Stepping up the Common Framework or reforming the debt architecture, this is the real question
On Thursday, the IMF published a blog on the problems facing the implementation of the G20 Common Framework (CF). This signals a victory for civil society campaigners – but is ultimately too little too late.
It has taken a year for the IMF to finally recognise what CSOs have been saying since November 2020, when the new(ish) framework was approved. It is not fit to address the challenges of creditor coordination and engagement and the uncertainties for borrowing countries. It is also not enough to tackle the debt problems that many countries in the global south are facing and will continue to face in the coming years.
The blog – written by IMF chief Kristiana Georgieva and Ceyla Pazarbasioglu, director at the IMF Strategy, Policy and Review Department – recognises that there’s a risk of “economic collapse” if no further debt cancellation and restructuring is available and accelerated..
However, in typical IMF style, proposals set out in the article raise more questions than they answer. It finally acknowledges that the Common Framework has not been able to ensure private sector participation, despite the fact that lack of engagement with these creditors was the Achilles heel of its predecessor - G20’s Debt Service Suspension Initiative (DSSI). The CF still depends on private creditors to voluntarily engage in the creditor committees and deliver on comparability of treatment, a principle developed in the Paris Club to ensure that all creditors contribute with their fair share in a debt restructuring and cancellation. One of the proposals outlined by the authors is the need to clarify “how the comparability of treatment will be effectively enforced”, noting the relationship with IMF lending into arrears policies. As Tim Jones from Jubilee Debt Campaign notes, “the IMF is hinting that if any private and bilateral creditors refuse a debt restructuring, the IMF and G20 should give the debtor political and financial support to default on recalcitrant creditors, while debt cancellation from the other creditors should go ahead”. Indeed, the IMF and bilateral creditors should commit to explicitly support borrowing countries that choose to default on creditors who refuse to participate on comparable terms in debt restructuring.
The article also rolls out a couple of proposals that were already on the table of the G20 Finance Ministers and leaders last October: the need for clearer steps and timelines, and a debt service payment standstill during the duration of the restructuring negotiations. Both creditors (including private lenders) and borrowers have been asking for the former since the approval of the Framework, but the G20 has been unable to reach an agreement. On the latter, while a positive and necessary proposal, the G20 DSSI experience throws doubts on the capacity of the Fund or the G20 to enforce private sector participation in such standstill. The only way to ensure a suspension on the payments is to effectively stop paying. Again, protecting those countries that have the courage to do so, by ensuring financing and legislation to protect them against uncollaborative creditors, is key to making this possible.
The article, unsurprisingly, fails to address the need to discuss multilateral debt cancellation and restructuring. For many low-income countries, debt with multilateral development banks or the IMF is a key element in their debt sustainability.
The text highlights the need for countries “to transition to strong [IMF] programs”, that will only be unlocked if these countries go under comprehensive debt treatment through the Common Framework. While it is important that the Fund does not throw fuel onto the fire by lending to countries with already unpayable debts, we need to sound the alarm on the risks for the Common Framework and the need for debt restructuring to become a Trojan horse for a wider wave of austerity in the global south.
The proposal touches on the need to extend the CF to other highly-indebted countries, namely most middle-income countries, yet another request from CSOs since the early stages of the DSSI and the CF. As some leaders from the Caribbean have stated, the use of income per capita indicators to determine which country can access a debt relief initiative, or concessional finance, is not only unfair but absolutely ineffective. The need for multidimensional vulnerability indicators and the review of the debt sustainability framework, to include human rights, SDGs, gender and climate considerations into it, is of utmost urgency.
While they represent a step in the right direction, the IMF proposals fall short of what is needed to tackle the crisis. The potential debt relief to be provided remains uncertain in a context in which many countries require large amounts of debt cancellation to free up resources to guarantee the basic economic, social and cultural rights of their populations. While the article addresses the need for an enhanced debt treatment framework, it fails to recognise that the Common Framework, even with small improvements, is not the solution. The problems of creditor coordination that the authors mention, as the cause for delays in the implementation of the CF, cannot be solved by a tool that is discussed in an exclusive forum like the G20 and based on voluntary engagement.
Acknowledging that we have an urgent problem on our hand is one thing, having the courage to take the bull by the horns is another. That starts with building the multilateral debt resolution framework that the world needs – one which offers timely, fair, comprehensive, rules based and durable sovereign debt resolution to all countries in need. Without it, and even with an enhanced Common Framework in place, countries all over the world are condemned to messy, long and costly default and restructuring processes, where the problem of uncollaborative private creditors, the non-participation of multilateral institutions and the risks of insufficient debt cancellation leading to years of serial debt restructuring remain unsolved.