Poor countries are facing financial pressure and spending cuts amid the outbreak of new variants of the SARS-CoV-2 virus along with the policy of raising interest rates in the face of rising inflation. Many countries could be plunged into serious crisis if they do not receive support.
IMF Managing Director Kristalina Georgieva expressed concern that some countries’ economies could collapse if the G20 countries do not agree to accelerate restructuring or postpone debt payments for poor countries. In addition, private creditors also need to come up with relief measures. According to the head of the IMF, if the implementation of DSSI is not extended, the debt challenge will increase pressure on many countries, especially low-income countries.
When the COVID-19 pandemic broke out in 2020 and hit poor countries hard, hampering their governments’ efforts to pay their debts and support their peoples, the G20 initiated DSSI to enable deferred payments for 73 low and middle-income countries. The initiative is expected to expire at the end of 2021 after being extended for one year.
However, the appearance of the Omicron variant is a clear warning that the pandemic will be long-lasting. In the context that poor countries are both buckling under debts and dealing with the severe impact of the pandemic, the IMF and World Bank (WB) have urged lending countries to do more to help poor countries deal with the increasing debt burden. According to the WB’s estimates, debt in poor countries has increased by 12% to a record 860 billion USD in 2020 during the pandemic. According to IMF Managing Director, about 60 percent of low-income countries are at risk or are having difficulties in paying their debts.
The Omicron variant has exacerbated supply chain problems and reduced demand, which in turn threatens to slow global economic growth. The appearance of Omicron has shaken financial markets and caused many countries and territories to tighten travel activities. Many countries have temporarily “banned” citizens from some African countries. Meanwhile, major airlines have quickly imposed restrictions on passengers from southern Africa.
According to Fitch Ratings, it is too early to include the impact of the Omicron variant in world economic growth forecasts, until scientists have a better understanding of its transmissibility and severity. However, the world’s leading credit rating agency said that rising inflation will complicate macroeconomic responses if the new variant hinders economic growth.
With inflation rising in major economies, central banks are pulling back from stimulus measures and are expected to raise interest rates next year. This will increase the cost of debt for poor countries and potentially lead to the flight of capital from these countries.
If the Omicron variant leads to a new COVID-19 outbreak, the worst-affected economies will be those with low vaccination rates, heavily reliant on tourism, and with little capacity to support monetary and fiscal policies to offset the growing impact of the infection wave. This is the great concern of poor countries.
