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Four priorities for the G20 meeting of Finance Ministers and Central Bank Governors

Expert comment

Written by Annalisa Prizzon, Shakira Mustapha, Iain Steel

Hero image description: Cash Money. Photo: Andy Thrasher, CC0 1.0.

Last month we eagerly welcomed back the buzz of face-to-face diplomatic pow-wows as the G7 leaders met in Carbis Bay after a two-year hiatus. Despite expectations that the Biden administration might propel a shift in gear for global development policy, the G7 communique left a bitter taste. It fell far short of what many NGOs and world leaders had advocated and argued for the development agenda. The FT’s Gideon Rachman could have not found a better title to summarise this year’s summit: The G7 was stronger on values than hard cash.

In early July, Finance Ministers and Central Bank governors of G20 countries will meet in Venice under the Italian Presidency. Will they put their money where their mouths are?

We suggest at least four priorities for the development agenda to support low and middle-income countries in the health emergency and recovery phase from the Covid-19 crisis.

1) Finance Covid-19 vaccinations in low and middle-income countries

Very rarely has a global priority aligned so closely with national interest as in this case of the deployment of vaccines against the Covid-19 virus. Vaccinating all adult populations in low and middle-income countries – including in G20 countries – is rational from an economic perspective. It will help open up the global economy and reduce the risks and uncertainty associated with a prolonged pandemic. A larger share of the world’s population that is vaccinated will also mean fewer opportunities for the virus to mutate and possibly jeopardize progress made so far.

In this article, we estimated that vaccinating the world will cost an extra $24-34 billion depending on the assumptions on the costs of vaccines. This might look like a large sum but it is less than a quarter of total annual ODA budgets across donors. It is also very small in comparison to the foregone benefits for the global economy of the avoidance of a prolonged pandemic, as estimated by the IMF, in order of $9 trillion.

2) Boost the ammunition of multilateral development banks

The Covid-19 crisis has hit both low and middle-income countries hard. Lower-income countries have seen assistance from the concessional windows of multilateral development banks rising and the IDA replenishment round being brought forward by a year. Non-concessional windows have expanded during the Covid-19 crisis but not as much as during the Global Financial Crisis in 2008 and 2009. Many middle-income countries have been somehow overlooked during this crisis.

G20 Finance Ministers and Central Bank Governors should consider a series of measures to expand the resources MDBs have at their disposal. The scale of the challenge ahead cannot mean either/or but all of them. First, prepare the groundwork or continue the work for the general capital increases of the IBRD and of the IADB, whose lending capacity will soon be constrained. Second, push forward an external review of multilateral development bank capital adequacy to assess their effective financial capacity. Finally, move forward with balance sheet optimisation measures, as summarized here.

3) Make sure lower-income countries benefit from global tax reforms

Most of the direct benefit from the proposed global minimum tax will go to advanced economies where large multinational enterprises (MNEs) are resident. Lower-income countries could benefit indirectly if MNEs reduce tax avoidance. However, because lower-income countries apply higher tax rates on average than the proposed 15% minimum rate, there will still be an incentive to shift profits to lower-tax countries. A higher minimum rate would further reduce that incentive and benefit lower-income countries.

To benefit from the global minimum tax, lower-income countries will need to remove existing tax incentives that result in effective tax rates below 15%. However, stabilisation clauses in investment agreements often prevent this. The G20 should therefore consider a global framework to enable lower-income countries to remove tax incentives from MNEs without risk of international arbitration. A new multilateral instrument to amend tax treaties across the board could also be used to enable lower-income countries to apply a new top-up tax on outbound payments of interest and royalties that are a common source of profit shifting. Without these, the minimum tax risks becoming a transfer of tax from lower-income countries to advanced economies, the opposite of what is needed to boost domestic revenue mobilisation.

Similarly, the new digital services tax needs to be designed carefully to enable lower-income countries to benefit. OECD analysis suggests that the smallest economies in the world with GDP below $4.3 billion could lose between 50% and 85% of the potential benefits if MNEs are required to make a minimum of EUR 5 million revenues in a country before it is allocated a share of taxing rights. This group includes some of the poorest countries in the world such as Djibouti, Liberia, and Sierra Leone. A lower threshold or special rule for smaller countries is needed for them to benefit from the new digital services tax. The scope of the new tax should also continue to exclude natural resources. Many lower-income countries are dependent on taxes from their extractives sectors, and it is a fundamental principle that the profits from selling natural resources that belong to the State should be taxed by that State.

4) Take concrete and bold steps to ensure private sector creditors participate in debt relief initiatives

The Covid-19 shock has had direct implications for budgetary balances pushing many lower-income countries to take up more debt or making servicing their debt more difficult. Disorderly defaults and lengthy resolutions could become a major obstacle to their post-crisis recovery.  High debt service burdens also mean fewer resources to address the climate crisis and other critical development goals.

Though a step in the right direction by including non-Paris Club members such as China, the G20 Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments (beyond the DSSI) still fall short of what is urgently needed.

First, despite requiring debtor countries to seek debt treatments from private-sector creditors on comparable terms, the Common Framework provides no mechanism for making this happen.  The participation of the private sector in these initiatives is on a voluntary basis. No private investor has participated so far in the DSSI, partly reflecting debtor countries’ concerns about their standing with private creditors and credit ratings.

Second, the framework fails to address countries’ fears of rating downgrades and loss of market access when applying for debt relief. This will likely lead to countries putting off restructuring to their detriment.  More needs to be done by the international community to push for changes to the international financial architecture that incentivise or compel private creditor cooperation and reduce the costs and risks associated with sovereign debt restructuring.  Some bold but practical solutions include amending UK and US law to protect sovereigns from litigious creditors, as well as creating a facility that would provide credit enhancements for new bonds that would be swapped for old debt from private sector creditors.

Time for action

The Covid-19 pandemic is now escalating once again across the world, ravaging countries across Africa, Asia and Latin America. Meanwhile, many countries are re-imposing lockdowns and travel restrictions, and new waves of infections are leading to more severe death tolls.

Now is the time for G20 countries to provide hard cash to support low and middle-income countries dealing with the health emergency and mitigating the long-term scars of the Covid-19 crisis. Decisive action cannot wait any longer.