Last week (12th April) was a big week for the global debt crisis, with the International Monetary Fund (IMF) and World Bank Spring Meetings, and the G20 Finance Ministers’ meeting, bringing together the people and institutions with the power to make real change. Some of the world’s most pressing issues were discussed, including the climate crisis, access to vaccines, and the debt crisis, and statements were made on how they intend to address these issues.
However, the outcomes for action on sovereign debt were disappointing. While there were some encouraging announcements, they did not go far enough to address the scale of the problem, and some seemed to be based on rhetoric rather than action. With 52 countries now in debt crisis, so much more needs to be done.
One area of progress was the G20 announcement of a further extension of the Debt Service Suspension Initiative (DSSI), allowing eligible countries continued respite from debt repayments until the end of this year. While this is an important short-term way to ensure funds remain in poorer countries, it does nothing to address their overall debt burden as payments are simply delayed, rather than cancelled.
Furthermore, middle-income countries cannot apply for the initiative, despite facing increasing debt burdens as a result of both COVID-19 and climate crisis. The initiative also does nothing to address debts owed to multilaterals such as the IMF and World Bank, and does very little to encourage private sector participation, meaning some of the resources freed up by the DSSI have been used to continue to pay these creditors.
Previous analysis by JDC has shown that some private creditors are expected to make up to 250% profit if paid back in full during the pandemic.
The G20 also announced that this would be the final extension of the DSSI, meaning that all hope of addressing harmful debt burdens for poorer countries moving forward now rests on the Common Framework, a mechanism for broader debt treatment DSSI-eligible countries can apply to.
Three countries have so far applied to the Common Framework – Chad, Ethiopia, and Zambia. Last week, the IMF announced that Chad’s creditors would be meeting to discuss the country’s request for debt relief in early April, but not much else is known about the process highlighting concerns about transparency and accountability.
There are also concerns about whether the framework will be adequate to address the levels of debt burdens faced by many poorer countries. For example, like the DSSI, middle-income countries, many of which also have huge debt burdens, are not eligible to apply – something not even discussed by the G20 according to the Italian President. Multilateral institutions are also not providing debt relief via the framework, and while private creditors were strongly called on to participate last week by the G20 and WB, they have so far refused with no mechanism compelling them to do so.
The G20, WB, and IMF are hoping that by demanding comparability of treatment of all creditors before a restructuring goes ahead, private creditors will be incentivised to participate to recoup at least some of what they are expecting to be repaid. But there are concerns about whether this will be enough to secure their participation given it has not always been effectively used in the past by other creditors. Furthermore, there is nothing stopping private creditors from suing debtor countries if they are forced to default in the event an agreement for debt treatment cannot be reached.
That is why we are calling for new laws to ensure private sector participation, and to protect debtor countries during the negotiation period. Given that a large proportion of developing country debts to the private sector are owed under UK law, it is vital that the UK passes such a law. The UK is also in a strong position to champion this given their G7 Presidency this year.
In other news, the IMF announced it would be cancelling $283 million of debt payments for 28 countries over the next six months – the third tranche of debt cancellation from the IMF’s Catastrophe Containment and Relief Trust (CCRT) since the onset of COVID-19. While it is positive that this was extended, especially given that it is the only debt cancellation (as opposed to suspension) that has taken place in response to the pandemic, the IMF needs to go much further if it wants to address the full scale of the problem.
David Malpass, President of the WB, also announced that the WB and IMF are considering ways of linking debt relief to climate goals, potentially within the Common Framework. It is encouraging to hear that the IMF and WB are exploring ways of linking these dual crises, especially given how they interlink and exacerbate one another. But there also several potential risks in the two crises being linked in this way, including making debt relief conditional upon goals set by the IMF and WB, and undermining wider, and much-needed, debt relief. It is important to ensure that these risks are factored in, and carefully managed, in any initiative that links debt relief to climate goals.
A common thread throughout all the announcements that came last week is a lack of debtor country participation in decision-making. The agenda on addressing debt distress has been largely set by G20, IMF and WB where wealthy countries dominate. To find solutions that truly address the heart of the problem, decisions must be made hand in hand with countries and communities most impacted by the issue.