July 8, 2020 / 1:18 PM / a month ago

Debt reduction only way to end "poverty trap" for some countries: World Bank chief

WASHINGTON (Reuters) - The Group of 20 major economies should extend a freeze on official bilateral debt payments by the world’s poorest countries through 2021, and permanently reduce the debt load of some of the most heavily indebted ones, World Bank President David Malpass said on Wednesday.

FILE PHOTO: World Bank President David Malpass attends the "1+6" Roundtable meeting at the Diaoyutai state guesthouse in Beijing, China November 21, 2019. REUTERS/Florence Lo

Merely delaying debt payments would not solve the problems of countries that were already facing high levels of debt before the coronavirus pandemic, Malpass told a G20 debt conference.

“In such cases, we need to not merely reduce debt service today, but reduce debt service tomorrow and permanently,” Malpass said.

“This will create light at the end of the debt tunnel for the poorest countries. For some of the hardest hit, a systematic reduction of sovereign debt stocks is the only way to restart growth, make new investment possible and profitable, and avoid an even longer poverty trap,” he said.

Developing countries and emerging markets face dire economic consequences from the pandemic given inadequate healthcare systems, a lack of resources to offset the impact of widespread lockdowns and, in some cases, a collapse in commodity prices.

Malpass emphasized the need for increased transparency about lending and said all official bilateral creditors, including policy banks such as China’s Development Bank, should take part.

He said a new Bank database of debt levels released in June would aid transparency and would be expanded in September. He said the goal was to add data on the terms of loans, including interest rates, maturities and grace periods.

The G20 initiative should cover all external, publicly guaranteed debt, including loans made by state-owned enterprises, if they had implicit government guarantees, he said, an apparent reference to Chinese companies involved in its Belt and Road infrastructure initiative.

He also cited concerns about confidentiality clauses in official loan contracts and debt-like instruments such as long-term bilateral swap lines that are often used as funding sources by countries such as Mongolia.

Long-term contractual commitments for electricity purchases also posed a crushing burden on poor countries, he said.

Reporting by Andrea Shalal; editing by Jonathan Oatis

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