G20 debt relief unlikely to change anything for developing countries: Moody’s  

Pakistan estimated to have high debt-service payments, large fiscal deficit in 2021

KARACHI: The G-20 debt suspension initiative is unlikely to ease credit challenges that the coronavirus pandemic has amplified in some developing countries, according to a report released on Monday by Moody’s Investors Service. 

The global rating agency’s research arm said in the sector report titled “G-20 debt service freeze supports liquidity, high debt level challenges will intensify”, that frontier market sovereigns, particularly in Africa, would face significant medium to long-term debt issues. 

“While debt-service relief will allow some governments to reallocate scarce resources toward health and social spending, it will not have a significant impact on weaker medium-term debt trends,” said Lucie Villa, a Moody’s Vice President – Senior Credit Officer, and the report’s co-author.

“The coronavirus shock will lead to sharply lower growth this year, wider budget deficits and higher debt burdens for at least the next few years, as well as higher borrowing costs, at least for debt contracted on commercial terms.”

While the report mostly focused on frontier markets in Africa, it did mention Pakistan in two capacities. First, it said that bilateral relief would only cover a fraction of the increased external funding gap resulting from the shock.

“We estimate that Angola, Vietnam, Pakistan, Bangladesh, Sri Lanka and Kenya have the highest debt-service payments to official creditors as a share of GDP, at between 1pc and 4pc,” the report highlighted. 

Second, the report also said that the coronavirus shock and the authorities’ associated policy response have opened large fiscal and external imbalances that will take time to unwind. 

“The economic downturn will significantly constrain government tax receipts, while health and social spending pressures will persist, constraining debt-service capacity. We expect that some countries such as the Maldives, Kenya, Mongolia, Pakistan, Sri Lanka will continue to register large fiscal deficits in 2021,” the report said. 

Moody’s estimated that the suspension of debt-service payments could reduce the funding needs of eligible Moody’s-rated sovereigns by about $10 billion over the next eight months. 

However, this would only cover a fraction of the external gap, leaving an outstanding shortage of around $40 billion. According to Moody’s, new official sector disbursements are expected to help fill the gap, including emergency financing from the IMF.

Meiryum Ali
The author is a member of the staff and can be reached at [email protected]

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