The G20 recently announced the agreement in principle of a “Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)”. The framework aims to address the problem of unsustainable debts faced by many countries in the aftermath of the Covid-19 pandemic. The agreement, which includes all members of the G20 and the Paris Club, still requires domestic approval by all the participants. The adoption and details of the framework are set to be published at an extraordinary meeting of G20 Finance Ministers and Central Bank Governors ahead of the G20 Summit on 21-22 November. 

The lack of transparency around the framework is troubling for at least two reasons. First, the potential amounts of debt relief involved dwarf the scale of the G20 DSSI. After its recent six-month extension, the DSSI is projected to allow 46 participant countries to suspend payments for a total of US$11.7 billion. In contrast, the public external debt stock for countries eligible for DSSI countries stood at US$477 billion in 2018. Even a partial write-off of these debts would have substantial financial repercussions. 

Second, for a large number of developing countries, the scope of the debt treatments agreed by the G20 represent the difference between achieving a sustainable post Covid-19 recovery or a lost decade for development. The absence of a seat at the table, or to be more precise, the absence of a Zoom code for G20 Finance Ministers’ meetings  keeps them in the dark regarding decisions that will define their future. 

While the details of the Common Framework remain hidden from the public, there are pieces of information that allow us to assemble an outline of what the G20 agreement could actually deliver and its implications for developing countries. 

Putting together the puzzle pieces

The G20 approach to debt vulnerabilities in the context of the pandemic has been framed by the six principles of the Paris Club. These include solidarity, consensus and information sharing amongst Club members; the requirement of an International Monetary Fund (IMF) programme; and last but not least, comparability of treatment for non-Paris Club commercial and bilateral creditors. These elements, including the increasingly controversial participation on a voluntary basis by private and multilateral creditors, are the foundation of the DSSI.    

Furthermore, the DSSI is simply a modified version of the Paris Club’s classic debt treatment. This mechanism was established at the time of the creation of the Club in 1956. It allows debtor countries to reschedule their debt payments using an interest rate and repayment period to be defined on a case-by-case basis by the Club. In contrast, the DSSI set a common benchmark for a temporary debt payment suspension for all participant countries. Suspension is designed to be Net Present Value (NPV) neutral and the repayment window includes a one-year grace period to be followed by a five year payment period.  

Given the complex nature of the negotiations to go beyond DSSI, it is unlikely that the G20 will deviate substantially from this approach in the design of the Common Framework. This conservative approach to debt crisis resolution is emphasised by a recent IMF policy paper. The document sets out the official position of the organisation regarding the required changes to the international architecture on debt resolution. While the IMF acknowledges the daunting challenges posed by the pandemic, it abstains from suggesting substantial changes to the current framework. Instead, the IMF supports the establishment of a common approach to official debt relief, including the Paris Club members and others, alongside improvements in debt transparency and contractual arrangements.

Thus, if the scope for 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 most recent debt relief mechanism created by the Paris Club. Established 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 that are identified as experiencing liquidity problems are provided with a debt treatment under the traditional terms of the Paris Club. Countries that are experiencing solvency problems are granted a comprehensive debt treatment, including extensive debt write-offs, on a case-by-case basis.

Debt relief under the Evian approach follows a three-stage process. The first stage involves an official request by the debtor country alongside the establishment of an IMF programme and a rescheduling of debt payments for a period of one to three years. A second stage requires a second IMF arrangement and may involve the provision of an initial amount of debt relief. The third and final stage requires the successful completion of the IMF programme and a successful track record of compliance with the Paris Club over time. Only if these criteria are met is the country eligible to receive full debt relief under the terms of the approach.

The structure of the Evian approach fits perfectly with the evolving response of the G20. The Common Framework seems destined to share the most important principles and characteristics of the Evian approach. This will include the principle of comparability of treatment. Under the Evian treatment, participant countries are contractually required to seek debt relief from non-Paris Club commercial and bilateral creditors on comparable terms to those granted by the Paris Club members. Factors for assessing comparability include changes in nominal debt service, NPV and duration of the restructured debt. Participation by private creditors in debt relief efforts under the Common Framework would probably take place under this clause. 

The sequencing of the Evian approach would also match the timing of the Common Framework. Participant countries in the DSSI can be considered to be in the first stage of the Evian approach. In the context of the pandemic, the second stage of the approach would map on to the transition of a number of countries from IMF emergency financing under the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) into standard IMF programmes in the near future.

G20 approach is bound to fail

Despite these similarities, it is possible to expect important differences. First, the Common Framework will probably apply to all DSSI countries, regardless of income levels. Given the US-China differences, it is rather unlikely that the G20 will agree at this stage to provide special treatment to low-income countries on standardised terms similar to those of the Heavily Indebted Poor Countries (HIPC) initiative. In that case, the Paris Club granted, under the Cologne terms, a cancellation of up to 90 per cent of non-Official Development Assistance (ODA) credits. Nothing as substantial seems to be under discussion at this stage. 

Second, the IMF and its DSA could play a more prominent role in the Common Framework. Following an IMF proposal for the DSSI, and subject to individual country applications, Common Framework eligibility 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 Low-Income Country Debt Sustainability Framework (LIC DSF) 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, St. Vincent and the Grenadines, Tajikistan and Togo. Several middle-income countries whose debts were classified as sustainable to facilitate their access to IMF emergency financing, but have a high degree of vulnerability, are likely to become eligible as well, pending a revision 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 available tools rather than the other way around, is bound to fail, as has been shown by the experience of the DSSI. G20 officials are not going to have to deal with the consequences of the decisions they are adopting in virtual meeting rooms. Instead, millions of people in developing countries will have to live with the effects of their failure to respond to a crisis of historic proportions. 

Why do we think a Paris Club-based approach to the Common Framework is unlikely to succeed? The answers are to be found in the next blog post.