'Poverty-Pause' to help debt-heavy nations weather shocks

Lenders to emerging markets are facing growing pressure to introduce so-called pause clauses into debt contracts as a way of buffering vulnerable borrowers from external shocks like climate change-driven extreme weather events.

The World Bank and the UK's export finance agency recently said they will test a version of such provisions, allowing a country to suspend debt repayments when it's hit by a natural disaster or environmental crisis. Some countries, like Barbados, are already including them in their debt contracts.

Now, the United Nations has a wider proposition: a "debt-poverty pause."

The instrument would be a "systemic addition" to the international financial architecture, the UN says. It would be "triggered automatically, to stabilise free-falls when exogenous shocks shrink developing countries' fiscal space, bloat their debt servicing and throw households into poverty," UN Development Program Chief Economist George Gray Molina said in a 14 July statement.

In the absence of a more long-lasting solution to the developing world's debt, climate and poverty crises, the UNDP said the tool could work as a financial lifeline for the world's most vulnerable. "We need to move beyond emergency measures," Molina said.

Climate pause-clauses have been welcomed by some on Wall Street. Jay Collins, vice chairman of Citigroup Inc's banking, capital markets and advisory division, recently said the tool "should become mainstream" and that they are "not only reasonable, but necessary."

The numbers backing UNDP's case are stark. A whopping 165 million people fell into poverty in the past three years, the agency estimates. The surge means that more than 20% of the world's population is now living on less than $3.65 a day.

That increase is correlated with high levels of debt and insufficient social spending. Forty-six countries pay more than 10% of government revenue on interest. On average, low-income countries are likely to spend twice as much on interest as they do on social assistance, and 1.4 times more than they do on healthcare, the UNDP said.

There's some precedent for shock-driven debt pauses. In May 2020, as the first wave of the Covid pandemic ravaged the world, the Group of 20 (G20), International Monetary Fund and World Bank set up the Debt Service Suspension Initiative. Over the next year and a half, 48 countries participated, collectively suspending a total of $12.9 billion in debt service payments. Private creditor participation was poor, however, with just one such lender participating, according to the World Bank.

"Ideally, private creditors would join in," said Lars Jensen, a senior economist at the UNDP. Governments and multilateral lenders "will have to lead by example" and "then the private sector will hopefully participate over time without having to be subsidised too much," he said.

The new, broader UNDP proposal has garnered an early backer in Hassatou Diop N'Sele, vice president for finance and chief financial officer at the African Development Bank Group. She welcomed the idea, as the bank already considers climate-related pause clauses — the environmental-focused alternative.

"We want to look at climate resilience, but we also want to look at other events that impact the region," N'Sele said in an interview. "This is exactly the type of instrument that we need as [a multilateral development bank] to support and also to help make a difference."

AfDB is part of a wider group of public development banks that was tasked with sharing lessons on the implementation of such clauses at a recent climate finance gathering hosted by French President Emmanuel Macron and Mia Mottley, prime minister of Barbados.

Expanding the tools available to the most vulnerable nations will help them prepare for, and respond to, crises tied to weather, sea level-rise and other climate crisis-induced challenges.

The UNDP proposal comes as nations of the so-called Global South urge rich lenders to step up before time runs out. The organisation estimates the cost of mitigating the recent surge in poverty to be about $14 billion, or just 0.009% of global gross domestic product. It's "within reach," Molina said.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement