Questions and Answers on Sovereign Debt Problems
Back to the top
The G20 Common Framework for Debt Treatment Beyond the DSSI
– What is the common framework of the G20 for the treatment of the debt beyond the DSSI?
– What is the role of the IMF within the common framework of the G20?
– What is the IMF’s point of view on countries’ recent debt restructuring requests within the common framework of the G20 and how does this affect their debt sustainability analyzes?
What is the G20 common framework for dealing with debt beyond the DSSI?
The Common Framework for Debt Treatment Beyond DSSI is an agreement between G20 and Paris Club countries to coordinate and cooperate on debt treatments for up to 73 low-income countries eligible for the ‘Debt Service Suspension Initiative (DSSI).
Debt treatments under the Common Framework are initiated at the request of a debtor country on a case-by-case basis. The framework is designed to ensure broad participation of creditors with equitable burden sharing. It is important to note that it includes not only members of the Paris Club but also official bilateral G20 creditors such as China, India, Turkey or Saudi Arabia who are not members of the Paris Club. .
The common framework can be used to resolve a wide range of sovereign debt issues of DSSI-eligible countries:
- For countries where public debt is unsustainable, it can allow for deep debt restructuring, with a reduction in the net present value of debt sufficient to restore sustainability.
- For countries with sustainable debt but liquidity problems, it may allow a portion of debt service payments to be deferred for a number of years, which can ease financial pressures. This type of processing is often referred to as rescheduling or reprofiling. Such debt treatment can also benefit countries where high debt service payments are a source of debt vulnerability.
What is the role of the IMF within the common framework of the G20?
To benefit from debt treatment under the common framework, a country must have an IMF-supported program, such as an Extended Credit Facility, to support the implementation of appropriate economic policies and structural reforms. . In practice, this means that if a country does not already have a program supported by the Fund, it will have to request one alongside a request for debt treatment under the Common Framework. The IMF plays a key role in working with the country’s authorities to develop a policy framework that will help the country regain its external sustainability, including by restoring sustained inclusive growth.
The second key role of the IMF is to define the financing envelope (or debt relief envelope) consistent with the parameters of the program supported by the IMF, which informs discussions between creditors and debtors on the necessary treatment of the debt. . This funding envelope is based on the macroeconomic framework of the program and the accompanying Debt Sustainability Analysis (DSA).
What is the IMF’s perspective on recent demands for countries’ debt restructuring under the common G20 framework and how does this affect its debt sustainability analyzes?
Recent requests from Chad, Ethiopia and Zambia for debt treatment under the common framework are welcome. The debt challenges these countries face are quite different, but the Common Framework can provide treatment tailored to their specific needs.
In some cases, when debt is sustainable, debt treatment will help reduce debt vulnerabilities, such as the risk of debt distress. In other countries where debt is unsustainable, debt treatment under the common framework could help the country meet the debt sustainability requirements necessary for the Fund to lend.
For countries with sustainable debt but significant financing needs, under what circumstances might they request debt relief under the Common Framework?
An IMF-supported program must be fully funded. In some cases, the program supported by the Fund is used to mobilize sufficient financing to meet a country’s needs, for example from multilateral development banks and other sources. In cases where these efforts do not generate sufficient funding to close program funding gaps, countries may need to seek debt treatment under the common framework to ensure that the program is fully funded, such as a rescheduling of debt service payments.
Does the IMF oblige countries to seek treatment of external debt within the common framework in order to access financing for IMF programs?
Any decision to seek debt treatment should be taken by the country’s authorities. If there are debt-related vulnerabilities and / or financing issues that prevent the Fund from providing financial support to a country, the Fund will notify the country’s authorities. The country would then decide whether it wishes to seek appropriate debt treatment.
If the G20 common framework can also be used as a tool to ease liquidity pressures through debt service rescheduling over time, what is the difference from the previous debt service suspension initiative? debt?
In view of the countries’ urgent financing needs and the highly uncertain environment, the DSSI has granted temporary liquidity relief with the same treatment of debt as that granted to all requesting countries. Debt service that was suspended from May to December 2020 must be repaid after a one-year grace period with payments spread over the following three years. For debt service suspended in the first six months of 2021, the grace period remains the same, but repayments are spread over five years to avoid duplication and consolidation of debt service payments.
In contrast, when the Common Framework is used to provide liquidity relief, debt service rescheduling is tailored to the specific needs of the country, with the potential to cover debt service payments due over several years and to cover all or part of these payments. Repayment terms, including the grace period, must be adjusted to meet the duration and magnitude of the liquidity pressures facing the county.
Another important difference is that DSSI encouraged, but did not demand, comparable debt relief from private creditors and any other creditors who were not directly participating in DSSI. On the other hand, the Common Framework requires the debtor to seek other creditors, including private creditors, treatment at least as favorable as that agreed in the Common Framework. How comparability of treatment will be implemented against the private sector will depend on the circumstances as assessed by official bilateral creditors signing the agreement with the debtor country, who in practice apply comparability of treatment at the level of the debtor country. private creditors as a whole, rather than each private creditor.
Voluntary private sector participation in the Debt Service Suspension Initiative to date has been limited, in part reflecting the concerns of debtor countries about their position vis-à-vis private creditors, including their credit rating. credit. What is the likelihood that requests for preventive relief under the common framework will face similar problems?
The DSSI lacked private sector participation in part because comparable treatment of private creditors was encouraged but not mandatory. This reflected the priority at the onset of the crisis to provide immediate support to as many countries as possible.
On the other hand, under the G20 / Paris Club agreement on the Common Framework, the debtor country is required to seek from private creditors treatment no less favorable than that of official bilateral creditors. How comparability of treatment will be implemented against the private sector will depend on the circumstances as assessed by the official creditors signing the agreement with the debtor country, who in practice apply comparability of treatment at the level of the debtors. private creditors as a whole, rather than each private creditor.