A bold targeted fiscal expansion led by advanced economies is the only way to build a fair and resilient economic recovery from COVID-19, according to the United Nations Conference on Trade and Development (UNCTAD).
In its report – Trade and Development Report 2020 — the United Nations body said that multilateral system needs to lend a bigger hand to developing countries. It mentioned that public debt-to-GDP ratios will increase substantially in 2020 and, if the past is any guide, they will not return to pre-COVID-19 values quickly.
UNCTAD Secretary General Mukhisa Kituyi said that a proper fiscal consolidation requires, first and foremost, a strong economic recovery and governments must take the lead.
The Trade and Development 2020 report points out that significant international support was needed to ensure that the developing countries have the required fiscal space. The report notes that global debt-to-GDP ratio jumped by no less than 10 percentage points to 331 per cent of GDP in the first few months of the pandemie. In developed economies, fast rising non-financial corporate debt of deteriorating quality was the problem. The total indebtedness of non-financial corporates had risen to 75 trillion dollars at the end of 2019.
Governments’ balance sheets under pressure
With government’s extending loans and guarantees in the lockdown, this wave of corporate defaults is likely to put additional pressure on their balance sheets. In developing economies, while corporate bond markets have also grown substantively since the GFC in some larger emerging markets – to 3.2 trillion dollars by 2017 – overall debt dynamics are dominated by the exposure of sovereigns to the spill over effects of global financial instability, the UNCTAD said.
The report said that some of the risks involved are volatile investor sentiment, commodity price fluctuations, shortening maturities and greater rollover risks. higher external debt service burdens (as a percentage of export earnings and government revenues), as well as a weakened ability to self-insure against exogenous shocks through reserve accumulation.
Growing out of debt distress
The report argues that sustained fiscal expansions can be managed in developed economies who can borrow at close to zero interest or less. In some larger developing economies, this can be managed if they are oriented to productive investment in new greening technologies and leveraging technological progress for social inclusion and provision of universal public services.
“What is required now is not a submissive retreat into austerity, but a strong collective voice to support sustained and coordinated state-led fiscal expansion around the globe,” said Richard Kozul-Wright, director of UNCTAD’s division on globalization and development strategies.
Smaller and open developing economies, at all levels of income, will need financial assistance from the international community to preserve and expand domestic fiscal space, the report said.
From crisis to prosperity for all
- Expanding the use of Special Drawing Rights (SDRs) to support national development strategies in developing countries through a truly internationally governed reserve system. At the very least, developing countries’ fiscal spaces should be backed by the equivalent of $1 trillion of SDRs to meet current liquidity constraints.
- Financial support for boosting the health emergency response to COVID-19 in developing countries through a Marshall Plan for Health Recovery funded through increased official development assistance (ODA) commitments, international tax reform and enhanced multilateral financing mechanisms, on a scale to build resilience and boost recovery.
- An international Public Credit Rating Agency to provide objective expert-based ratings of the creditworthiness of sovereigns and companies, including developing countries, and to promote global public goods.
- A Global Debt Authority to stop a repeat liquidity crises from turning into serial sovereign defaults. Such an authority would build a repository of institutional memory on sovereign debt restructurings. It would also oversee the establishment of a global publicly accessible registry of loan and debt data pertaining to sovereign debt restructurings. In addition, it would develop a blueprint for a comprehensive and transparent international legal and institutional framework to govern automatic temporary standstills on sovereign debt repayments in times of crises and to manage sovereign debt workouts in a fair, efficient and transparent manner.