Here’s what 2020 taught us about funding a crisis and how to do better in 2021
by Zoë Scott, Head of Multilateral Programmes, Centre for Disaster Protection and Dirk-Jan Omtzigt, Chief Economist and Head, Humanitarian Financing Strategy and Analysis Unit, UN-OCHA [1]
Photo: © Arne Hoel/World Bank
The start of a new year usually brings with it a sense of expectation, hope and resolve to make improvements. 2021 should be no different. There is much reason to believe that enormous global progress is possible this year, including through the G7 and COP26, to create a more equitable, sustainable future.
However, progress will be greatest if we are honest about challenges and failures, rather than trying to pretend that the covid-19 pandemic and its socio-economic impact was an aberration that will not be repeated. On the contrary, the covid-19 crisis highlighted both our interconnectedness and our collective vulnerability. Whilst a lot of money was mobilised more quickly than usual for covid-19, overall the crisis underscored that the global system for anticipating, responding to and paying for crises is inadequate. And that an inadequate response is very costly. The Centre’s work on Funding Covid-19 Response highlights some important facts about the response to date:
Most crisis funding is slow and is not arranged in advance – only 2% of covid-19 funding was pre-arranged. This means it does not always reach people when they need it.
This crisis was mainly funded with debt – 93% of covid-19 funding was in the form of loans. This means that countries that were already highly-indebted were less able to get support.
When crisis funding is arranged after a disaster, it does not always end up where it is needed most – the 20 countries where covid-19 created the most poverty only got 4% of the overall funding.
Clearly, many countries are starting 2021 in a worse economic position than at the beginning of 2020. The World Bank expects that by the end of 2021, real GDP per capita in sub-Saharan Africa will likely regress to the same level as 2007, with between 119 and 125 million people having been pushed into poverty by the pandemic. There are therefore two big questions that we must address in 2021:
What can we do now to support countries struggling with the impacts of covid-19?
What can we do to build a better global system for crises so this is not repeated?
This blog provides concrete suggestions to answer the first question and presents a clear way forward for the second.
What can we do now to support countries struggling with the impacts of covid-19?
The current funds and commitments from International Financial Institutions (IFIs) fall short of what is needed to address the socio-economic impact of the crisis. Data collected by the Centre shows that, of the US$110 billion pledged by the IFIs, only US$11.7 billion was targeted at low income countries (LICs), and only $7bn has actually been disbursed to date—or about $10 per person.
During the 2008/9 global financial crisis, a number of actions were taken to support countries. The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) has produced a background paper that calls for the same measures to be put in place immediately. Further delays in the global response will increase the cost of the crisis, leading to lost development gains, increasing poverty and rising probability of conflict. An additional 13 countries are forecast to experience new conflicts between 2020 and 2022, driven by economic contraction, rising unemployment and falling school enrolment rates. If this forecast were to materialise, global instability would peak relative to the past 30 years. In an interconnected and globalised economy, the effects of the crisis, if left unaddressed, are likely to cascade and reverberate for years to come.
There are concrete things that can and should be done, including:
Expand Special Drawing Rights (SDRs). The shareholders of the International Monetary Fund (IMF) should agree to a general issue of SDRs of at least US$500bn. The concern that the benefits of this would mostly accrue to better-off economies could be addressed by an agreement among the G20 to forgo access to their allocations, allowing them to be redistributed to the most vulnerable countries on the basis of objective criteria. This will provide much needed liquidity to LICs.
Rethink outstanding debt and new debt relief packages. Over 50% of LICs are now assessed to be in or at high risk of debt distress according to the joint IMF-World Bank debt sustainability framework. The pandemic and the economic crisis are raising spending requirements as countries seek to mitigate the dual health and economic impact, while revenues are falling due to falling income. There should be a coordinated effort between private and official creditors to (1) extend and expand the universal debt standstill and (2) initiate concrete and systematic efforts towards debt restructuring for longer-term debt sustainability.
IFIs should deploy their existing balance sheets to support their weakest members. Instead of seeking to protect their balance sheets during the current crisis, IFI’s should protect vulnerable people. IFI’s should increase the speed of disbursement and volume of finance to LIC’s by leveraging the balance sheet, going to the market and/or seeking replenishments. The International Development Association (IDA)–the concessional arm of the World Bank most relevant to the poorest countries–can borrow more on the markets to increase the availability of affordable money to its most vulnerable members. Regional Development Banks should similarly extend their balance sheets. Together this could increase IFI lending capacity to an estimated US$1 trillion.
What can we do to build a better global system for crises?
We enter 2021 with a better global appreciation of the need to plan and prepare for crises. Risk management and preparedness is higher up the global political agenda than it has been before, not just for pandemics but also for climate-related emergencies and food insecurity. We have the opportunity now to build a system that is not as slow, unreliable, inequitable, uncoordinated or as reliant on hastily-arranged debt as the one we currently have.
In January, the Centre and UN OCHA will join a wide range of experts calling on the G7 and COP to improve the way we predict crises, prepare response and protect people. This coalition will be setting out three priority asks of world leaders, and initiating a consultation process to develop the detail of these asks throughout 2021. If you want to help make 2021 a year of real change and join with others to create a brighter future where we are better protected from the 21st century threats that we face, please get in touch to join the campaign.
Footnotes
[1] The ordering of author names was randomised, as is the case in all Centre blogs.