Question 4 [25 marks]

Many developing countries are facing a renewed debt crisis. This is directly related to COVID- 19, which is now sweeping across many poor countries in a new wave.

Between 2016 and 2020, debt service as a percentage of GDP rose from an average of 7.1% to 27.1% for South Asian countries, from 8.1% to 14.1% for Sub-Saharan African countries, from 13.1% to 42.3% for North African and Middle Eastern countries, and from 5.6% to 14.7% for East Asian and Pacific countries. These percentages are expected to climb again in 2021.

(5 marks)

Meanwhile, incomes have fallen in developing countries with illness, lockdowns and business failures. This has been compounded by a fall in their exports as the world economy has contracted and by a 19% fall in aid in 2020.

The fall in incomes has put developing countries in a "trilemma": (1) a decline in tax revenues; (2) demands for increased government expenditure on healthcare and social support; and (3) a steep rise in public-sector deficits.

International agencies and groups have all advocated increased help to tackle this debt crisis. The IMF has allocated $100bn in lending through the Rapid Financing Instrument (RFI) and the Rapid Credit Facility (RCF) and nearly $500m in debt service relief grants through the Catastrophe Containment and Relief Trust (CCRT). The G20 countries have committed to suspend debt service payments by eligible countries which request to participate in its Debt Service Suspension Initiative (DSSI).

Source: https://pearsonblog.campaignserver.co.uk/debt-a-second-pandemic/

4.1 Imagine you are an economic advisor to a developing country attempting to rebuild the economy after the COVID-19 pandemic. How would you advise it to proceed, given the

"trilemma" described above?

(13 marks)

4.2 To what extent is it in the interests of the developed world to provide additional debt relief to developing countries whose economies have been badly affected by the pandemic?

(12 marks)