The Covid-19 pandemic has triggered a collapse in global economic activity that will have lasting economic and social impacts across the world. Recent World Bank estimates suggest that there could be more than 100 million additional people earning less than $1.90 per day as a result of the crisis. Yet, governments in lower income countries have been constrained in mounting responses of a comparable scale because of relatively lower tax revenues, more limited opportunities for domestic borrowing and, in many cases, a lack of access to international capital markets.
As a part of the financial response to Covid-19, multilateral development banks (MDBs) have gained traction, although they intend to fund longer-term development projects, not short-term liquidity. The objective of this paper to assess the best way to deploy MDB assets to help lower income countries respond to the global crisis triggered by the Covid-19 pandemic. It seeks to find answers to the following questions:
Should MDBs participate in debt suspension?
If not, what are the prospects for providing substantial liquidity through new financing to face the crisis, and what does this mean for debt sustainability of the world’s poorest countries?