G-20 News

G20 common framework for dealing with debt needs to be strengthened – IMF blog

By Kristalina Georgieva and Ceyla Pazarbasioglu

As the debt service suspension initiative expires and interest rates rise, low-income countries will find it increasingly difficult to service their debts.

Despite the significant relief measures brought by the COVID-19 crisis, about 60% of low-income countries are at high risk or already in debt distress. In 2015, that number was less than 30%.

With the policy space tightening for the heavily indebted countries, the framework can and must work faster.

For many of these countries, the challenges are intensifying. New variants cause further disruption to economic activity. COVID-related initiatives, such as the G20 Debt Service Suspension Initiative (DSSI), are coming to an end. Many countries face arrears or a reduction in priority spending. We could see an economic collapse in some countries unless G20 creditors agree to speed up debt restructurings and suspend debt service while the restructurings are being negotiated. It is also essential that private sector creditors implement debt relief on comparable terms.

Recent experiences from Chad, Ethiopia and Zambia show that the Common Framework for Debt Treatment Beyond DSSI needs to be improved. Swift action is needed to build confidence in the framework and provide a roadmap to help other countries facing growing debt vulnerability.

2022: a more difficult debt outlook

Since the start of the pandemic, low-income countries have benefited from some mitigation measures. Domestic policies, together with low interest rates in advanced economies, have mitigated the financial impact of the crisis on their economies. The G20 set up the DSSI to temporarily suspend public debt payments to the poorest countries, followed by the Common Framework to help these countries restructure their debt and deal with insolvency and protracted liquidity problems. The international community has also increased its financial support, including record emergency loans from the IMF and an allocation of $ 650 billion in Special Drawing Rights, or SDRs, of which $ 21 billion has been allocated directly to low-income countries. returned. G20 leaders pledged to support low-income countries by lending $ 100 billion from their SDRs to dramatically amplify this impact.

No doubt 2022 will be much more difficult with the tightening of international financial conditions on the horizon. The DSSI will expire at the end of this year, forcing participating countries to resume debt service payments. Countries will need to move on to strong programs, and for low-income countries that need comprehensive debt treatment, the Common Framework will be key to unlocking IMF financing.

But the Common Framework has not yet kept its promise. It requires quick action.

Implementation has been slow so far

The common framework is intended to deal with insolvency and protracted liquidity problems, as well as the implementation of an IMF-backed reform program. The official G20 creditors – both traditional ‘Paris Club’ creditors, such as France and the United States, and new creditors, such as China and India, who, as shown in the chart below. below, have overtaken the Paris Club as lenders over the past decade – agreed to coordinate to provide debt relief consistent with the debtor’s ability to pay and sustain essential spending. The common framework requires private creditors to participate on comparable terms to overcome the challenges of collective action and ensure fair burden sharing.

But so far only three countries – Chad, Ethiopia and Zambia – have made requests for debt relief under the Common Framework. And each case has experienced significant delays.

These delays partly reflect the problems that motivated the creation of the Common Framework in the first place. These include coordinating the Paris Club and other creditors, as well as multiple government institutions and agencies within creditor countries, which can slow down decisions. The common framework aims to alleviate these problems but does not eliminate them. New creditors, including relevant national institutions, should feel comfortable with restructuring processes that would allow all creditors to work together to provide relief and the IMF to lend to countries facing debt difficulties. . That takes time.

But there were also delays for reasons that have nothing to do with the Common Framework. To restore debt sustainability, Chad needs to restructure a large secured bond held by a private company, which is partly syndicated to a large number of banks and funds. This complicates the decision making process. National challenges have slowed progress in Ethiopia and Zambia.

No time to waste

With the policy space tightening for the heavily indebted countries, the framework can and must work faster.

First, greater clarity on the different stages and timetables of the Common Framework process is vital. Along with earlier engagement of public creditors with the debtor and private creditors, this would help speed up decision making.

Second, a comprehensive and sustained halt in debt service payment during the negotiation period would relieve the debtor at a time when he is in difficulty, and encourage speeding up of procedures to achieve effective debt restructuring.

Third, the common framework should further specify how comparability of treatment will be effectively applied, including, where applicable, through the implementation of IMF arrears policies, in order to further reassure creditors and debtors.

Last but not least, the common framework should be extended to other heavily indebted countries which can benefit from creditors coordination. The prompt and orderly settlement of debts is in the best interests of debtors and creditors.

Ensuring success in the first cases will not only benefit countries, but will build confidence in the common framework. In this regard, the rapid completion of the restructuring of Chad can set a critical precedent for other countries. In Ethiopia, the creditors’ committee is expected to continue technical work that will quickly provide debt relief guarantees once the situation stabilizes. In Zambia, G20 creditors are expected to quickly form an official creditors committee and start engaging with authorities and private creditors on debt relief, while also providing for a temporary suspension of debt service during the duration of discussions on debt restructuring. Otherwise, the country would be faced with the impossible choice of reducing priority spending or accumulating arrears.

The challenges of debt are pressing and urgent action is needed. The recent Omicron variant is a stark reminder that the pandemic will be with us for some time. Decisive multilateral action is now needed to tackle vaccine inequalities globally and also to support early and orderly debt settlement. For its part, the IMF stands ready to work with the World Bank and all of our partners to ensure that the framework is effective for the people it has been put in place to help.

Related links:
Sovereign debt
A reform of the international debt architecture is urgent
Joint action needed to ensure recovery
Low income countries