Prime Minister Narendra Modi recently called the debt crisis a “great concern for the world, especially developing countries”, as he said India’s G20 Presidency placed a significant emphasis on addressing the global challenges posed by debt vulnerabilities and there are some “appreciable results” as well. In an interview with PTI, the PM said India hopes to build consensus at the G20 summit to create a framework to help low-income economies ridden by debt.
New Delhi is set to host world leaders on September 9 and 10 for the G20 Heads of State and Government Summit. Many leaders expected to attend the meeting have called for a discussion on the issue. While the rising public debt globally is not a new phenomenon, the current crisis has come at a time of greater vulnerability.
What Is A Debt Crisis?
A global debt crisis is a situation when the total debt of all countries in the world becomes so large that it threatens to destabilise the global economy. This can happen when countries borrow too much money, or when the interest rates on their debt become too high.
According to IMF, “A common feature of debt crises has been a sudden jump in debt levels, often driven by large exchange rate depreciations in countries with foreign currency debt, and governments’ assumption of so-called contingent liabilities amassed by state-owned enterprises, subnational governments, banks, or corporations. Because these crises are associated with lower growth, higher inflation, and setbacks in the fight against poverty and other development goals, protracted defaults are damaging to the economic and social fabric of the debtor country.”
The impact of a global debt crisis can be far-reaching. It can lead to financial instability, economic recession, and even social unrest. In the worst cases, it can even lead to a sovereign default, which is when a country is unable to make its debt payments.
The global debt crisis is not a new phenomenon. There have been many debt crises in history, including the Latin American debt crisis of the 1980s and the Asian financial crisis of the 1990s.
How We Reached To This Point
According to various reports by the World Bank, IMF, and other global financial institutions, many countries today are facing high debt levels because they amassed debt to fight the Covid-19 pandemic and the economic recovery in these economies now substantially lags behind their advanced economy counterparts.
Additionally, tighter monetary policies in advanced economies are poised to push up international interest rates, which tends to put pressure on currencies and heighten the odds of default. To complicate matters, the extent of many emerging market and developing economy liabilities and their terms aren’t fully known, according to an IMF report from March 2022.
A United Nations (UN) report dated July 12, 2023, says public debt of governments, including both domestic and external debt, has increased more than fivefold since the year 2000. In 2022, the global public debt – comprising general government domestic and external debt – reached a record $92 trillion.
Notably, the report said, developing countries owe almost 30 per cent of the total public liabilities, of which roughly 70 per cent is attributable to China, India, and Brazil.
The number of countries facing high levels of debt has increased sharply from only 22 countries in 2011 to 59 countries in 2022, as per the UN. This includes low-income and emerging economies from Africa, Asia, and Latin America.
According to the report, developing countries’ total public debt increased from 35 per cent of GDP in 2010 to 60 per cent in 2021. Similarly, external public debt, the part of a government's debt owed to foreign creditors, increased from 19 per cent of GDP to 29 per cent of GDP in 2021. According to the World Bank International Debt Report 2022, global external debt reached $9 trillion in 2021, rising by 5.6 per cent.
Rising Chinese Lending And Why It Is Concerning
According to the World Bank International Debt Report 2022, the composition of debt owed by International Development Association (IDA) countries, the world's poorest developing countries, changed significantly. The proportion owed to Paris Club creditors, a group of 22 developed economies including the US, UK, and EU nations, fell to 32 per cent at the end of 2021 ($64.2 billion), down from 58 per cent ($48.9 billion) at the end of 2010.
Meanwhile, the amount owed to non–Paris Club creditors (China, India, Saudi Arabia, the United Arab Emirates, and others) increased to 68 per cent ($138.3 billion) in 2021 from 42 per cent ($35.3 billion) in 2010.
Among the non-Paris Club creditors, China’s share of official bilateral debt stock grew from 18 per cent in 2010 to 49 per cent in 2021. This growth is also reflected in the increase of debt service flows to China, estimated at $17 billion in 2022 and accounting for 66 per cent of official bilateral debt service.
Another aspect of debt provided by China is the terms and conditions of debt.
A 2021 CEPR Discussion Paper says: “Very few contracts between Chinese lenders and their government borrowers have ever been published or studied….the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek an advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring ("no Paris Club" clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors' domestic and foreign policies.”
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Debt Service Suspension Initiative (DSSI) And Common Framework for Debt Treatment
Covid-19 hit the world's poorest countries hard, pushing over 100 million people into extreme poverty in 2020, as per the World Bank. Following this, the G20 nations established the Debt Service Suspension Initiative (DSSI) in May 2020 to help these nations combat the pandemic and protect vulnerable populations. It temporarily halts debt service payments from the poorest countries that request the suspension.
As many as 48 out of 73 eligible countries participated, suspending $12.9 billion in debt payments until December 2021, as per the World Bank data. However, only one private creditor participated in the Initiative. The World Bank and IMF support DSSI by monitoring spending and promoting debt transparency.
Data Shows that over 65 nations have debts to China that surpass 10 per cent of their overall external debt. China stands as the primary bilateral creditor in numerous countries participating in the Debt Service Suspension Initiative (DSSI), with an average share of 54 per cent and peaking at 72 per cent in certain instances.
Following the DSSI, the Group of 19 nations and the EU came out with the 'Common Framework for debt treatment' beyond the DSSI (Common Framework), together with the Paris Club, to support low-income countries with unsustainable debt in a structural manner.
As per the Italian G20 Finance track, the Common Framework considers debt treatment, on a case-by-case basis, driven by requests from eligible debtor countries. In response to a request for debt treatment, a Creditor Committee is convened. Negotiations are supported by the IMF and the World Bank, including through their Debt Sustainability Analysis (DSA).
However, as many reports have pointed out, the Common Framework has not effectively addressed debt sustainability in distressed cases, leading to delays in IMF financing due to the need for Chinese assurances. Proposed reforms appear underwhelming, with the core issue being China's stance on maintaining high-value claims and coupon rates.
After 3 years of the G20 Common Framework coming out, according to a June 2023 report by news agency Reuters, only Zambia, Chad, Ethiopia, and Ghana have opted for the scheme and even they are yet to “chalk up a solid success".
A Council on Foreign Relations report says China's demand that multilateral development banks take a haircut alongside other creditors risks undermining the system. The IMF's approach to debt targets in Zambia and Sri Lanka (not eligible under the framework) is inconsistent, creating challenges in achieving debt sustainability. China's insistence on restructuring MDB debt is politically contentious and unwarranted. The IMF's debt sustainability targets were designed for hard currency debt, causing issues in countries like Zambia with significant local currency external debt. Debt service on local currency bonds is consuming much of Zambia's payment capacity.
Though Zambia, locked in default for almost three years, does look to be making some progress, the report said. Adding that the core struggle has been how much debt countries need to write off, and coaxing China into debt negotiations which it sees as designed by Western powers.
The report also noted that China issued some $138 billion in new loans between 2010 and 2021, making its sign-off essential as a condition to unlock IMF funds. Zambia owes China some $5.9 billion, roughly 23 per cent of its GDP and close to half of the $12.8 billion of the external debt it is trying to restructure.
India’s G20 Presidency And Debt Restructuring Progress So Far
Following the Third G20 Finance Ministers and Central Bank Governors Meeting in Gandhinagar Gujarat, on July 18, 2023, an Outcome Document and Chair’s Summary was issued. It said that G20 continues to "stand by all the commitments made in the Common Framework for Debt Treatments beyond the DSSI".
The document asked the institutions to “step up the implementation of the Common Framework in a predictable, timely, orderly and coordinated manner”.
Further, it asked the G20 International Financial Architecture Working Group (IFA WG) to continue to explore opportunities for a “User manual” for the Common Framework presenting the experience of the first cases. It also asked G20 IFA WG to continue developing expeditiously the G20 Note on the Global Debt Landscape in a fair and comprehensive manner and continue to discuss policy-related issues linked to the implementation of the Common Framework and make appropriate recommendations.
Further, amid the rising debt problem, the Global Sovereign Debt Roundtable (GSDR) grouping, which includes Paris Club creditors, private creditors, and borrowing countries, had three meets throughout the year including one in Bengaluru in February on the sidelines of the first G20 Finance Ministers and Central Bank Governors (FMCBG) meeting.
Notably, the GSDR, held in April on the sidelines of IMF-WB Spring meetings, agreed on improving information sharing at an early stage of debt restructuring processes.
Following the meeting in Washington, Finance Minister Nirmala Sitharaman, co-chair of the meeting, said: “We agreed on the importance to urgently improve information sharing including on macroeconomic projections and debt sustainability assessments at an early stage of the process.”
The statement issued after the meeting said: “Further work will be undertaken on principles regarding cut-off dates, formal debt service suspension at the beginning of the process, treatment of arrears, and perimeter of debt to be restructured, including with regard to domestic debt.”