COVID-19 has laid bare a blatant double standard: the world’s wealthiest countries play by one set of rules and the world’s poorest countries by another. G20 governments have spent trillions to keep their economies afloat, while others have been left without the necessary support to weather the storm. The needs are immense. As many as 150 million people could be pushed into extreme poverty by 2021 and many countries are facing a cash crunch. However, the G20 has failed to rise to the occasion.
G20 leaders urgently need to respond with an economic package commensurate with the scale of the need. Backing the creation of $500 billion in Special Drawing Rights (an international reserve asset) and allocating these to the poorest countries should be a priority. A comprehensive standstill covering bilateral, multilateral, and private debt service payments through the end of 2021 is essential; it is wrong for private creditors and the World Bank to continue collecting these dues from countries struggling to contain the fallout from the pandemic.
Restructuring debt
The G20 has one more chance when it meets at the end of this week. It will unveil the full details of its “Common Framework for Debt Treatments beyond the DSSI,” which sets out the rules for future debt restructuring or forgiveness. The statement from last Friday’s meeting was disappointing — it was vague, unambitious, and lacked accountability.
So much is at stake. The set of eligible countries owe a total of $516 billion in official and private debt — over 10 times the volume of aid they receive.* Details released suggest that there will only be a commitment for official bilateral debt to be negotiated — which is just 37% of this total. Crucially, the official multilateral and private creditors that hold the remaining 63% are only encouraged to participate. There is no incentive for them to do this, nor a process to be held to account. We also hoped to see the eligible countries list expanded to include all those at risk of distress, and concrete reporting requirements on transparency for all lenders and borrowers.
Zambia’s default
Last weekend Zambia became the first African country to default on its debt since the onset of the COVID-19 pandemic. Progress on negotiating how lenders will be repaid has been slow, with concerns around transparency of Chinese debt adding a layer of complexity. History tells us that this takes time and can have dire consequences. Mozambique also defaulted on previously hidden private debt in 2016, triggering an economic and currency crisis, on top of the withdrawal of IMF and donor support due to a lack of transparency, before an agreement with creditors was reached in 2019. This is where the Common Framework could have come in, to make the process fair and transparent for everyone.
It is not too late for the G20 to step up and show leadership. The Common Framework could be a game changer for the world’s poorest countries, if it includes the following five essential ingredients:
- The Framework must contribute to the finance needed for COVID-19 recovery. Taking into account the full financing picture and needs of each country, the overarching goal must be a fair chance at recovery. Debt cancellation should not be off the table for those that really need it.
- The Framework should ensure accountability for lenders and borrowers. Changes to the law in G20 countries can make sure that private sector lenders do not profit from developing countries that are in debt distress.
- Private Sector and Multilateral lenders must participate. G20 countries should also change their laws so that all private institutions are mandated to participate, and they should support multilaterals’ participation. It will not work unless all stakeholders are represented fairly.
- The Framework must address the transparency gap. Data on debts owed by all countries must be made available and published online for all participating lenders and borrowers so that all stakeholders have a full picture, and can be held to account.
- Commitments to responsible debt management: All participants should make commitments to better governance of debt, which would make debt sustainable and make it less likely that they are unable to repay again.
With these essential ingredients, and borrowing countries and civil society at the table, the Common Framework has a chance of success and this could be a first step towards the more comprehensive steps we need to respond to the crisis and create a financing system that works for everyone — not just the lenders.
