Economic recovery from the COVID-19 pandemic depends on sustained investment in health care and social services. But while rich countries like the United States can borrow and spend relatively easily, low-income countries face a major hurdle: their credit rating.
A credit score, like a credit score, is an assessment of the ability of a borrower, whether business or government, to repay their debts. Lower credit ratings drive up the cost of borrowing.
This threat has prompted some poorer countries to avoid tapping investors for vital financing during the pandemic, while other governments planning to spend more on public services have been hit by downgrading credit ratings. private companies.
My upcoming research shows that when credit scores drop, countries tend to spend less on health care. This should be cause for concern as the delta variant of the coronavirus is increasing the number of cases across the world.
Punished for his health expenses
A wide gap has emerged between rich and poor countries in terms of spending to combat the impact of the coronavirus and strengthen their healthcare infrastructure.
Rich country governments have provided trillions of dollars in direct and indirect support to their economies, averaging around 24% of their gross domestic product. Developing economies, on the other hand, have been able to spend only a tiny fraction of this amount, averaging about 2% of their GDP.
Recent research found that a country’s credit rating was the most important factor in how much a government spent on COVID-19 relief. That is, the lower a country’s score, the less it was able to spend on health care and other social services.
For example, Côte d’Ivoire and Benin are the only two countries in sub-Saharan Africa to have been able to borrow on international markets since the start of the pandemic. Others have chosen not to borrow, at least in part, it seems, for fear of the rating downgrades that could result. This prevented them from financing much-needed expenses.
The fear is justified. Countries that planned to increase spending, such as Morocco and Ethiopia, were punished for it. Morocco’s credit rating, for example, was downgraded to speculative, or “junk,” grade by Fitch and Standard & Poor’s due to plans to spend more on social services. The ratings downgrades will make it much harder and more expensive for it to borrow from international investors.
And Moody’s Investors Service cut Ethiopia’s credit rating after the country applied for debt relief under a new Group of 20 program so it can spend more to support its economy and communities. citizens.
Overall, despite spending significantly less during the pandemic, poorer countries were much more likely than richer ones to have their credit ratings reduced by Fitch, Standard & Poor’s and Moody’s – the big three. private rating agencies.
Low-income countries are therefore forced to choose between maintaining their stable credit rating and undertaking essential spending on social services.
In my own research, which is currently under peer review, I looked at rating changes in a group of 140 countries from 2000 to 2018. I found that credit rating downgrades reduced public spending on health care.
The IMF rating system
Even the International Monetary Fund, which is the main global agency that oversees development finance, uses a rating system that tends to penalize governments for any increase in public spending. This includes spending invested in their health care systems.
The IMF assesses the creditworthiness of countries through a system it calls its debt sustainability framework. Countries are classified into three levels of “credit capacity” — strong, medium or weak.
Weak countries are deemed to have a low capacity to manage additional debt based on their current debt levels. No distinction is made between debt resulting from large long-term investments in social services such as health and education and debt incurred due to more wasteful spending. Countries are then required by the IMF to improve their ratings as a condition of aid, for example by emphasizing debt repayment, short-term economic targets and general spending cuts.
An editorial in The Lancet blamed similar IMF-induced austerity in the early 2000s for cuts in health spending in Guinea, Liberia and Sierra Leone, leaving them vulnerable to the Ebola crisis in 2014. These three countries were the most affected by an epidemic that lasted two years and caused more than 11,000 deaths.
The IMF recently announced a plan to issue $650 billion in reserve funds that low-income countries can use to buy vaccines and expand health care. While this should help more countries not have to choose between credit ratings and the well-being of their citizens during the pandemic, it is only a short-term solution.
A recent United Nations report called for reform of the regulation of private credit rating agencies, saying they lack accountability and make it difficult for poor countries to meet their human rights obligations. A proposal to impose a moratorium on sovereign credit ratings of over-indebted countries during crises would also help provide a buffer.
However, permanent changes in how the IMF and private rating agencies assess debt may be needed so they don’t penalize countries for making large investments in health care and other public services. . This would help countries build their healthcare infrastructure so that they are not caught off guard by the next pandemic.
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