Financial Markets, Friend or Foe of Low Income Developing Countries (LIDCs) During the COVID-19 Pandemic

Author: Natalia Nava-Urbina

The BRB Bottomline

 The pandemic has disproportionately affected LIDCs across the globe. LIDCs’ debt to private creditors has created financial distress as LIDCs try to allocate limited funds to fight the pandemic and increasing poverty. However, financial markets can be mobilized to support LIDCs during these distressing times.

The pandemic has caused sizable harm to LIDCs’ domestic economic activity; according to Grugara,Fabrioso, and Wiegand over 90% of LIDCs have experienced an economic decline due to contraction in real exports, lower export prices, less capital, and fewer remittances inflows. It’s been forecasted that economic declines could become an agent for irrecoverable production disruptions, and increased levels of poverty, as exhibited below.

The chart below indicates that LIDCs face difficulties accessing capital to fight the pandemic and mitigate forecasted increases in poverty. As LIDCs struggle with limited financial capital, what role do financial markets play; are they helping or hurting LIDCs?


During the pandemic, the World Bank has supported LIDCs by mobilizing capital markets. The World Bank is owned by governments and can go into the international bond market to issue bonds; plus, their high credit ratings allow them to borrow at low-interest rates. In 2020, after investing in the international bond market they came up with a $160 billion package; $12 Billion from the package was used for financing vaccines in LIDCs. That illustrates the powerful role capital markets have had in raising money for LIDCs.


The World Bank also urged G20 countries to establish the Debt Service Suspension Initiative (DSSI) and Common Framework to restructure debt agreements. The DSSI and Common Framework request public sectors in G20 countries to give LIDCs extensions of maturity for bilateral debt payments until June 2021. The extension has delivered $5 billion in relief and helped LIDCs concentrate resources on combating the pandemic. 

However, both the DSSI and Common Framework fall short in forcing private creditors to negotiate debt agreements with LIDCs, and private creditors are not reaching out to offer debt negotiations voluntarily. Without having private creditors provide extensions, LIDCs find themselves in debt distress meanwhile trying to utilize limited funds to fight the pandemic and increasing poverty. 

We found that mobilizing capital markets can support LIDCs, but LIDCs’ debt to private creditors has created financial distress. So, are financial markets helping or hurting LIDCs? The truth is, financial markets have caused distress given that private creditors are not negotiating with LIDCs; however, mobilizing capital markets, like World Bank, endows hope to LIDCs. 

Below are two examples demonstrating the positive effect financial markets can have on LIDCs during the pandemic. 

LIDCs can seek support from Multilateral Development Banks (MDBs); MDBs have AAA credit ratings and can provide long-term finance at affordable rates to developing countries.

Having  FAST-infra develop and implement country platforms for sustainable infrastructure finance would mean that LIDCs could have a platform that provides banks with transparent, standardized information. Those platforms would broaden the scope of potential investors including National Development Banks which could offer financing for economic development. 

While financial markets do create a toll on LIDCs, as we saw from the debt owed to private creditors, financial markets still play a major role in helping LIDCs combat the pandemic.

Take-Home Points

  • LIDCs are facing lack of access to financial capital to combat the pandemic and increasing levels of poverty.
  • Debt owed to private creditors creates financial distress that hinders LIDCs from addressing the pressing needs of LIDCs civilians suffering from the pandemic. 
  • Mobilizing capital markets, accessing Multilateral Development Banks, and seeking support from National Development Banks can provide LIDCs with the necessary capital to combat the pandemic.

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