Author: San Bilal
Affiliated organization: Real Instituto Elcano
Type of publication: Report
Date of publication: December 30, 2020
The COVID-19 crisis is causing dramatic health and socio-economic impacts, affecting primarily the most vulnerable peoples and countries, and significantly increasing inequality. While the recession is global, poorer countries are less able to adopt rescue and countercyclical measures to support their populations and economies. Sub-Saharan Africa is experiencing the worst contraction of its economy on record, with an annual average contraction of -3% of its GDP in 2020, which is even greater in countries highly dependent on commodity exports and tourism. This could cost 25 to 30 million jobs and increase poverty by 10%, pushing up to 50 million additional people below the poverty line.
Boosting quality public investment is highly recommended to speed up COVID-19 recovery and job creation, with a strong emphasis on climate, sustainability and gender dimensions, in an effort to build back better. Yet the capacity to do so of poorer, but also many emerging countries, is highly constrained.
While developing countries are stretching their limited fiscal space to address emergency health and socio-economic distress, they must prepare now for the long road to recovery, for which they will also need support. Boosting collaborative efforts and partnerships, at both the domestic and international levels, will be a critical factor to promote their sustainable and inclusive recovery, notably through sustainable, green, gender-sensitive and inclusive investment to build back better. The EU is a committed partner for Africa in this endeavour. Joining forces and identifying synergies and complementarity are key to unleashing the potential for sustainable investment.
Strategic and macro-economic considerations
Europe is adopting a ‘policy first’ approach, defining key policy priorities and actions, combined with a whole-of-government approach, to help ensure that support for investment is well anchored in a coherent, sustainable, green, gender-sensitive and inclusive approach to development. Given the emphasis on the EU’s geostrategic ambitions, the European approach to partnership and development aims to become more strategic, including collaborative efforts at the global, regional and country levels in response to the COVID-19 crisis.
Support for enhanced macro-economic conditions and governance, and reforms towards a conducive investment climate and business environment at the national and international levels are among the EU’s priorities. In the context of its global response to the COVID-19 crisis, the EU has speedily been providing such support, notably by allocating €3 billion for macro-financial assistance to 10 neighbouring countries in the form of loans. The EU has also boosted its budget support by grants to developing countries and by accompanying them in their adjustment measures.
Addressing debt vulnerabilities
Debt vulnerabilities, already present before 2020, have been heightened for an increasing number of emerging and developing countries as a result of the COVID-19 crisis. Around half of low-income countries and several emerging economies, including Egypt, Ghana, Kenya and South Africa, are in –or at high risk of– a debt crisis, as their public debts continue to rise. Argentina experienced another debt default in May and Zambia defaulted in November 2020. More could follow if no speedy action is taken by the international creditor community.
The G20, together with the Paris Club, have agreed a temporary suspension of debt services for low-income countries (LICs). The Debt Service Suspension Initiative (DSSI), adopted in April 2020 until the end of the year, was renewed by the G20 in November 2020 for another six months until mid-2021, with the possibility of a further extension beyond June 2021, to be decided at the World Bank-International Monetary Fund (IMF) Spring meeting of 2021. While this is a welcome decision, it is insufficient one.
The Common Framework for Debt Treatments beyond the DSSI is a first step in the right direction. It foresees the possibility of considering debt restructuring for poorer countries on a case-by-case basis, also with the participation of private creditors. But, as it stands, the Common Framework still falls short of: (1) identifying specific measures; (2) reaching out to a broader range of developing countries in debt distress; and (3) addressing systemic issues around the international debt architecture. Nonetheless, it is an important diplomatic effort to the extent that it brings together, under the same umbrella, Paris Club members and other public debt creditors, notably China, which alone owns 63% of the combined sovereign debt held by G20 members by the end of 2019.
The EU has called for a Global Recovery Initiative, which would help address debt vulnerabilities in a more structural way, directly linking debt relief and investment to the Sustainable Development Goals (SDGs). This is an important endeavour, as the global community should seek to use the fiscal space that debt service suspension and debt relief could provide to developing countries to stimulate more sustainable, green and gender-sensitive investment, aligned with both the 2030 Agenda on Sustainable Development and the Paris Agreement
China has become a major actor for both public and private debt, as the distinction is not always straightforward in its state-owned enterprises and parastatal financial institutions. China has recently been renegotiating the public debt of several developing countries, including Kenya, Mozambique and Tanzania, and claims to have reached an agreement with 10 of the poorest countries –although the list is not public it apparently also includes Angola–. It is said to mainly take the form of deferral of payment.
The G20 should prioritise replenishing the Catastrophe Containment and Relief Trust (CCRT), through which the IMF has provided debt service relief to the world’s 29 poorest and most vulnerable countries, amounting to almost US$500 million. The EU, through its membership of the G20, Paris Club and IMF, has a catalytic role to play in fostering a consensus towards adjustment and reforms to improve debt sustainability. The EU has already contributed €183 million to the CCRT, and could contribute more, including the IMF Poverty Reduction and Growth Trust.
The G20, together with the Paris Club, have agreed a temporary suspension of debt services for low-income countries (LICs). The Debt Service Suspension Initiative (DSSI), adopted in April 2020 until the end of the year, was renewed by the G20 in November 2020 for another six months until mid-2021, with the possibility of a further extension beyond June 2021, to be decided at the World Bank-International Monetary Fund (IMF) Spring meeting of 2021. While this is a welcome decision, it is insufficient one
The EU has called for a Global Recovery Initiative, which would help address debt vulnerabilities in a more structural way, directly linking debt relief and investment to the Sustainable Development Goals (SDGs). This is an important endeavour, as the global community should seek to use the fiscal space that debt service suspension and debt relief could provide to developing countries to stimulate more sustainable, green and gender-sensitive investment, aligned with both the 2030 Agenda on Sustainable Development and the Paris Agreement.
From transaction to transformation, with local actors
The EU and its financial institutions are well placed to adopt such transformative, cooperative and impactful approaches. The European External Investment Plan (EIP) is based on a three-pillar approach, combining European blended finance and guarantees for IFIs and DFIs (pillar 1), grant support, notably for technical assistance (pillar 2) and the promotion of an enabling environment and conducive investment climate (pillar 3). Under the new long-term budget of the EU for 2021-27, the EU has adjusted its instruments and financial framework to harness this comprehensive approach in its Neighbourhood, Development and International Cooperation Instrument (NDICI). This includes an open European mechanism for blended finance and guarantee, with the enhanced European Fund for Sustainable Development (EFSD+) and External Action Guarantee (EAG). The steering principles are meant to provide greater flexibility in EU development finance, to better respond to evolving needs while ensuring greater coherence in the EU, following a ‘policy first’ approach based on EU priorities for its external action. By adopting a ‘Team Europe’ approach, designed in the context of the EU’s global response to the COVID-19 crisis, the Union also aims at enhancing the coordination between EU institutions and member states, as well as increasing the visibility of EU action.
The Team Europe approach is proving an attractive rallying call for greater European policy coherence, which could usefully be implemented on the ground for European financial institutions of development. But to be truly effective, it must be anchored in local realities, with local actors and based on local priorities. Europe is well placed to do so, based on its experience and vast array of initiatives
While greater European coherence and synergy is a most welcome outcome in the ‘Working better together’ agenda, it should be carried out in close cooperation with other international actors, notably multilateral development banks and institutions and the UN, even more so in the context of the COVID-19 global response. Even more importantly, it must build on local needs, priorities and dynamics, together with local actors. This is what the EU is doing or should be doing. But there is always the danger that European actors become too focused on their own internal priorities, mechanisms and cooperation agendas, at the expense of coordination and engagement with local actors and locally owned initiatives.
Towards Team Europe-African approaches
The Team Europe approach is proving an attractive rallying call for greater European policy coherence, which could usefully be implemented on the ground for European financial institutions of development. But to be truly effective, it must be anchored in local realities, with local actors and based on local priorities. Europe is well placed to do so, based on its experience and vast array of initiatives.
In the context of its strategic partnership with Africa, the EU should consider building strong alliances with local actors around a sustainable, green, gender-sensitive and inclusive investment agenda. This is even more important in the context of the harsh socio-economic consequences of the COVID-19 crisis, which call for a mobilisation of all resources available by a broad range of actors. Europe and Africa could do so by jointly adopting a Team Europe-Africa approach at the continental level for its overall framework, which could be articulated at sub-regional and country levels as appropriate and necessary. It could help bring together European and African financial institutions for development, prioritise and coordinate their actions to promote and mobilise sustainable investments to build back better in the recovery process of the COVID-19 crisis, in line with the sustainable development goals. Such endeavours could also facilitate the interaction with public authorities and donors, framing investment in more inclusive processes.
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