Paris Club likely to provide financial assurances to IMF on Sri Lanka debt

Paris Club likely to provide financial assurances to IMF on Sri Lanka debt

Subject :International relations

Section: Groupings 

What the News?

The Paris Club, an informal group of creditor nations, will provide financial assurances to the International Monetary Fund on Sri Lanka’s debt, Reuters has reported quoting two unnamed sources.

Why?

An assurance from the Paris Club, as well as other bilateral creditors, is one of the conditions that Sri Lanka has to fulfil for the IMF to begin disbursing a $2.9 bn bailout package to the beleaguered nation that all but collapsed last year under a severe economic crisis.

What is ‘Paris Club’ in Economics?

• It is an informal group of officials from major creditor countries whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries.
• Paris Club creditors provide debt treatments to debtor countries in the form of rescheduling, which is debt relief by postponement or, in the case of concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment).
• The Paris Club is a group of mostly western creditor countries that grew from a 1956 meeting in which Argentina agreed to meet its public creditors in Paris. Their objective is to find sustainable debt-relief solutions for countries that are unable to repay their bilateral loans.
• It describes itself as a forum where official creditors meet to solve payment difficulties faced by debtor countries. All 22 are members of the group called Organisation for Economic Co-operation and Development (OECD).
• The Paris Club was created gradually from 1956, when the first negotiation between Argentina and its public creditors took place in Paris.
• The Paris Club treats public claims (that is to say, those due by governments of debtor countries and by the private sector), guaranteed by the public sector to Paris Club members.
• It is similar to the London club, which is a group of commercial bankers formed in 1976 to deal with the financial problems of Zaire, and is focussed on providing various forms of debt relief to countries that face financial distress due to their heavy debt load.
• There are currently 22 Permanent Members of the Paris Club–
• The members are: Australia, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Japan, Netherlands, Norway, Russia, South Korea, Spain, Sweden, Switzerland, the United Kingdom and the United States.
  • Unlike China and India, Japan is a member of the Paris Club.

How has Paris Club been involved in debt agreements?

• According to the information on its website, since its beginnings, the Paris Club has reached 478 agreements with 102 different debtor countries. Since 1956, the debt treated in the framework of Paris Club agreements amounts to $ 614 billion.
• It operates on the principles of consensus and solidarity. Any agreement reached with the debtor country will apply equally to all its Paris Club creditors.
• A debtor country that signs an agreement with its Paris Club creditors, should not then accept from its non-Paris Club commercial and bilateral creditors such terms of treatment of its debt that are less favourable to the debtor than those agreed with the Paris Club.
• The role of the Paris Club over time
• The Paris group countries dominated bilateral lending in the last century, but their importance has receded over the last two decades or so with the emergence of China as the world’s biggest bilateral lender.