut adrift.

As a group, IDA countries are facing the fastest contraction in growth since the 1960s, with per capita incomes projected to fall by up to 6 per cent in 2020. The already limited fiscal space available to governments has shrunk dramatically. IMF and World Bank estimates put the financing gap facing sub-Saharan Africa alone at $114bn, and that was before a marked downward revision in growth numbers.

These macro-economic pressures translate into real human costs as people see their livelihoods disrupted, their wages decline, and budgets for the vital services on which they depend cut.

Reading updates from my Save the Children colleagues in the field, I get daily reminders of what all of this means for children. We have established a tracking system for attendance at clinics – and the results include:

  • Steep declines in attendance at clinics for the treatment of diarrhoea, pneumonia, and malaria in programmes in Kenya
  • A devastating reversal in utilisation of health and nutrition services in Yemen
  • Falling attendance at ante-natal clinics in Senegal
  • Declining utilisation of maternal health services in some districts of Sierra Leone

The reports on education make for similarly harrowing reading. School closures have left millions locked out of classrooms for over six months. In a situation where rising poverty and hunger is forcing children into labour markets and adolescent girls into early marriage, where hunger is rising, and where education budgets are being hollowed out, this is catastrophic.

I should emphasise that what we see through our programmes is part of a global picture of reversals in development. The magnitude of these reversals is not widely recognised. To cite some of the more recent evidence:

  • Based on growth and distribution data, Save the Children/UNICEF estimate that an additional 117 million children could fall below national poverty lines in the poorest countries
  • New estimates published in The Lancet on childhood malnutrition warn that an additional 6.7 million children could be left suffering from wasting over the first year of the pandemic.
  • Another modelling exercise using the Johns Hopkins Lives Saved Tool produces a mid-range scenario for the disruption of health services in the context of increased child wasting estimating an additional 75,000 child deaths per month. Most of these additional deaths would results from wasting and delayed or disrupted treatment of killer diseases like pneumonia – now the biggest infectious killer of children as highlighted by  the Every Breath Counts coalition
  • In education, detailed household survey analysis of the impact of the 2005 earthquake in northern Pakistan have shown that children aged 3-15 living close to the fault line suffered serious long-term learning losses equivalent to 1.5 grades of schooling. It is worth noting that COVID-19 school closures have lasted longer, and the poverty impacts have been more severe, than in this case.

A supplementary IDA budget

Governments across the IDA countries are responding to the crisis created by COVID-19 – and it is imperative that they mobilise additional resources, and allocate those resources equitably. Non-government organisations can also play a role in supporting communities and partnering with governments. Save the Children has launched its single biggest appeal ever in response to the pandemic – and we are working with donors, philanthropists, and corporate partners to make a difference.

But let’s be honest. In the absence of urgent and converted international effort, we will see the hard-won gains of decades stall and then reverse. Rich countries recognise how high the stakes are. They have gone to extraordinary efforts to protect their citizens from the impact of the pandemic, and to prevent their economies going into depression. Fiscal rule books have been torn up, monetary policy has been redefined, and governments have demonstrated an appetite for innovation in using loans and credit guarantees to protect jobs, support firms, and underpin, recovery.

Unfortunately, that ambition and innovation have been sadly lacking in international cooperation to support the poorest countries. This is not the time to rehearse the arguments we and others have made elsewhere for bold new approaches to Special Drawing Rights and leveraging of the World Bank’s balance sheet. The Annual Meetings provide an opportunity to signal a shift in two critical areas for IDA-eligible countries:

  • A supplementary IDA budget
  • The development of a more comprehensive debt relief framework

Failure to expand the flow of financial resources to IDA countries will leave governments and communities fighting the equivalent of a human development forest fire with small buckets of water.

Let’s be absolutely clear on one thing: front-loading IDA resources was the right response at the right time. The $35bn provided in record time has not only protected livelihoods, supported safety nets, and enabled governments to mitigate the economic downturn – it has also saved lives.

But front-loading is what it says on the tin - front-loading. It is not a transfer of new and additional resources to respond to an unprecedented development emergency.

The case for a supplementary IDA budget is surely self-evident.

Front-loading has left the IDA budget facing a fiscal cliff in the next two years. The $35bn allocated - 43 per cent of the resources available for IDA-19 – leaves just $22bn a year for the next two years, which would mark a sharp decline in transfers at a time of rising need. The danger is that a cut in IDA flows will leave countries trapped in a downward spiral of recession and human capital erosion.

That outcome would effectively leave the SDG goals out of reach.

Save the Children has argued for a supplementary budget roughly equivalent to the $35bn front-loading effort to date. We believe around half could be mobilised by leveraging the World Bank’s balance sheet through bonds. However, the remainder needs to come from donors as additional grant contributions to subsidise an increase in the grant element of loans or provide outright grants for countries in or at risk of debt distress.

We therefore urge shareholders and donors to enable IDA to provide additional commitment authorisation of $35bn to IDA countries over the next two years, with provisions for up to half of this amount in grants.

At a time when all governments are facing budgetary pressures, we do not under-estimate the effort required to provide a credible IDA supplementary budget. However, there are three overwhelming reasons for action:

1.     The human costs of inaction will be unacceptable. IDA is a financial lifeline for some of the poorest countries – and people – in the world. Weakening that lifeline in a moment of crisis will have devastating consequences for children, potentially fuelling reversals in nutrition, child poverty, education, and other areas.

2.     A supplementary IDA budget provides value for money. Every $1 provided by donors in grants will unlock an additional $1 or more by leveraging the World Bank’s balance sheet. Moreover, the costs of subsidising credit accessed by the World Bank will be relatively modest because of low interest rates

3.     This is an opportunity to strengthen confidence in multilateralism and act on commitments to the SDGs. The World Bank’s shareholders have endorsed the institutions commitment to human capital and collectively signed-up for the SDGs. Failure to provide a supplementary IDA budget would call those commitments into question.

Beyond the Debt Service Suspension Initiative

IDA-eligible countries face a debt service bill of around $45bn this year and a roughly equivalent amount next year. Paying that bill is diverting resources from vital investments in areas like health and education.

In the midst of the devastating reversals in child health and nutrition I mentioned earlier, over 30 IDA countries are now paying more to service debts than they are spending on their health of their citizens (see below) .

Some are spending more on debt than on health and primary education combined. That is indefensible. Spending on health, nutrition and education not only averts suffering and expands opportunity, it also boosts productivity, creates jobs, and drives shared prosperity.

Allowing the claims of creditors to trump the right of children to health and education is not inefficient and inequitable for the future of societies and national economies. It is also, frankly, immoral.

The World Bank and the IMF deserve credit for steering the G20 towards the Debt Service Suspension Initiative (DSSI). All creditors were asked to participate. Unfortunately, only the Paris Club has so far suspended the collection of debt service payments on any scale. Private commercial creditors accounting for some $14.5 billion in payments this year have been conspicuous by their absence as have Chinese creditor agencies, including the China Ex-IM Bank and the China Development Bank.

The end result is that the DSSI is suspending payments on probably no more than 10 per cent of the debt service flowing out of IDA countries. 

We can debate the underlying causes of the current debt crisis. Both the World Bank and the IMF were sounding the alarm long before COVID-19. Some governments unquestionably borrowed on terms which now appear reckless. In some cases, debt deals were negotiated on opaque terms, with loans advanced off- budget, beyond public scrutiny, and collateralised against mineral exports.

By the same token, creditors seeking high returns invested in high risk debt – and that risk was priced into interest rates.

The background to the problem matters less now than the urgency of finding solutions. The Annual Meetings provide an opportunity to convert what are unpayable debt liabilities into investments in human capital, starting with children.

Save the Children is calling for measures in four areas:

1.     Extend the DSSI. The DSSI should be extended to the end of 2021 at the earliest to provide governments with a more stable planning environment.

2.     Initiate dialogue on an extended debt relief architecture, as proposed by the Managing Director of the IMF. The DSSI suffers from the limitation of a long list of failed debt relief initiatives: it focusses on liquidity, rather than the solvency problem facing many countries. There is currently no comprehensive architecture for dealing with all major creditors, including commercial creditors and Chinese agencies. The IMF-World Bank should work with governments to develop that architecture, which should encompass transparent reporting mechanisms

3.     Strengthened private sector participation, including debt restructuring. It is widely assumed that any suspension of restructuring of commercial credit will harm credit ratings and/or exclude countries from credit markets. However, orderly restructuring has the potential to release resources and improve credit rating. Ecuador’s recently negotiated a 57 per cent (NPV) reduction in bond debts encompassing a 10 per cent reduction in principal, the postponement of amortisation payments, and reduced interest rates. The agreement, backed by almost all bondholders and supported by the IMF, enabled the governments to reduce payments by over $1.5bn. The country’s credit rating was upgraded after the deal.

4.     Engagement with China. Chinese development finance has played an important role in infrastructure development. However, Chinese creditors have been slow to support the DSSI. In some countries – Zambia being a case in point – disputes between private creditors and China threaten to delay or derail debt relief, creating the risk of disorderly defaults.

We fully recognise the need to treat each country on a case-by-case basis. The most immediate priority is to increase the net flow of finance to IDA eligible countries. However, if we have learnt anything from the torturous history of debt relief in low income countries, it is surely that delayed action on systemic problems is a prescription for excessive economic costs and avoidable human suffering – a point reinforced by a recent IMF paper.

While Save the Children recognise the complexities associated with debt service suspension and debt relief, we believe a simple principle should guide the dialogue: creditor claims do not override the rights of children to decent nutrition, health, education, and hope for the future.

We would urge private creditors to work with governments and the World Bank, the IMF and UNICEF not just to reduce debt, but to convert debt into investments in children.

Looking ahead

The World Bank was born out of one of the great tragedies of the 20th century. It is now facing what future historians will surely look back on as a watershed moment in the 21st century – a moment in which governments saw the scale of the crisis unfolding, weighed the options, and decided on a course of action.

As Eugene Meyer noted almost 75 years ago. The World Bank was created to improve the lot of humanity. IDA is today a central pillar in that mission. It is an expression of shared humanity, multilateralism, and commitment to the SDG ambition.

What the Bank is able to do will be determined by the actions and decisions of its major shareholders. Taking action now on a supplementary IDA budget and debt relief will not mark the end of the crisis, but it could mark the beginning of the end.