Exceptional measures for exceptional times
By Patrick Bolton, Columbia University and Imperial College, Lee Buchheit, University of Edinburgh, Pierre-Olivier Gourinchas, University of California Berkeley, Mitu Gulati, Duke University, Chang-Tai Hsieh, University of Chicago, Ugo Panizza and Beatrice Weder di Mauro, The Graduate Institute Geneva*
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
These are not normal times, and what the world is experiencing is not a normal recession. We propose a mechanism to implement a debt standstill for low- and middle-income countries, which would facilitate the involvement of private creditors in the restructuring, reduce potential risks of free-riding and free resources to cover some of the immediate costs of the COVID-19 crisis.
The Bank of England has announced that Great Britain is entering the worst recession in 300 years, the spike in unemployment claims in the US makes unemployment claims in previous recessions look like rounding errors, and the Olympic games have been postponed. IMF forecasts predict that only 9 countries out of 190 will have positive per capita GDP growth in 2020 (and none of them will record a growth rate above 2%). To put this in context, at the peak of the global financial crisis more than 75 countries registered positive GDP per capita growth.
A downturn of this magnitude can cause tremendous long-term damage, especially so in emerging and developing economies with a high degree of informality and weaker social and economic safety nets.
While many advanced economies are able to finance massive fiscal stimulus packages with super low interest rates, emerging and developing countries are hit by a double whammy as the COVID-19 crisis has led to a sudden stop in capital flows. According to estimates by the Institute of International Finance, non-resident portfolio outflows from emerging market countries amounted to nearly $100 billion over a period of 45 days starting in late February 2020. For comparison, in the three months that followed the explosion of the Global Financial Crisis, outflows were less than $20 billion.
This situation has led more than 100 countries to seek IMF help. As explained in an April 30, 2020 Op Ed by the Ethiopian prime minister Abiy Ahmed, many countries are facing a dilemma: continue to service their external debts or redirect resources to save lives and livelihoods? Continue reading “Exceptional measures for exceptional times”