The Spiralling Debt Crisis for G20 and the Way Ahead
Updated: Oct 31, 2022
Image Graphics by Team Geostrata
The G20, since its inception in 1999 has provided an equal stage to the developed world as well as the developing which makes its presence way more important and impactful when dealing with global challenges, such as the spiralling debt crisis and the climate change.
Composed of key advanced and emerging economies, the G20 accounts for 80% of the world GDP, 75% of the global trade, and 60% of the world population.
One such challenge that the world faces collectively is the growing debt distress among the Low-income countries (LICs). These countries were facing a debt crisis even before the pandemic took off. According to an IMF paper published in Feb 2020, 36 of the 70 low-income countries were at a high risk of debt distress or already in debt distress. The pandemic compounded the effect of debt these nations were already facing. As a result, the nations seeked to mitigate the health and economic impact of the crisis, while the revenue declined due to lower growth and trade which together fuelled the already raised debt burdens.
Where does India fit in the equation?
Not long ago, India was a major receiver of foreign aids and relied on the same for its CAPEX. On the contrary, the recent times have witnessed a turn around in the aforementioned case. India has shifted its economic stand towards a mutual assistance scheme to provide financial assistance to neighbours and those in need. India provides foreign aid mainly in the form of Line of Credits for different entities. In lieu of the COVID-19 pandemic, grave need was felt for cushioning the low income countries to help them mitigate the debt stress their economies faced.
India lent its hand to those in need which includes a $700 Million debt suspension to Mozambique until the end of 2020, assistance worth $700 Million to other African nations and almost a $4 Billion aid to Sri Lanka ($400 Million currency swap, $1 Billion for essential goods, $500 Million for fuel imports, $55 Million for fertiliser imports and a deferred payments of imports worth $1.2 Billion). India’s financial foreign aid is not humongous because it still depends on multilateral debt relief instruments, but is very vocal in putting up its stand on global platforms for helping those in need and towards the SGDs as described by the UN.
However, India along with other bilateral creditors has been working in close proximity in relieving the debt stressed economies through debt relief programs such as the DSSI and the Common Framework. During its upcoming G20 Presidency, India will have to make an effort in raising a unanimous front to tackle the global debt crisis faced by the majority in the world and to portray itself as the voice of the collective Global South.
What is the DSSI?
During the G20 summit of Finance Ministers and the Central Bank Governors in April 2020, a Debt Service Suspension Initiative (DSSI) was approved which authorised the official bilateral creditors to suspend debt repayment services from the poorest nations that request the suspension, for a limited period of time. Its initial objective was to ease financing constraints on the LICs, allowing them to use fiscal space for social health and economic support as monitored by the IMF. The DSSI forelooks to immediate liquidity needs but that necessarily doesn’t mean it will help the debtors in resolving their debt.
Has the DSSI been significantly impactful?
The amount of relief provided under the aforementioned scheme depends entirely on willing countries’ voluntary requests. More than 60% of eligible countries have benefited from the initiative as of March 8, 2021, as envisaged to add around $7.3 Billion of debt service suspension.
Initially, the scheme was to cover debt suspensions until the end of 2020 which was later extended by 6 months in a meeting held in April, extending the scheme until December 2021.
The mandatory conditionalities governed by the IMF can be a subject of concern. In order to apply for the DSSI, a country needs to have a financing program with the IMF or it needs to have requested the same. The request is enough to initialise the process but lags in commitment and relief.
The IMF and the World Bank are providing technical support to the DSSI through their country teams working on ground, informing the countries about the initiative and also supporting the provision of information requested by the G20, such as monitoring the utilisation of resources released by the DSSI.
The DSSI has however been criticised for being unable to compel all creditors for their participation. Only 45 out of 73 eligible LICs have sought to suspend debt repayments to official bilateral creditors.
What is the Common Framework?
In April 2021, the G20 nations initiated the Common Framework for Debt Treatment beyond the DSSI. Aimed at facilitating negotiations over debt restructuring for LICs, the Common Framework is an agreement of the G20 and the Paris Club designed to commence a significant participation from the creditor countries and ensure a fair burden sharing among the creditor nations. The Common Framework not only includes countries from the Paris Club but also the G20 official bilateral creditors including China, India, Saudi Arabia or Turkey.
The Common Framework can provide deep debt restructuring to countries where debt has become unsustainable. For countries with sustainable debt but a liquidity crunch, a deferral of a portion of debt service payments can be provided, resulting in an ease in financing pressures.
To benefit from the Common Framework, a country must have an IMF supported program, for example, an Extended Credit Facility, for supporting the implementation of suitable economic policies and structural reforms. In reality, these conditionalities have raised eyebrows on the implementation of immediate help dimension, because if a nation lacks an IMF supported program it will have to request for the same. This condition is exactly synchronous with that in the DSSI.
The second key role of the IMF is defining the debt envelope, informing the creditors and debtor discussions on the necessary debt treatment. This envelope is based on the Debt Sustainability Analysis (DSA) of the IMF.
Problems associated with the DSSI & the Common Framework
Three key shortcomings as cited by William N Kring, Assistant Director for the Global Development Policy Center at the Boston University are as follows:
The DSSI and the Common Framework are only applicable to bilateral government lenders and do not draw participation from other creditors. A study conducted by Eurodad highlighted that only 16.8% of debtor repayments have been suspended. There is a dire need for countries to participate in the debt suspension process in a balanced manner if they really want to provide the distressed low income countries with a feasible fiscal space to tackle the problems they face.
The area of benefit from the DSSI should be expanded to countries apart from just the LICs who as well might be facing a debt insolvency. A recent study by the United Nations Development Program estimated that between 2021-2025, a minimum of $598 Billion of external debt public service payments was due on a pool of 72 nations, 94% of which are middle income countries. 23 nations classified as “Vulnerable” by the UNDP are not even eligible under the DSSI or the Common Framework. As a result, around $387 Billion of debt service is at risk.
The G20 must immediately reform the Common Framework to ensure all participants are onboard playing their part. Without parallel action by each, debtors will simply use credit to pay off their other creditors, thus leaving no real fiscal space to mitigate the effects of the pandemic or the economic slowdown.
Both the DSSI and the Common Framework are crucial instruments for debt relief. However, the forthcoming programmes need to adapt to the changing pitch of the creditor base and increasing complexity of the financial instruments. It is now necessary to improve debt transparency by defining how the growing base of private creditors including the State-owned enterprises will be dealt with in the forthcoming time, in view of an increment in the blurred lines between the private and the public creditors that has made it very complex for debt restructuring programmes.
BY DIGVIJAY SINGH