G20 Countries Have a Grossly Inequitable Debt Management Strategy. That Needs to Change.

Since the “Common Framework” was launched, only four countries – Chad, Ethiopia, Zambia and Ghana – have requested for restructuring of their debts. This does not speak too well about the success of the initiative.

The first G20 finance ministers’ and central bank governors’ meeting under the Indian presidency that concluded on February 25 saw parties agree to strengthen “multilateral coordination by official bilateral and private creditors” for addressing the “deteriorating debt situation and facilitate coordinated debt treatment for debt-distressed countries”. This was an unequivocal endorsement of the decision to suspend debt service of the most vulnerable countries that the G20 countries had taken in the Extraordinary G20 Finance Ministers and Central Bank Governors’ Meeting on November 13, 2020.

The initial steps towards ameliorating the burden of external debt faced by the low-income countries were taken immediately after the onset of the pandemic. In April 2020, G20 countries, at the urging of the World Bank and the International Monetary Fund (IMF), lent their support to the Debt Service Suspension Initiative (DSSI) taken in response to the significant increase in debt vulnerabilities and deteriorating outlook in many low-income countries arising from the pandemic. The DSSI, which became effective from May 2020, was aimed at ensuring that bilateral official creditors temporarily suspend debt service payments from the most vulnerable countries, subject to requests being made by the debtors, until the end of the year. The potential beneficiaries under DSSI were the 73 low-income countries eligible for support under the IMF’s Poverty Reduction and Growth Facility (PRGF), the arm of the Fund that supports the world’s poorest countries. The private creditors were also invited to participate in the initiative on comparable terms.

The Extraordinary G20 Finance Ministers and Central Bank Governors’ Meeting in November 2020 marked a significant step wherein the members of the grouping recognised that a fresh view had to be taken to redress the debt situation of the low-income countries that went beyond the DSSI. While doing so, they endorsed the “Common Framework for Debt Treatments beyond the DSSI”, which was also endorsed by the Paris Club of donors. Under the “Common Framework”, all official bilateral creditors should implement this initiative fully and in a transparent manner.

The objective of this new initiative was to “facilitate timely and orderly debt treatment for DSSI-eligible countries, with broad creditors’ participation including the private sector”. Under the terms of the DSSI, bilateral official creditors were expected to commit to suspend payments on all principal and interest that became due between May 1 and December 31, 2020, including all arrears from public sector borrowers. The six-month extension announced this week will see it run until at least June 30, 2021. However, some creditors did not agree to the rescheduling arrears.

The restructuring of debt was based on the IMF-World Bank’s Debt Sustainability Analysis and the participating official creditors’ collective assessment. More importantly, this would have to be consistent with the parameters of an upper credit tranche IMF-supported programme, whose conditionalities usually involve agreement with the Fund on a series of macroeconomic measures (including managing the budget) and other structural measures, like discontinuation of petroleum product subsidies or reforming state-owned enterprises.

As indicated earlier, the DSSI was applicable to 73 PRGF countries, though initially, 30 countries indicated that they would not be joining the initiative. Of these 30 non-participating countries, 23 countries have firmly indicated that they are not interested in the initiative. However, subsequently, five more countries participated in the DSSI.

Since the “Common Framework” was launched, only four countries – Chad, Ethiopia, Zambia and Ghana – have requested for restructuring of their debts. This does not speak too well about the success of the initiative, especially due to the fact that the restructuring plan has gone through only in case of Chad, and in case of Ghana, the initial step, namely the establishment of the Creditor Committee, has not yet been completed. Thus, this initiative of the G20 countries to address the debt burden of the low-income countries is also fading into irrelevance as most other debt-reduction initiatives have been since the debt crisis in the 1980s.

It is not difficult to understand that the “Common Framework” was doomed to be a failure arising from the several design flaws plaguing the initiative. First, the initiative is intended to “temporarily” suspend the debt service payments that the 73 PRGF-eligible low-income countries owed to only the bilateral official creditors. This implies that the G20 countries did not want to include in the “Common Framework” the debt servicing obligations of the targeted countries arising from the larger burden of debt that they owed to their private creditors as well to the multilateral agencies. At the end of 2019, bilateral official creditors accounted for 25% of the total outstanding external debt stocks of developing countries, which had declined to 21% at the end of 2021. No country, with the exception of Zambia, had publicly applied for similar treatment from private-sector creditors. Zambia has asked for rescheduling of $200 million worth of bond payments, but this request was refused. In this context, it must be mentioned that the debt that low-income countries’ owed to private-sector creditors had increased from just below $14 billion in 2010 to over $83 billion a decade later.

A second major flow in the “Common Framework” is that it targets the low-income countries, ignoring the significant problems with external debt that several middle-income countries, especially Sri Lanka and Pakistan, are struggling with. But even for these countries, the mandate of the G20 initiative, namely rescheduling debt service payments due to bilateral official agencies, would do little to lesser the debt burden. For instance, in case of Pakistan, bilateral official donors accounted for 30.5% of the total outstanding external debt, while for Sri Lanka, the corresponding figure is much lower at 20.3%.

Finally, it is important to understand the rationale of the “Common Framework”, the “debt-relief” plan of the G20 countries. First, the initiative was intended to bring on to the table the “new donors” from the developing world, especially China and India, alongside the traditional “Paris Club” donors. This introduced a dynamic that the grouping has been unable to deal with, which is encouraging China and the traditional donors to work together. The result has been the usual blame game, which has resulted in the impasse. China has argued that it is not a Paris Club member and is therefore not expected to follow Paris Club-like policies. A more substantive point that the Chinese have made is regarding the inclusion of private lenders in the mix.

China may be arguing for the inclusion of the private lenders, but it should be obvious from the design of the “Common Framework” that it is not intended to provide relief to the debtors from the growing burden of external debt, but only to ensure that they remain solvent. This G20 initiative created a window to ensure that even in the face of their severe economic stress following the onset of the pandemic, the low-income countries were able to continue to meet their debt-service obligations. The attempt was to avoid the sequence of events in the early 1980s, when several debt-stressed Latin American countries had declared insolvency leading to the debt crisis, which eventually led to a “lost decade” for the indebted countries.

These issues arise due to the lack of full transparency regarding the amount of outstanding loans and terms. Under the terms of the “Common Framework”, the private sector lenders are expected to contribute data to the joint Institute of International Finance (IIF)/OECD Data Repository Portal. For so doing, a multi-stakeholder Advisory Board on Debt Transparency  has been established with three objectives: (i) to obtain perspectives on the scope and sequencing of the initiative; (ii) to assess challenges that arise and recommend solutions; and (iii) to provide a preliminary assessment of the debt collection, data gaps, and implications of debt trends. Importantly, this OECD debt transparency initiative a handmaiden of the G-7 countries as the Advisory Board is overwhelmingly represented by members the elite grouping and major financial institutions and investment funds while being bereft of any representation from the developing countries.

Thus, the “Common Framework for Debt Treatments beyond the DSSI” is yet another creditor-driven initiative aimed at protecting the interests of global capital while the indebted countries remained condemned to bear the burden of debt. Importantly, Prime Minister Narendra Modi had flagged the threat of unsustainable debt facing some developing nations in his message before the recent G20 Finance Ministers and Central Bank Governors. The question is, can India pull its political weight to alter the rules of the grossly inequitable debt management strategy of the G20 countries?

Biswajit Dhar is a professor at the Centre for Economic Studies and Planning, Jawharlal Nehru University.

Edited by Jahnavi Sen.