It is being called the “great reversal”. After decades of progress, the international goal of eradicating extreme poverty by 2030 is in jeopardy, Gordon Brown has warned, as developing countries battling the coronavirus sacrifice their health and education systems to pay western and Chinese creditors.
“We need a comprehensive new plan that recognises the need for some countries to restructure and reduce debt,” Brown told the Observer. Ahead of a key G20 meeting next weekend, the former prime minister is calling for a global solution if an imminent child mortality crisis is to be averted.
His warning comes against a backdrop of rising poverty and reversals in child health. Data from the Johns Hopkins Medical School shows that an additional 6,000 children could die every day from preventable causes as the pandemic weakens health systems and disrupts routine services.
But the ability of many developing countries to tackle Covid-19 is severely limited by their debt obligations. With little financial support flowing from the IMF and the World Bank, some governments face a stark choice between repaying creditors or funding crucial public services.
It is predicted that African countries will pay out more than $10bn to creditors this year and next year alone. More than half will go to City asset management firms, like BlackRock, which employs former chancellor George Osborne on £650,000 a year, and Fidelity Investments.
Some countries owe a substantial amount to major commodity firms, while Chinese development banks and companies also figure prominently on their balance sheets.
Zambia, which like many African countries is spending more repaying debt than it is on health and primary education, looks set to become the first African country to default on its debts to bondholders since the pandemic began.
The G20 group of countries that meets in Saudi Arabia next weekend is promoting a Debt Service Suspension Initiative (DSSI) under which 73 eligible countries will receive a temporary debt service freeze, with repayments to follow over three years.
Of the 73 countries covered by the DSSI, 43 are scheduled to spend more on debt repayments in 2020 than on health provision.
But aid experts are sceptical about the initiative and the appetite of private creditors to back it. “The G20 debt initiative is an exercise in sleepwalking,” said Kevin Watkins, chief executive of Save the Children. “At a time when many countries need permanent debt reduction, it offers a temporary pause on payments. It is treating a solvency crisis as a liquidity problem, repeating the mistakes that led to the debt crisis of the 1980s. The refusal of private creditors and China to participate in the initiative means that over half of the debt service bill for the poorest countries is not covered by the initiative.”
According to Save the Children, a failure to tackle the debt crisis will see child poverty numbers rise from 307 million to 354 million in the poorest countries covered by the initiative.
It warns that millions more children will go unvaccinated, while untreated killer diseases, such as pneumonia, malaria and diarrhoea, could reverse gains in child mortality built up over the last two decades. The charity is calling for a new initiative that converts debt liabilities into investments in children.
Brown, who played a major part in helping tackle Africa’s debt crisis 20 years ago, said if a comprehensive solution were to be found this time around, the private sector had to step up.
“What’s new is that, unlike early 2000, private creditors account for a sharply rising share of debt service obligations. I would stress the need for a global framework, covering all creditors and, in advance of the G20 meeting next week, we are trying to build worldwide support for it.”
The Observer approached both BlackRock, which is said to hold more than $1bn of African sovereign bonds, and Fidelity for comment.
BlackRock declined to comment and Fidelity did not respond.
Financial experts said that creditor firms had a fiduciary obligation to clients, such as pension funds, limiting their ability to write off debts. Also, the debts are parcelled up, making it impossible for them to act unilaterally. But Watkins called for the firms – and China – to think again. “Money that should be going into health clinics, nutrition programmes and schools is being siphoned off to repay unpayable debts to commercial creditors and China. To speak plainly, this is a violation of child rights.”