Opinion: Punished for health expenses


Economic recovery from the Covid-19 pandemic depends on sustained investments 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 a borrower’s ability – whether it’s a business or a government – to repay debts. Lower credit scores drive up the cost of borrowing.

This threat has prompted some of the poorest countries to avoid calling on investors for vital finance during the pandemic, while other governments that planned to spend more on utilities have been hit by downgrades in credit ratings. private companies.

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My upcoming research shows that when credit scores go down, countries tend to spend less on health care. This should be of concern as the delta variant of the coronavirus is increasing the number of cases across the world.

Big gap

A significant gap has emerged between rich and poor countries in terms of the amount they spend to combat the impact of the coronavirus and strengthen their health infrastructure.

The governments of rich countries have provided trillions of dollars in direct and indirect support to their economies, on average about 24% of their gross domestic product. Developing economies, on the other hand, were able to spend only a tiny fraction, on average around 2% of their GDP.

Recent research has revealed that a country’s credit rating is the most important factor in a government’s spending for Covid-19 relief. That is, the lower a country’s score, the less it is 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 downgrades that could result. This prevented them from financing much-needed expenses.

The fear is justified. Countries that planned to increase their spending, such as Morocco and Ethiopia, were sanctioned. Morocco’s credit rating, for example, has been downgraded to a speculative, or “junk” rating, by Fitch and Standard & Poor’s because of its intention to spend more on social services. Downgrades will make borrowing from international investors much more difficult and expensive.

And Moody’s Investors Service downgraded Ethiopia’s credit rating after the country requested debt relief from a new Group of 20 program so it can spend more to support its economy and citizens.

Overall, despite spending much less during the pandemic, poorer countries were much more likely than richer ones to have their credit ratings downgraded by Fitch, Standard & Poor’s and Moody’s – the three largest agencies in the world. private credit rating.

Low-income countries are therefore forced to choose between keeping their credit ratings stable and undertaking essential spending on social services.
In my own research, 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.

IMF Rating System

Even the International Monetary Fund, which is the main global agency overseeing development finance, uses a rating system that tends to penalize governments for any increase in public spending. This includes spending invested in their health systems.

The IMF assesses countries’ creditworthiness through a system it calls its debt sustainability framework. Countries are classified into three levels of “credit capacity”: high, medium or low.

Weak countries are deemed to have 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 resulting from more unnecessary spending. Countries are then required by the IMF to improve their ratings as a condition of aid, for example by focusing on debt repayment, short-term economic goals and general spending cuts.

An editorial in ‘The Lancet’ blamed similar IMF-induced austerity in the early 2000s for reduced health spending in Guinea, Liberia and Sierra Leone, leaving them vulnerable to the Ebola crisis in 2014 The three were the most affected. country in an epidemic that lasted two years and killed more than 11,000.

Rating reform

The IMF recently announced a plan to issue $ 650 billion in reserve funds that low-income countries can use to purchase vaccines and expand health care. While this should help more countries not have to choose between credit scores and the well-being of their citizens during the pandemic, it is only a short-term solution.

A recent United Nations report called for reforming the way private credit rating agencies are regulated, arguing that 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.

Permanent changes in the way the IMF and private credit rating agencies assess debt, however, may be needed so that they do not penalize countries for their large investments in health care and other public services. . This would help countries build their health infrastructure so that they are not caught off guard by the next pandemic.

Ramya vijaya

(The author is professor of economics at the University of Stockton. theconversation.com)

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