The United Nations is proposing a $2.5 trillion economic package to support developing countries, which it said are facing unprecedented harm from the COVID-19 crisis.
According to a recent report from the United Nations Conference on Trade and Development (UNCTAD), the pandemic has caused developing countries to take an enormous hit in terms of capital outflows, growing bond spreads, currency depreciations, and lost export earnings, including from falling commodity prices and declining tourist revenues.
“The speed at which the economic shock to advanced economies has hit developing countries—in many cases in advance of the health pandemic—is dramatic,” the report said. “Even in comparison to the 2008 global financial crisis.”
UNCTAD said it is not optimistic that there will be the rapid rebound seen in many developing countries between 2009 and 2010, as “many of the conditions that produced a sharp bounce back in developing countries after 2010 are no longer present or a good deal weaker.”
The report said that despite moves by world governments to launch massive economic packages, the UNCTAD estimates the world economy will still go into recession this year with a predicted loss of global income that will be in the trillions of dollars.
“This will spell serious trouble for developing countries, with the likely exception of China and the possible exception of India,” said UNCTAD, which estimates that developing countries face a $2 trillion to $3 trillion financing gap over the next two years.
To close this gap, the UN is proposing a four-pronged strategy to deliver the $2.5 trillion package. The first part is a $1 trillion liquidity injection that UNCTAD described as “a kind of helicopter money drop” through reallocating existing special drawing rights at the International Monetary Fund and adding a new allocation that will need to go significantly higher than the 2009 allocation made in response to the global financial crisis.
The second move would be an immediate debt standstill on sovereign debt payments, followed by significant debt relief. The UNCTAD said approximately $1 trillion should be canceled this year, overseen by an independently created body, comparing it to when half of German debt was canceled in 1953 in the aftermath of World War II.
The third prong has been described as a Marshall Plan for health recovery that would be funded from some of the missing official development assistance (ODA) that had not been delivered by development partners. UNCTAD estimates that an additional $500 billion, which is 25% of the unpaid ODA over the last decade, should be earmarked for emergency health services and related social relief programs.
And the fourth prong would be capital controls to slow the surge in capital outflows, reduce illiquidity driven by sell-offs in developing country markets, and stop declines in currency and asset prices.
“The economic fallout from the shock is ongoing and increasingly difficult to predict, but there are clear indications that things will get much worse for developing economies before they get better,” UNCTAD Secretary-General Mukhisa Kituyi said in a statement.