High-level meeting on middle-income countries, convened by the President of the United Nations General Assembly

The crisis has created a series of simultaneous and reinforcing shocks that has exposed and exacerbated economic, financial and debt vulnerabilities of middle-income countries.

Prior to the pandemic, the debt sustainability of middle-income developing countries was already under pressure. We have since witnessed a concerning deterioration of debt sustainability indicators of the group due to the economic fall out associated with COVID-19 crisis.

Mobilizing financial resources to assist countries to respond to the health and socioeconomic challenges stemming from the crisis is essential to ensuring that the progress towards achieving the SDGs is not undone. In parallel, the climate and environmental emergency also threaten to compromise the progress we have achieved and the development prospects of future generations. Hence economic recovery must be both green and inclusive.

The international community has rallied around a few initiatives to provide countries with additional fiscal space that are unlikely to fully address the difficulties of middle-income countries.

First, the reallocation of the IMF Special Drawing Rights to provide developing countries with 650 billion in additional resources is welcome. For the greatest impact it will be key for these resources to be aimed towards economic development and recovery rather than a simple provision of liquidity. Further, any unused SDRs by countries with the fiscal and monetary tools and borrowing space to support their economies should be allocated to countries in most need of those additional resources.

Second, the G20 Debt Service Suspension Initiative has delivered more than $5 billion in relief to more than 40 eligible countries. However, the DSSI and the Common Framework for Debt Treatments exclude more than 40 per cent of MICs. Out of the eligible MICs only half are participating due to the fear of downgrading by credit rating agencies that might result in loss of access to private external financing. However, even if the G20 DSSI included all MICs, this would not be sufficient to address the problem.

Many MICs face an external solvency problem. They lack the capacity to generate the foreign currency revenues required to service their debt in the medium and long term. This means they will require comprehensive debt relief and restructuring, with the participation of all bilateral, multilateral and private creditors. This is essential to allow them to promote economic recovery and a longer-term growth path aligned with the achievement of the 2030 Agenda.

MICs may consider debt-swaps as an alternative to deeper sovereign debt restructurings in countries with high but sustainable debt burdens. Debt-swaps can be effective in addressing different debt compositions in developing economies, including those with exposure to large commercial debts and large public debt stocks. One disadvantage can be high transaction and monitoring costs for project- based swap programmes. However, these can be mitigated under regional coordination initiatives, such as ECLAC’s Debt for Climate Adaptation Initiative for the Caribbean and ESCAP’s Debt Swap Mechanism for the Western Asia region.

Ultimately comprehensive debt relief programmes should be considered a pre-condition to increase MICs’ fiscal space. This would enable them to launch the massive public investment push required for a green and equitable recovery and a transformation that will be compatible with future and long- term external debt sustainability.

A green transformation in MICs also require investments in climate adaptation, mitigation, biodiversity conservation and other related activities that have higher social than private returns that are considered too risky by private investors. While private finance will have an important role to play, international public finance will be important sources of external finance due to its lower cost and longer maturity.