The G20 recently announcement the agreement in principle of a “Common framework for the treatment of debt beyond the Debt Service Suspension Initiative (DSSI) ”. The framework aims to solve the problem of unsustainable debts that many countries are facing in the aftermath of the Covid-19 pandemic. The agreement, which includes all G20 and Paris Club members, still requires national approval from all participants. The adoption and details of the framework are expected to be released at a special meeting of G20 finance ministers and central bank governors ahead of the G20 summit on November 21-22.
The lack of transparency around the frame is troubling for at least two reasons. First, the potential amounts of debt relief involved exceed the scale of the G20 DSSI. After its recent six-month extension, the DSSI is expected to allow 46 participating countries to suspend payments for a total of US $ 11.7 billion. On the other hand, the stock of external public debt of countries eligible for DSSI amounts to US $ 477 billion in 2018. Even a partial cancellation of these debts would have significant financial repercussions.
Second, for a large number of developing countries, the scope of debt treatments agreed by the G20 represents the difference between achieving a sustainable post-Covid-19 recovery or a lost decade For the development. The absence of a seat at the table, or to be more precise, the absence of a Zoom code for the meetings of G20 finance ministers keeps them in the dark about the decisions that will define their future.
While details of the Common Framework remain hidden from the public, there is evidence that allows us to provide insight into what the G20 agreement could actually deliver and its implications for developing countries.
Putting the pieces of the puzzle together
The G20’s approach to debt vulnerabilities in the context of the pandemic has been framed by the six principles of Parisian club. These include solidarity, consensus and information sharing between clubs members; the requirement for an International Monetary Fund (IMF) program; and finally, the comparability of the treatment of non-Paris Club commercial and bilateral creditors. These elements, including the increasingly controversial participation on a voluntary basis private and multilateral creditors, are the foundation of the DSSI.
In addition, the DSSI is only a modified version of the Paris Club policy. classic debt treatment. This mechanism was put in place when the Club was created in 1956. It allows debtor countries to reschedule the payment of their debt by using an interest rate and a repayment period to be defined on a case-by-case basis by the Club. In contrast, the DSSI has set a common benchmark for a temporary suspension of debt payment for all participating countries. The suspension is designed to be Neutral Net Present Value (NPV) and the repayment window includes a grace period of one year, followed by a period of five year Payment deadline.
Given the complex nature of the negotiations to go beyond the ISD, it is unlikely that the G20 will deviate substantially from this approach in the design of the Common Framework. This conservative approach to resolving the debt crisis is underscored by a recent IMF Policy Brief. The document sets out the organization’s official position on the required changes to the international architecture on debt resolution. While the IMF recognizes the daunting challenges posed by the pandemic, it refrains from suggesting substantial changes to the current framework. Instead, the IMF is supporting the establishment of a common approach to public debt relief, including Paris Club members and others, alongside improving debt transparency. and contractual agreements.
Thus, if the scope of innovation in the Common Framework is negligible, its structure is likely to resemble an established Paris Club mechanism.
The Common Framework: an Evian + approach?
The Evian approach is the latest debt relief mechanism created by the Paris Club. Created in 2003, this approach is designed to address the debt vulnerabilities of middle-income countries. Debt treatments are granted on the basis of Debt Sustainability Assessments (DSAs) conducted independently by the IMF and Paris Club members. Countries identified as having liquidity problems benefit from debt treatment under the traditional terms of the Paris Club. Countries with credit problems are given full debt treatment, including large debt cancellations, on a case-by-case basis.
Debt relief under the Evian approach follows a three-step process. The first step consists of an official request from the debtor country accompanied by the establishment of an IMF program and a rescheduling of debt payments for a period of one to three years. A second step requires a second agreement with the IMF and may involve providing an initial amount of debt relief. The third and final step requires successful completion of the IMF program and a history of Paris Club compliance over time. Only if these criteria are met can the country benefit from full debt relief under the approach.
The structure of Evian’s approach fits perfectly into the evolving response of the G20. The Common Framework seems intended to share the most important principles and characteristics of Evian’s approach. This will include the principle of comparability of treatments. As part of the treatment of Evian, the participating countries are contractually required to seek debt relief from non-Paris Club commercial and bilateral creditors on terms comparable to those granted by Paris Club members. Factors to assess comparability include changes in nominal debt service, NPV and the duration of restructured debt. The involvement of private creditors in Common Framework debt relief efforts would likely be under this clause.
The sequencing of the Evian approach would also correspond to the schedule of the Common Framework. The countries participating in the DSSI can be considered as being at the first stage of the Evian process. In the context of the pandemic, the second stage of the approach would be articulated transition from a number of countries from the IMF’s emergency financing under the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (IFR) into standard IMF programs in the near future.
G20 approach doomed to failure
Despite these similarities, it is possible to expect some significant differences. First, the common framework is likely to apply to all DSSI countries, regardless of their income level. Given the United States-China differences, it is unlikely that the G20 will agree at this stage to grant special treatment to low-income countries on standardized terms similar to those of the Heavily Indebted Poor Countries (HIPC) initiative. In this case, the Paris Club has granted, by virtue of the Cologne conditions, a cancellation of up to 90 percent of unofficial development assistance (ODA) appropriations. Nothing so substantial appears to be under discussion at this point.
Second, the IMF and its DSA could play a larger role in the common framework. Next to a IMF proposal for DSSI, and subject to individual country requests, eligibility for the Common Framework could be limited to countries identified by the IMF as being at high risk or in debt distress or their debts may be considered unsustainable.
Under this assumption, a total of 25 countries covered by the IMF’s Debt Sustainability Framework for Low Income Countries (CSD LICs) would be eligible for the Common Framework: Afghanistan, Cabo Verde, Cameroon, Central African Republic, Chad, Djibouti, Ethiopia , Gambia, Ghana, Grenada, Haiti, Kenya, Liberia, Malawi, Maldives, Mauritania, Mozambique, Papua New Guinea, Samoa, Sao Tome and Principe, Sierra Leone, Somalia, Saint Vincent and the Grenadines, Tajikistan and Togo. Several middle-income countries whose debts were classified as durable to facilitate their access to IMF emergency financing, but have a high degree of vulnerability, are likely to also become eligible, pending a review of their risk rating by the IMF. This group would include countries such as Angola, Nigeria and Pakistan.
The G20 approach, which seeks to adjust the problem to the tools available rather than the other way around, is doomed to fail, as the experience of the DSSI has shown. G20 leaders won’t have to deal with the consequences of decisions they make in virtual meeting rooms. Instead, millions of people in developing countries will have to live with the effects of their inability to respond to a crisis of historic proportions.
Why do we think that a Paris Club-based Common Framework approach is unlikely to be successful? The answers can be found in the next blog post.