How Can a World Recovery Fund Relieve Developing Countries from Debt Having Piled Up in the COVID Aftermath?

HKUST IEMS Thought Leadership Brief No. 62

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Alicia Garcia-Herrero

After a pandemic with major social and economic consequences, emerging and developing countries need to swiftly address a two-pronged policy objective: sovereign debt sustainability and being able to fund investment, especially investment with high economic and social returns. So far, the international community – through the G20 in particular – has alleviated the liquidity strain facing developing countries with the DSSI and quick mobilization of financial resources by the Bretton Woods institutions. However, the DSSI has come now come to an end while the FED is tapering and about to hike interest rates. A handful of low-income countries face liquidity constraints or even solvency challenges already and such circumstances could also quickly extend to middle-income countries. With both new financing and legacy debt issues in mind, we make the proposal of setting up a World Recovery Fund (WRF), aimed at addressing some of the key problems with the design of the DSSI and more generally the existing international financial architecture for dealing with debt problems in the developing world. We first describe the main challenges in the international financial architecture for post-pandemic sovereign financing and then detail our proposal for the WRF.

About the author

Alicia García-Herrero is the Chief Economist for Asia Pacific at Natixis. She also serves as a Senior Fellow at European thinktank BRUEGEL and a non-resident Research Fellow at Real Instituto Elcano think tank. She is currently an Adjunct Professor at the Hong Kong University of Science and Technology. She is also a Faculty Associate of HKUST IEMS. More >>

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