Global public debt is currently only three percentage points to reach 100% of gross domestic product (GDP), a level that was not reached even during the global financial crisis of 2008-09. There is a chance that this over-indebtedness will worsen again, depending on the duration and the prolongation of the impact of the covid pandemic. The debt-to-GDP ratio of low-income developing countries increased to 50% in 2020, from 44% the year before. The darker part is that about half of low-income countries today are at high risk of debt distress or real debt distress, and these debts are mostly due to higher private debt unlike others. segments. This marked change in the composition of debt and its servicing to commercial and non-Paris Club lenders has resulted in increased borrowing and servicing costs, budget deficits, unfavorable contractual terms and clauses. non-disclosure of loan terms, making debt resolution more difficult.
Is Debt Really Bad? Not quite. Simply put, a debt is good when the resources mobilized are intended for development purposes and the servicing of that debt does not put too much pressure on public assets. Once it crosses the optimal threshold (for example, the optimal ceiling of public debt to India’s GDP is estimated at around 60%), debt tends to become unsustainable.
Several countries had already reached unsustainable debt levels in 2019, a problem that has been exacerbated by the pandemic. This increase in debt created significant challenges for their economies as they found themselves with reduced incomes after a collapse in economic activity amid the pandemic. In many cases, revenue collection after debt service remains insufficient to support citizens and achieve their development goals, making additional borrowing unsustainable. Debt servicing itself has become a Herculean task for these indebted economies, plunging millions of people into poverty and economic despair.
Debt Service Suspension Initiative (DSSI) and Common Debt Treatment Framework: Recognizing the need of the hour, the G20 and the Paris Club, with the support of the International Monetary Fund and the World Bank, have proposed a temporary debt relief plan for 73 eligible countries, called DSSI. Although originally formulated to take effect from May to December 2020, the DSSI has a one-year extension until December 2021. The World Bank has reported that since its inception, the initiative has provided debt relief. over $ 5 billion to over 40 eligible countries.
Although the DSSI has provided additional fiscal space through the payment of debt service to these countries, it faces several challenges in achieving its objectives, mainly due to the limited participation of the private sector, the low level of bilateral debt and fear of downgrading. Problems with the quality and transparency of debt data have also prevented a few countries from reaping the full benefits of the initiative. In addition, the DSSI provides only temporary relief to a country’s liquidity problems, and the unsustainable debt levels of several countries require a longer-term structural debt treatment plan.
In view of these challenges, the Common Debt Treatment Framework was formatted in November 2020 to bring together all official creditors and ensure fair burden sharing among them. In this context, debt processing would be initiated at the request of a debtor country on a case-by-case basis. The aim is to have a different treatment of debt for countries with sustainable and unsustainable debt levels. The advantage would be that with each country facing different forms of debt problems, the debt treatment would be tailored to their specific needs. It also offers the option of covering debt service payments over a longer period, all or part of which is covered. In addition, it obliges the debtor country to seek treatment from private creditors at least as favorable as that of official bilateral creditors.
So far, Chad, Ethiopia and Zambia have requested debt treatment under the common framework. Chad has no Eurobonds or publicly traded debt and has a large external oil-backed commercial loan (Glencore Plc and its syndicate of lenders), making it a suitable candidate for the executive. With coordination among all creditors, Chad could become the first successful case of debt processing under this program, paving the way for more countries eligible for debt relief. Chad has been able to negotiate a debt restructuring plan with its sovereign bilateral creditors, including China, India, France and Saudi Arabia, the final outcome of which now rests on the decision to be taken by Glencore.
India and DSSI: Over the past decades, India has emerged as an important source of medium and long-term development finance for low- and middle-income countries, mainly through lines of credit (LOC) provided by India Exim Bank. As a member of the G20, India has pledged to participate in the DSSI and grant moratoriums on debt service to borrowers who request them.
According to the World Bank, India’s bilateral claims on DSSI-eligible countries stood at $ 6.4 billion at the end of 2019. Of the more than 60 countries for which LOCs have been extended, 45 are in principle eligible for debt relief and represent around 80% of total credit granted.
In conclusion, ensuring the transparency of debt data and putting in place a mechanism for periodic review of the treatment of the debt provided could go a long way in supporting low-income countries.
Sara Joy is an economist at India Exim Bank. These are the personal opinions of the author.
Never miss a story! Stay connected and informed with Mint. Download our app now !!