A key advisor to Prime Minister Mia Mottley is touting greater use of disaster clauses in debt financing, particularly for developing countries in the Caribbean.
Professor Avinash Persaud, who recently shared his thoughts on the subject in a letter published in the Financial Times, said the Debt Service Suspension Initiative (DSSI) which was incorporated into the Mottley administration’s 2018-2019 debt restructuring, was an important move.
“Today, over 75 per cent of the world’s poor live in countries with a per capita GDP above US$1,185, so aren’t eligible for concessionary finance.
“Yet these states don’t have the fiscal or monetary space to address a pandemic or natural disaster and protect their poor.
The threat a catastrophe poses to their solvency narrows that space further. Of the 20 countries with the most significant GDP contraction during 2020, only Kyrgyzstan was eligible for the DSSI,” Persaud contended.
The financial expert who is also chair of the CARICOM Commission on the Economy added: “The initiative offered liquidity of up to US$12 billion to the poorest countries but developing countries that were not eligible had to meet over US$1 trillion in debt service payments by the end of 2021, almost two-thirds of which was to private creditors.
“The difference between the assistance offered and the liquidity needed in these countries must be addressed to make the world more resilient when the next disaster hits.
“During its debt restructuring in 2018-2019, Barbados exchanged old debt for approximately US$5 billion of sovereign bonds with natural disaster clauses and is now the largest issuer of such bonds.”
He explained that under this style of clause, when the World Health Organisation (WHO) or meteorological agency declared a disaster, debt service is immediately suspended for two years, with the payments added back at the end of the term of the loan or bond.
According to Persaud: “Barbadian-style clauses only cover events outside of the control of the country that can be declared within hours of — or even before — they hit.
“If G20 countries committed to adopting Barbadianstyle natural disaster clauses, there would automatically be one hundred times more liquidity to deal with the next global crisis, giving developing countries the ability to breathe.” (IMC1)