Update Country Report Maldives 16 Apr 2021

Event

In early April G20 countries extended their debt-relief programme to low-income countries until the end of 2021.

Analysis

The coronavirus pandemic has caused a major deterioration in the fiscal situation of most low-income economies. In many of these countries, governments had no choice but to increase their healthcare spending to protect their populations. These additional expenses exacerbated well-known structural problems, such as the more expensive cost of borrowing on international markets and a low level of tax revenue collection relative to GDP. The average fiscal deficit in Middle East and African countries widened to 10.4% of GDP in 2020, from 3.9% in 2019. In Latin America, the average deficit stood at 7.4% of GDP, up from 1.9% in the previous year.

The G20 created the debt service suspension initiative (DSSI) in May 2020, after it became clear that the pandemic was going to put pressure on government finances all over the world. Under the scheme, eligible economies can postpone payments of debt due to G20 members. However, debt must be repaid in full within six-years after the DSSI ends. The World Bank recorded debt deferrals worth US$5.7bn under the scheme between its launch and the end of 2020, with another US$7.3bn likely to be frozen in the first six months of 2021. In a separate development, the IMF announced in early April that it was releasing a third tranche of funds, worth about US$240m, under its Catastrophe Containment and Relief Trust (CCRT) to pay debt falling due for 28 of its poorest member states.

As welcome as these measures are, they are a drop in the ocean when compared with the additional spending of governments in low-income countries to try and combat the pandemic. The head of the World Bank, David Malpass, believes that debt relief, instead of debt deferrals, will be required in the long term to ensure that governments have sufficient revenue to spend on providing services and infrastructure to their populations. The G20 is building a "common framework" on debt restructuring for low-income countries, and the extension of the DSSI will enable more work to be done on its development.

Impact on the forecast

Despite the extension of the DSSI, the fallout from the pandemic means that many low-income countries will struggle to repay debt in the coming years without additional multilateral support.