The G20 must help resolve debt Crises across the World : Daily Current Affairs

Date: 23/02/2023

Relevance: GS-2: Effect of policies and politics of developed and developing countries on India’s interests

Key Phrases: Humanitarian Crisis, Anti-Globalization, Debt Sustainability, Geopolitical Turmoil, Common Framework (CF), Debt Service Suspension Initiative, Paris Club, IMF, Debt Service Payment Standstills.

Why in News?

According to a 2022 UNDP report, 54 developing economies representing about 3% of the global economy and accounting for over half the world’s poverty have been identified as facing severe debt stress.
These include the 25 sub-Saharan African nations, followed by Latin American and Caribbean countries.

Key Highlights:

According to World Bank data, in 2022, the world’s poorest countries owed $35 billion as debt-service payments to official and private-sector creditors, with China alone accounting for over 40% of the total dues.
Apart from the pandemic and the economic devastation it wrought, a general trend of anti-globalization amid pre-covid changes in the structure of global growth has been a key factor behind their debt spiral.
The Russia-Ukraine war has only aggravated their debt sustainability problem by setting off an energy-and-food crisis.

Implications Of Looming Debt Crisis:

Debt distress is not merely a macroeconomic problem as it has real socio-economic consequences in terms of heightened inequality, increased levels of poverty, and growth inadequacy that can together culminate in a humanitarian crisis.
Amid geopolitical turmoil, these debt-ridden poor countries have faced severe food crises due to swelling import bills for wheat, rice, and maize.
With so many countries reeling under food scarcity, energy shortages, and high inflation, among other problems, a looming debt spiral presents a complex developmental challenge that is difficult to address and might render some economies unstable in time to come.

Common Framework (CF) By G20:

The G20 2020 launched a Common Framework (CF) which brought creditors such as China and India, along with the IMF, the Paris Club, and the private creditors to the negotiation table.
The CF intended to deal with insolvency and protracted liquidity problems, and only three countries – Chad, Ethiopia, and Zambia – have applied for debt treatment under the CF, and none has accomplished debt restructuring.

Debt Service Suspension Initiative (DSSI) by G20:

The G20’s Debt Service Suspension Initiative (DSSI) was able to suspend $12.9 billion in debt-service payments owed by participant countries to their creditors between May 2020 (when it began) and December 2021, by latest estimates.
The DSSI, which saw 48 of the 73 eligible countries participate, has enabled a coordinated release of resources to its beneficiary countries but such initiatives need to be made more frequently as well as more effective outcomes are needed.
Nonetheless, the debt composition of these DSSI countries has changed in the last two decades, with multilateral debt obligations now accounting for about 48%, followed by Chinese debt (18%), Eurobonds (11%), Paris Club lending (10%) and private lending (8%).

Debt Service Suspension Initiative (DSSI)

The Debt Service Suspension Initiative (DSSI) means that bilateral official creditors are, during a limited period, suspending debt service payments from the poorest countries (73 low- and lower-middle-income countries) that request the suspension.
It is a way to temporarily ease the financing constraints for these countries and free up scarce money that they can instead use to mitigate the human and economic impact of the COVID-19 crisis.
The DSSI was quite helpful, but it did not solve longer-term problems.
In 2022, the world’s poorest countries owed money to multilateral, governmental and private institutions. More than 40 % was owed to China, now the world’s largest bilateral creditor.

Common Framework (CF) For Debt Treatment

In view of mounting problems, the G20 launched the Common Framework for Debt Treatment (CF) to reach beyond the DSSI.
It is the only multilateral mechanism for forgiving and restructuring sovereign debt.

Roadmap For India:

As India has assumed the G20 presidency at an uncertain time for the global economy, addressing debt distress, initiating action, and devising a coordinated framework for relief would be a challenging endeavor.
India has provided $4 billion in assistance to Sri Lanka and is a major creditor of the island country alongside a few heavily-indebted countries in Africa.
Under the G20’s aegis, India should provide leadership and help negotiate commitments to debt relief before this crisis worsens global economic conditions.
This can be facilitated:
- Through debt suspension and debt relief
- By granting unhindered market access to these countries for inclusive trade and shared prosperity.
For the latter, an emphasis should be laid on the development of tradable sectors, with priority given to the informal sector, lower-income groups, and conflict-affected regions.

Targeted Measures:

Lifting barriers to trade
Amending regulatory requirements that are discriminatory to least developed countries
Ensuring fair prices for raw material imports
Boosting trade in services as hospitality and tourism have borne the brunt of the pandemic.

Creditor Committee For Chad:

The creditor committee for Chad under CF includes India as a member. The Chad relief package was aimed at restructuring its debt, but progress has been largely conditional on forging agreements among government creditors and private consortiums.
Reports suggest that creditors have agreed that given high energy prices, Chad does not require debt relief at this time, and the initiative will be reopened as and when needed but several other countries do not benefit from oil price surges and macroeconomic contexts vary.
Long-winded negotiations for debt recasts have seen debt service payment standstills.

Way Ahead:

In 2020, G20 leaders committed support to low-income countries by lending $100 billion of their special drawing rights to those in need, which the group should recommit to.
Given CF implementation delays, the G20 must commit to quicker timelines.
Difficult negotiations will need to be driven with due urgency.
A $1.4 billion three-year extended credit facility to Zambia in December 2021 had almost become uncertain because debt recast talks between China and Zambia seemed to be in the dark.
The G20 could develop debt relief packages that favor green and inclusive growth, and help boost economic resilience.
Resources need to be directed towards low-carbon production.
With the welfare of millions at stake, relief of debt distress is necessary. This would be in line with India’s G20 presidency slogan of “one earth, one family, one future”.