- Introduction – the debt scenario.
- Trace the evolution of G20’s debt resolving instruments.
- Point out the challenges in the instruments.
The pandemic has elevated global debt levels to new heights. Nearly 60% of the low income countries are at a high risk or already in debt distress. The global economy saw the largest one-year debt surge since WWII, with global debt rising to US$226 trillion in 2020. The post-pandemic blow & financing constraints faced by several low income economies urged the G20 to set up Debt Service Suspension initiative. Therefore, it becomes crucial to examine the evolution of debt structuring programme and evaluate the backdrop.
Evolution of debt treatments: The Paris Club was one of the main drivers in resolving debt crisis post 1980. Following the 1980 crisis, the Paris club saw structural shift in its classical approach of applying same rules to all debtor countries for short-term relief. The Venice Terms & Toronto terms provided longer deferral period & repayment periods with partial cancellation of the debt of most heavily indebted countries. The plan encouraged not only short-term relief but also debt reduction to restore debtor solvency. In 1996, with the introduction of Heavily Indebted Poor Countries (HIPC), the debt cancellation increased, reaching almost 90%. In 2005, the HIPC was supplemented with Multilateral Debt Relief Initiative (MDRI) which linked debt relief with structural reforms program related to SDGs.
With the Covid-19, the need for an umbrella programme was felt. The DSSI suspended debt service payments from the poorest countries. The DSSI provides the same debt treatment to all requesting countries, allowing temporary liquidity relief through debt suspension. In 2020, the G20 meeting recognized the need for debt relief beyond DSSI – a Common Framework for Debt Treatments was proposed to address the protracted insolvency problems.
Common Challenges for DSSI and CFDT: the DSSI faces criticism due to limited participation of debtor countries and reporting about private-creditor participation due to fear of facing credit-rating downgrade. It lacked private creditor participation in debt service suspension on equal terms. Similarly CFDT has been sought only by 3 countries – Chad, Ethiopia, and Zambia – all of which are delayed. Even though the Common Framework seeks comparable debt relief from all creditors, the task is challenging owing to the growing creditor base diversity in emerging & least-developed countries.
Additionally, debt transparency is undermined by non-disclosure agreements & hidden debts of state-owned enterprises. The increasing diversity of creditor composition & complexity of debt instruments leads not only to debt intransparency but also difficulty in coordination b/w creditors. It lacks clear methodology for assessing comparable treatment for private creditors & failure to provide incentives for participation.
Both DSSI and CFDT are crucial instruments for debt relief. However, the newer programmes need to adapt to changing landscape of the creditor base & increasing complexity of financial instruments. It is necessary to improve the debt transparency by clearly defining the growing base of private creditors including state-owned enterprises. The G20 must seek solution which not only ensures fair burden sharing but also provides speedy debt resolution.