Why budget support is a more effective way to help LIC governments respond to COVID-19 than debt relief

By Alan Harding, Independent Development Economist (ex-Senior Economic Advisor at DfID)

The COVID effect … The pandemic has created new, all-time-high requirements for humanitarian response. OCHA has announced that it is seeking more than $35 billion to reach 235 million people in need.
.. and getting things back on track. OCHA’s Mark Lowcock discusses the urgent choices facing the international community in light of the “Global Humanitarian Overview 2021” launching today.

(From Devex Newswire, 1/12/2020]

The impact of COVID-19 on the growth and economic development prospects of low income countries (LICs) should not be underestimated. Modelling by researchers at Kings College, London and UNU-WIDER estimate that around 500 million people worldwide[1] could be pushed back into absolute poverty, reversing three decades of progress in achieving poverty reduction.

Many LICs are also in debt distress so they have little fiscal room to respond to COVID-19 and other exogenous macro-fiscal shocks e.g. due to climate change and associated natural disasters.

Further debt relief is not the answer, especially for countries that have already benefitted from HIPC e.g. Zambia or Mozambique, due to the moral hazard associated with creditors being willing to continually bail out fiscally irresponsible governments.

However, governments and Ministries of Finance in many LICs in Africa and elsewhere do require urgent support to help them through 2021 and 2022 without a collapse in their health care systems and other essential public services….potentially leading to even more humanitarian disasters (see above).

So what is the answer to this conundrum?

Well, I strongly believe that what is required is a new type of time-limited and targeted budget support programme, based upon the EU’s successful use of State-Building Contracts in a range of fragile state contexts since 2012.

These budget support contracts come with a range of pre-conditions and also a range of safeguards built in to the process to ensure that funds are used transparently, responsibly and are targeted to where they are needed most.

In the current circumstances, a new type of instrument called, for example, COVID-19 Emergency Budget Support could be designed and contributions sought from donors, foundations and philanthropists to an associated trust fund. This could be jointly managed by the World Bank and EuropeAid (DGDevco) who are the two organisations with the most experience in the successful management of these types of aid instruments.

Such a new aid instrument could be seen as the financial basis for a new “Marshall Plan” to demonstrate global solidarity and ensure that the world’s bottom billion do not get left even further behind due to COVID-19.

[1] Andy Sumner, Chris Hoy and Eduardo Ortiz-Juarez (April 2020), Estimates of the impact of COVID-19 on global poverty, WIDER Working Paper 2020/43.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s