G20’s Debt Service Suspension Initiative 

G20’s Debt Service Suspension Initiative

Subject: Economy

Context:

The International Monetary Fund Chief has called on China to speed up restructuring of debt in Sri Lanka and Zambia following a meeting with the leaders of the country.

Details:

• China will implement the G20’s Debt Service Suspension Initiative (DSSI) in all respects.
• China has given infrastructural loans and cover up loans.

Concept:

Cover up loans or bridge finance

• These are monetary instability linked borrowings that are not linked to infrastructure or economic reforms
• It was given to Sri Lanka to cover the forex shortages under ‘flexible inflation targeting/output gap targeting’ compound borrowings from sovereign bond investors.
• The World Bank and Asian Development Bank does not give such ‘bridging finance’ or budget support loans without reforms to expand economic activities.

G20’s Debt Service Suspension Initiative 

• G20 set up the Debt Service Suspension Initiative in 2020 and later, the Common Framework to address unsustainable debts faced by countries, especially in the aftermath of the pandemic.
• Other debt reduction initiatives –the Multilateral Debt Relief Initiative, Paris Club, London Club, Brady Plan, and the Heavily Indebted Poor Countries Initiative (HIPC).
• The Debt Service Suspension Initiative (DSSI) means that bilateral official creditors suspend debt service payments from the poorest countries on request.
• The DSSI is part of a broader package to support low-income countries, including the provision of further concessional financing, debt relief under the CCRT support for capacity development and a new general SDR allocation.
• DSSI eligible countries that need debt relief beyond the DSSI, are encouraged to seek such relief under the G20 Common Framework.
• In order to apply for the DSSI, a country either needs to be in an IMF financing arrangement, or it needs to have requested financing (including emergency financing) from the IMF.