TWN Info Service on Finance and Development (Feb22/04)
24 February 2022
Third World Network

No new actions to combat debt crises offered by G20 ministers
Published in SUNS #9521 dated 24 February 2022

New York, 23 Feb (Bhumika Muchhala) – The Group of 20 Finance Ministers and Central Bank Governors met in Jakarta on 17-18 February to discuss global economic recovery, the debt crises in many developing countries, international financial instabilities, the voluntary channeling of Special Drawing Rights (SDRs), global tax reform, inclusive and green finance, climate finance and infrastructure investment, among other issues.

The critical crisis in the world economy today is undeniably that of unsustainable sovereign debt, with several developing countries defaulting on their debts in 2021 and several more countries close to a default in 2022.

On the urgent need for debt relief, restructuring and coordination, the communique of G20 finance officials welcomed “efforts to make progress on the Common Framework for Debt Treatment beyond the DSSI,” and reiterated their “commitment to step up our efforts to implement it in a timely, orderly and coordinated manner.”

They noted that Creditor Committees may discuss and find appropriate solutions on a case-by-case basis, for those countries who have requested debt treatment, including Chad, Ethiopia and Zambia.

The communique stressed the importance for private creditors and other official bilateral creditors to commit to providing debt treatments on terms at least as favourable, to ensure fair burden sharing in line with the comparability of treatment principle, and affirmed the joint efforts by all actors, including private creditors, to continue working toward enhancing debt transparency.

The launch of the joint Institute of International Finance (IIF)/OECD Data Repository Portal was welcomed, and all private sector lenders were encouraged to contribute data to this initiative.

DEBT DISTRESS IN DEVELOPING COUNTRIES

According to the IMF’s calculations in June 2021, more than half of low-income countries are in debt distress or at risk of debt distress, double the numbers of 2015. A report by the Financial Times disclosed that the world’s poorest countries face a $10.9 billion surge in debt repayments in 2022. Payment to creditors increased from 6.8% of government revenue in 2010 to 14.3% in 2021; while in 2020, 62 developing countries spent more repaying debt than they did on healthcare during a health pandemic.

Over the next three years, the debt repayments as well as the interest charges on the debt, which are increasing as a result of a stronger dollar and tightening monetary policy, will hamstring governments that should be spending public finances to battle the pandemic as well as to address long-term problems, such as the effects of climate change.

Already heavily indebted before the pandemic, many developing countries had no choice but to spend public finances in tackling the pandemic while tax revenues collapsed. Meanwhile, with record low interest rates, public borrowing was easy to access. As a result, sovereign debt quickly piled up.

The World Bank’s 2022 Global Economic Prospects Report acknowledges that rather than a liquidity issue, many countries actually face a solvency crisis which require “debt stock reductions,” rather than re-profiling of debt which only addresses the terms of debt repayment. This is a significant shift from the G20’s understanding of the debt problem when the Common Framework to address unsustainable debt was formulated by the G20, in that debt treatments would not involve debt write-offs or outright cancellation.

In 2021, Argentina, Belize, Ecuador, Suriname and Zambia defaulted on their debts. In 2022, the countries of Sri Lanka, El Salvador, Tunisia and Ghana are assessed by financial journalists and analysts as being close to a debt default. Lebanon, Turkey and Ukraine are also mentioned.

According to the UN’s Department of Economic and Social Affairs, “Elevated external debt burdens, additional borrowing during the pandemic and increasing debt-servicing costs have pushed a rising number of countries to the brink of a debt crisis.”

Recent Jubilee Debt Campaign findings report that average global South external debt payments have increased 120% between 2010 and 2021 and are higher than at any point since 2001. Average government external debt payments were 14.3% of government revenue in 2021, up from 6.8% in 2010.

Globally, 54 countries are in debt crisis, meaning that debt payments are undermining the ability of governments to protect the basic economic and social rights of their citizens. The analysis finds that a further 14 countries are at risk of both a public and private debt crisis, 22 at risk of solely a private sector debt crisis, and 21 at risk of a public sector debt crisis.

LIMITATIONS OF G20’S COMMON FRAMEWORK & DSSI

Despite the G20’s exclusivity as a club of the world’s 20 biggest economies, it is still the pre-eminent body of global economic decision-making. The G20 Finance Ministers’ meeting is therefore perceived as the prime venue to begin addressing the debt crises rippling across many countries.

While there was some hope that the G20 finance officials would reinstate the Debt Suspension Service Initiative (DSSI), which took effect on 1 May 2020 and was terminated at the end of 2021, it was not revived at the recent meeting.

The DSSI was critiqued by analysts and international organizations as being inadequate, as it merely suspended debt on a temporary basis and in doing so “kicked the can down the road” rather than sustainably restructuring debt in a fair manner that divided burden sharing between creditors and debtors. It did deliver approximately $10.3 billion in relief to more than 40 eligible countries.

However, IMF and World Bank debt data sources reveal that the 46 lower-income countries that applied for the scheme still paid out more than three times in debt payments, or about $36.4 billion. Meanwhile, only $600 million of debt was cancelled, primarily through the IMF’s Catastrophe Containment and Relief Trust (CCRT).

The lack of political enforcement by the G20 resulted in private creditors, especially big commercial banks, asset management companies, investment banks, hedge funds and oil traders, providing no relief and receiving $14.9 billion in debt repayment from the poorest countries (April 2020-June 2021).

The G20’s Common Framework for Debt Treatments was established in 2020 to reduce debt burdens by a Paris Club approach, meaning a “case-by-case” approach that individualizes debt restructuring by debtor country, rather than addressing the systemic nature of debt. The shortcomings of the Common Framework have been acknowledged by a range of actors, from the IMF and World Bank to the financial press and international civil society.

They include, for example, the voluntary engagement of private creditors in the creditor committees of the Common Framework to deliver on comparability of treatment, which is a principle developed in the Paris Club to ensure that all creditors contribute with their fair share in debt restructuring and cancellation. The voluntary nature has resulted in private creditors continuing to refuse engagement in the Common Framework to date.

Importantly, none of the countries that have applied to the Common Framework thus far have had any debt cancelled. This has led to the assessment that the Common Framework is not fit to address the challenges of creditor coordination and engagement in order to deliver debt relief of the scale that is sufficient to tackle the debt distress many developing countries are facing and will continue to face in the coming years.

As such, the case-by- case approach of the Common Framework does not meaningfully address the scale, volume and systemic nature of debt restructuring and write-off of the principal debt stock required to prevent debt insolvency and crises in many developing countries.

In order to incentivize private creditor participation, the World Bank and IMF allude to credit enhancements employed in the past and the need to make debt restructuring agreements binding on all creditors by majority vote, primarily through activating aggregated Collective Action Clauses.

In theory, these clauses allow private bondholders to coordinate restructuring terms among themselves. While the communique stressed that private creditors should ensure fair burden sharing in alignment with the comparability of treatment principle, a specific and detailed map of how this will be achieved across all types of private creditors has not to date been provided by G20 finance officials.

Overall, the Common Framework has been viewed by financial analysts as well as many in civil society as a messy, long and costly default and restructuring process, where the problem of un-collaborative private creditors, the non-participation of multilateral institutions and the risks of insufficient debt cancellation lead to years of serial debt restructuring that remain unsolved. Furthermore, the Common Framework’s requirement that debt treatment has to come attached with an IMF programme exacerbates the dilemma of fiscal austerity measures that the IMF recommends in its lending frameworks.

Both the IMF and World Bank focus their recommendations on greater effectiveness of the Common Framework through steps such as clearer timelines and rules, a debt payments standstill during negotiations, inclusion of middle-income countries and debt cancellation in cases of unsustainable debt, which goes beyond debt re-profiling of terms of payment.

The World Bank, in its 2022 Global Economic Prospects, stresses that in its current form the Common Framework is not suitable for ensuring sufficient debt relief and a fair distribution of costs between the various creditors. The Bank also says it is problematic that public creditors have, since the early 1980s, relied on debt suspensions, payment extensions and insufficient relief to address recurring debt crises in developing countries.

As a first step, the Bank recommends that the Common Framework commit to granting comprehensive debt relief. The Bank also suggests that the participation of private creditors should be made binding through, among other steps, the route of national legislation. While restructuring negotiations are ongoing, debtor countries should be granted a debt moratorium.

Meanwhile, the IMF’s “G20 Surveillance Note” published on 16 February 2022 stresses that immediate action by the G20 is needed to arrest the rising human and economic toll of the COVID-19 pandemic. It also encourages the G20 to help ensure weaker economies have access to financial liquidity, including through the operationalization of the Common Framework and support for the channeling of the $650 billion issuance in Special Drawing Rights.

A key aspect of the Common Framework is addressing how comparability of treatment will be effectively enforced. The IMF’s 2015 “Policy on Arrears to Official Creditors” can potentially be a key advocacy strategy on this enforcement.

The Fund’s policy suggests that if private and bilateral creditors refuse to engage in a debt restructuring, the IMF and G20 should give the debtor country political and financial support to default on non-engaging creditors.

Meanwhile, debt reduction and/or cancellation from creditors willing to engage should proceed. This IMF policy could potentially guide the G20’s support to borrowing countries that choose to default on creditors refusing to participate on comparable debt restructuring terms.

As the third year of the pandemic begins, the lack of concrete action on debt in the G20 Finance Ministers’ communique does not bode well for the timely resolution of debt distress of both low and middle-income countries, which undermines their national policy space to recover from the economic and public health toll of COVID-19. Countries on the verge of default can only hope that the G20 will not wait to take real action until full-blown debt crises take place.

UNCTAD’s secretary-general, Rebeca Grynspan, warned that many developing countries are truly at risk of another lost decade. To prevent this outcome, governments and international financial institutions, particularly the G20’s Finance Ministers’ body, need to take immediate and urgent action to provide unconditional debt cancellation for all countries in need.

For the systemic debt solution, a meaningful, inclusive and democratic process to reform the international debt architecture is necessary.

This can be effectively and efficiently achieved through the long advocated multilateral framework for sovereign debt resolution under the auspices of the United Nations. Such a framework would comprehensively address unsustainable and illegitimate debts and provide systematic, timely and fair restructuring of sovereign debt in a process convening all creditors from bilateral, multilateral and private.