How to resolve Covid’s debt crunch?

The Covid-19 pandemic and the accompanying economic lockdowns have deepened inequality both within national borders and across the globe. Many low-income countries have suffered a severe economic contraction that has derailed budgets and created urgent financing needs. This has exacerbated debt-sustainability concerns, which were already high on the eve of the pandemic.
Today, more than half of low-income countries eligible for relief under the Group of 20’s Debt Service Suspension Initiative are either in debt distress or at high risk, doubling in the last decade.
Since (at least) the founding of the League of Nations in 1920, a recurring preoccupation of the international community has been the cycles of boom and bust in indebtedness, particularly external indebtedness. Proposals to “fix” the global financial architecture usually intensify with the severity of the problems. These have ranged from the broadly encompassing, such as the Bretton Woods Agreement at the end of World War II, to the more targeted, such as the re-introduction of collective action clauses in sovereign debt contracts in the early 2000s (already used in the 19th century).
Changes to the global financial architecture are easy to propose and difficult to implement. But progress can be made incrementally as well as with great leaps. The growing focus on transparency in finance, debt statistics and contracts is a case in point. Global leaders, as well as G-7 and G-20 communiques, stress transparency as a priority. In connection with the DSSI, the International Monetary Fund and the World Bank have taken important steps to disclose more data on the creditor composition of each country. In the private sector and civil society, the call for greater transparency has also escalated, as highlighted by a recent Group of 30 report. The Institute for International Finance finally agreed on voluntary principles for debt transparency, although it remains to be seen whether there will be effective implementation by private creditors.
Given the scale and complexity of social, climate, economic and political challenges facing the global economy, why is debt transparency important and why now? Let’s be clear. Boom-bust cycles in international debt have been around for centuries. Transparency on debt and financial flows alone will not change that. Transparency can, however, play a critical role in mitigating the severity of these cycles, helping to avoid setbacks in poverty reduction and other development objectives. Covid-19 constitutes a major setback: The World Bank estimates that the global poverty rate has increased in 2020 for the first time since 1998.
Inadequate debt disclosure undermines debt-sustainability analyses and poses serious challenges for macroeconomic surveillance work.
—Bloomberg