Giving Credit (Relief) Where It Is Due

On March 25, in a move that initially raised eyebrows in many G20 capitals, the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, and president of the World Bank, David Malpass, called on “all official bilateral creditors to suspend debt payments from IDA (low-income) countries that request forbearance.” The heads of the two Bretton Woods Institutions went on to “invite G20 leaders to task the (World Bank Group) and the IMF” to prepare a proposal for comprehensive action by official bilateral creditors to address both the financing and debt relief needs of IDA countries, which could be endorsed during the Spring Meetings of the World Bank and IMF.

Three weeks later, the Spring Meetings produced a G20 commitment to “support a time-bound suspension of debt service payments for the poorest countries,” a significant accomplishment considering the G20 typically tasks the IMF and the World Bank to implement G20 priorities, not the other way around. In addition, history has shown that debt relief, even on a modest scale, is a time-consuming endeavor, not typically the stuff of a rapid crisis response. By agreeing on common terms for even modest debt service relief, the G20 can claim a concrete example of multilateral cooperation, one that prioritizes crisis-related health and social spending over debt service, and starts to address long-identified transparency and coordination gaps in the international system. Depending on the evolution of the health and economic crises and the pace of recovery, the precedent for a coordinated G20 approach to debt relief may prove even more valuable in the months ahead.

In the lead up to the Spring Meetings, the G20 had been reviewed critically for its failure to deliver the kind of coordinated approaches demanded by a pandemic. The criticism is fair: communiqués from G20 finance ministers and central bank governors in late February and early March failed to reflect the gravity of the health crisis and the subsequent economic and financial fallout, let alone specific proposals for coordinated initiatives. (G7 performance was even more dismal, with foreign ministers failing to issue a statement in late March due to disagreement on what to call the virus.) In their April meeting, by contrast, finance ministers and central bank governors acknowledged both the magnitude of the challenge ahead and the divergent capacities of governments around the world to respond to the pandemic, reaching agreement on the temporary suspension of debt service payments despite very different implications for G20 countries.

Many G20 advanced economies generally provide grant assistance rather than loans to low-income countries, meaning they will not be affected directly by the suspension of debt service payments. Other members of the G20, however, including some emerging markets and China, in particular, have become important sources of lending to low-income countries; these creditors may face losses in the event debtor countries suspend debt service. The near inevitability of some sort of relief to the poorest countries no doubt made it easier to reach an agreement, but that shouldn’t detract from the achievement, which includes the participation of all G20 bilateral official creditors on common terms.

The common term sheet requires beneficiary countries to “increase social, health or economic spending in response to the crisis,” with reports that the temporary suspension of debt service could free up more than $20 billion for eligible countries to spend on pandemic-related expenditures. There are also commitments to transparency with the disclosure of all public sector debts as a condition for debt service relief, with the promise of technical assistance from international financial institutions as needed. By prioritizing social spending and including transparency in the common term sheet, the agreement makes progress on long-standing issues where consensus had previously been lacking. Given that such commitments require implementation by the recipient countries, the reach of the G20 agreement extends well beyond the G20 to include the 77 countries that are eligible for the debt standstill.

Finally, the agreement promises to address a long-identified source of weakness in the international system: the absence of a collective approach to debt restructuring that includes the largest official creditors to the poorest countries. The issue of indebtedness has attracted considerable attention in recent years, as it became apparent that some low-income countries’ debt burdens overwhelm their capacity to repay. When debt is unsustainable, it scares off other investment, including from multilateral institutions such as the IMF, World Bank, and regional development banks—which are prevented from lending into unsustainable situations—let alone private investors. In effect, official bilateral creditors have “crowded out” other sources of finance, even those provided on more advantageous terms.

Historically, the largest official bilateral creditors have sought “coordinated and sustainable solutions to the payment difficulties experienced by debtor countries” through the Paris Club, an informal group of official creditors consisting mostly of advanced economy members. However, the Paris Club hasn’t been able to coordinate an effective response to the uptick in low-income country indebtedness precisely because its membership does not include “non-traditional” official lenders—notably China—that are the largest source of debt financing to many low-income countries. The G20 agreement explicitly calls on all G20 members to provide debt relief on terms consistent with the common term sheet, “which is also agreed by the Paris Club.” Linking the G20 commitment and the Paris Club represents progress in the years’-long effort to bring non-traditional official creditors such as China into a coordinated approach.

The limited debt relief agreed to date is highly unlikely to meet the eventual needs for sovereign debt relief, but the G20 agreement provides a framework to build upon. It specifically “calls on private creditors, working through the Institute of International Finance, to participate in the initiative on comparable terms” and asks “multilateral development banks to further explore the options for the suspension of debt service payments over the suspension period.” While financing needs will ultimately depend on the evolution of the health and economic crises and the path to economic recovery, the G20 deserves credit for delivering on its promise to offer a coordinated approach.

Stephanie Segal is a senior fellow with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C.

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Stephanie Segal

Stephanie Segal

Former Senior Fellow, Economics Program