DEBT RELIEF

G20 adopts a plan to reduce or reschedule the debts of deeply indebted poorer countries

By Peter Fabricius 23 November 2020

A handout photo made available by G20 Riyadh Summit for a combo of photos of world leaders attending the virutal G20 Riyadh Summit, Riyadh, Saudi Arabia, 21 November 2020. The G20 Leaders' Summit will be held virtually on 21 and 22 November and is organized by Saudi Arabia's current G20 Presidency. EPA-EFE/G20 RIYADH SUMMIT HANDOUT HANDOUT EDITORIAL USE ONLY/NO SALES

Global debt-relief plan goes beyond current deferment of debt service payments, to forgive debt

G20 leaders have endorsed a plan to reduce or reschedule the debts of poorer countries hit hard by the Covid-19 pandemic.

Meeting virtually for their 2020 summit, the leaders also agreed to extend by six months an existing programme to defer the debt service payments of poor countries so they could divert the money to fighting Covid-19 and reviving their economies battered by the pandemic.

The Debt Service Suspension Initiative (DSSI) initially suspended debt service payments from May 1 2020 until the end of the year. The G20 and the Paris Club have agreed to extend the debt service for a further six months, until June 30 2021. 

And they decided that the G20 would determine next year whether to defer the debt service payments for another six months, until the end of 2021, depending on its assessment of the needs of the indebted countries.  They noted that the Paris Club – of 22 government creditors – had also agreed to this possible extension. 

The G20 leaders agreed that debt service suspension would not be enough to help deeply indebted countries and so they also decided on a “Common Framework for Debt Treatments beyond the DSSI”. This would reduce or reschedule some debt.  

President Cyril Ramphosa, who attended the summit hosted by Saudi Arabia, the G20 president for 2020, had urged his fellow G20 leaders to extend debt relief, particularly for African countries. He noted that the African Union – which he is chairing this year – had proposed several measures, “including debt relief in the form of interest payment waivers and deferred payments”.

“We call on the G20 member states … to convince all creditor countries, the multilateral development banks, the credit rating agencies and the private sector to continue to work with us to address the problem of burgeoning and unsustainable developing country debt.

“The G20 Debt Service Suspension Initiative has helped to defer the immediate debt service payments of participating countries, and the recently agreed six-month extension will provide further support.

“However, in addition to the suspension of debt service payments, large financing needs remain necessary to both stave off a deep humanitarian crisis and stimulate economic rebirth.”

In their declaration at the end of the summit on Sunday, the G20 leaders welcomed the progress of the DSSI so far. They noted that together with exceptional financing from the World Bank and International Monetary Fund “the DSSI is significantly facilitating higher pandemic-related spending”.

Some debt relief advocacy NGOs have criticised the DSSI because no multilateral development banks or private creditors have suspended debt service payments, although the G20 and the Paris Club had urged both those sets of creditors to participate when it launched the DSSI on 15 April. 

Private creditors have said no debtor countries have asked them to suspend debt service payments. The countries seem to have been deterred from doing so because credit rating agencies have warned that the countries could be downgraded if they participate. 

Multilateral development agencies like the World Bank have also expressed concerns that they risk losing their extremely high credit ratings if they participate in the DSSI.

Given the scale of the Covid-19 crisis, the significant debt vulnerabilities and deteriorating outlook in many low-income countries, we recognise that debt treatments beyond the DSSI may be required on a case-by-case basis.

The G20 declaration “strongly encouraged” private creditors to participate if asked by eligible countries to do so and encouraged multilateral banks to increase their support to the DSSI, including by providing net-positive flows of financing to the DSSI countries during the suspension period. 

“As of 13 November 2020, 46 countries have requested to benefit from the DSSI, amounting to an estimated $5.7-billion of 2020 debt service deferral,” they said. 

They added that “given the scale of the Covid-19 crisis, the significant debt vulnerabilities and deteriorating outlook in many low-income countries, we recognise that debt treatments beyond the DSSI may be required on a case-by-case basis”. 

“In this context, we endorse the Common Framework for Debt Treatments beyond the DSSI, which is also endorsed by the Paris Club.” 

The “Common Framework” would go beyond the DSSI by not merely suspending debt service payments temporarily, but rescheduling and, if necessary, writing off some debt.

Although it is not yet clear how it will operate, the G20 is confident that private creditors will participate in the programme and that this would also bring in some Chinese development banks – which, though government-owned, have not participated in the DSSI on the grounds that they are commercial banks. 

Ramaphosa urged the G20 summit to endorse a proposal by the AU for the IMF to issue Special Drawing Rights to help finance the post-Covid recovery of poorer countries. 

The G20 declaration did not respond explicitly to this call, although it did “call on the IMF to continue exploring additional tools that could serve its members’ needs as the crisis evolves”.

Ramaphosa welcomed the commitment by the G20 to equal global access to Covid-19 vaccines and treatments. He called for a commitment by G20 leaders “to invest substantially” in the immediate $4.5-billion funding gap of the Access to Covid-19 Tools Accelerator (ACT-A), a joint initiative by developed, middle-income and developing countries to finance access to Covid-19 therapies, diagnostics and vaccines for middle-income and developing countries.

EU Commission President Ursula von der Leyen had earlier put the overall ACT-A financing gap much higher. She said in a pre-summit press conference that ACT-A and the similar COVAX partnership were the world’s main tools to achieve wide distribution of vaccines and other treatments.

“As of 2 November, 94 high-income countries have confirmed their participation in COVAX as well as 92 middle- and low-income countries. The objective is to purchase 2 billion doses by the end of 2021 for the low- and middle-income countries. 

“Pledges of $1.8-billion have been made for procuring vaccines through COVAX for the low- and middle-income countries. More will be needed in 2021 for vaccine procurement. So the estimates are $5-billion.  

“Funding is also needed for testing and treatment in the ACT Accelerator. The total needs were estimated at $38-billion, of which $4-billion had been made available so far. The funding needs for the ACT Accelerator may seem to be very large, but are small in comparison with the cost of the pandemic.” DM

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