Daily Prelims Notes 5 June 2024

Daily Prelims Notes

5 June 2024

1. Zambia’s Debt Restructuring: A Painful Test Case

Sub: IR

Sec: Int conventions

Duration: Over three-and-a-half years, since Zambia declared bankruptcy.

Restructuring Deal: $13.4 billion debt restructuring under the G20-led Common Framework.

Background:

• Bankruptcy Declaration: Zambia’s formal bankruptcy declaration highlighted the challenges of the G20 Common Framework for debt relief.
• Historic Achievement: Recognized by international leaders as a significant moment for multilateral cooperation.

Challenges and Criticisms:

• Prolonged Process: The restructuring took nearly four years, causing significant delays and frustrations among all parties involved.
• Complexity and Transparency: The process was criticized for its complexity and lack of transparency, with complaints from officials and creditors in Zambia, Ghana, and Ethiopia.
• Conflict Among Creditors: Early conflicts arose, notably when China demanded multilateral development banks also incur losses, complicating negotiations.

Key Agreements and Terms:

• Debt Reduction: The restructuring will cut about $900 million from Zambia’s debt and extend payment terms.
• Creditor Agreements: Official sector creditors will reschedule $6.3 billion of loans. Zambia’s main bonds, worth $3 billion, will be consolidated with new payment terms.
• Conditional Payments: Clauses in the new deals mandate extra payments if Zambia’s economic recovery accelerates, potentially risking future debt distress.

Lessons and Improvements:

• Framework Adjustments: Lessons from Zambia’s experience have led to improvements in the framework, facilitating quicker agreements in other countries like Ghana.
• Global Cooperation: Enhanced understanding among creditors and continuous improvements through mechanisms like the Global Sovereign Debt Roundtable.

Differing Perspectives:

While some view Zambia’s restructuring as a positive sign of progress, others, like bondholder committee member believe the issues are deeply rooted and complex, highlighting geopolitical tensions between Western nations and China.

Additional Context:

• Current Crises: Zambia faces further economic challenges, including a severe drought, which has delayed the review of its IMF Extended Credit Facility and added a $900 million funding gap.
• Global Impact: Zambia’s experience serves as a critical test case for future debt restructuring under the Common Framework, with implications for other indebted countries.

Conclusion:

Zambia’s arduous journey through debt restructuring under the G20 Common Framework reveals the complexities and necessary improvements in global debt relief mechanisms. While Zambia’s case offers valuable lessons, it also underscores the ongoing challenges in managing international debt crises.

IMF Extended Credit Facility (ECF)

The International Monetary Fund (IMF) Extended Credit Facility (ECF) is one of the key financial assistance programs provided by the IMF to support low-income countries facing prolonged balance of payments problems.

Purpose and Objectives:

• Financial Assistance: The ECF provides medium-term financial support to low-income countries to help them stabilize their economies, restore sustainable growth, and reduce poverty.
• Economic Reforms: The facility is designed to support countries implementing economic reforms aimed at addressing structural issues, reducing vulnerabilities, and improving economic performance.

Benefits:

• Stabilization: Helps countries stabilize their economies by providing financial resources and policy advice.
• Growth and Poverty Reduction: Supports measures that promote economic growth and reduce poverty.
• Confidence Building: Builds confidence among investors and international donors, often catalyzing additional external financial support.

Challenges and Criticisms:

• Conditionality: The ECF often comes with stringent policy conditions, which can be politically and socially challenging to implement.
• Impact on Social Spending: Critics argue that fiscal austerity measures required by some IMF programs can negatively impact social spending and public services.

G20 Common Framework

The G20 Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI) is an international initiative designed to address and alleviate the debt burdens of poorer countries, particularly in the wake of the COVID-19 pandemic.

Purpose and Background:

• Initiation: Launched in November 2020 by the G20, in cooperation with the Paris Club, the Common Framework aims to provide a structured approach to debt relief for eligible countries.
• Predecessor: It follows the Debt Service Suspension Initiative (DSSI), which provided temporary debt service relief to the poorest countries to help them manage the economic impacts of the pandemic.

Objective: The framework seeks to ensure fair and coordinated debt treatment among various creditors, including traditional Paris Club members and non-Paris Club creditors like China.

2. World Health Assembly defines pandemic emergency, pledges improved access to medical products & financing

Sub: IR

Sec: Int org

Context:

• Member countries of the World Health Organization (WHO) have adopted crucial amendments to the International Health Regulations (IHR) at the recently concluded 77th World Health Assembly. 
• These alterations include defining a “pandemic emergency” as well as pledging improved access to medical products and financing.

Details of Amendments to the International Health Regulations (IHR):

• Definition of Pandemic Emergency:
  • The pandemic emergency is being Defined to allow for more effective international collaboration in response to events that are on the verge of becoming, or have already become pandemics.
  • The pandemic emergency definition represents a higher level of alarm and builds on the IHR’s existing mechanisms, such as the determination of a public health emergency of international concern.
• Improved National Capacities:
  • Enhancements aim to strengthen individual countries’ abilities to detect and respond to future outbreaks.
  • Focus on better disease surveillance, information sharing, and response plans.
• Global Health Threats and Equity:
  • Emphasizes that health threats transcend national borders.
  • Prioritizes equitable access to resources for all countries to prepare and respond effectively.

Structural Changes:

• States Parties Committee:
  • Established to ensure effective implementation of the amended IHR.
  • Facilitates coordination among countries.
• National IHR Authorities:
  • Created to improve regulation implementation within and between countries.

Ongoing Initiatives

• Pandemic Agreement:
  • Member countries committed to working on a proposed agreement to enhance international coordination, collaboration, and equity in pandemic preparedness and response.
• Intergovernmental Negotiating Body:
  • The mandate was extended to finalize the Pandemic Agreement by the World Health Assembly in 2025, with a potential special session in 2024 to expedite the process.

Current International Health Regulations (IHR):

• Came into existence in 2005
• Adopted after the 2002/3 SARS outbreak
• Obligates countries to report public health events with potential cross-border impact and includes measures on trade and travel.
• Inadequacies: Effective for regional epidemics (such as Ebola) but insufficient for global pandemics (Eg.- Covid-19).

Changes to Global Health Rules:

• Recent update in the IHR:
  • New Alerts System: Introduces different risk levels for outbreaks, including an “early action alert” and a “pandemic emergency” for severe threats.
    • Currently, the WHO has only one level of emergency – a public health emergency of international concern (PHEIC). The new system envisages an intermediary stage called an “early action alert”.
  • Strengthening Obligations: Enhances state obligations to report public health events from “may” to “should”.

Source: DTE

3. No party wins majority: What does a coalition government mean for economic reforms in India?

Sub: Polity

Sec: Executive

Context:

• The NDA has returned to power for a historic third straight term at the Centre, but the BJP itself has fallen short of the majority mark of 272.

Key Highlights:

• Since 1991, when India was forced to open up its economy and give up on the planned economy model, all governments were coalitions of the sort where even the lead party was quite far from the majority mark of 272.
• The process can be aptly described in terms of Montek Singh Ahluwalia (former Deputy Chairman of the erstwhile Planning Commission) as creating a strong consensus for weak reforms.

What is a Coalition Government?

• A coalition government, or coalition cabinet, is a government where political parties enter a power-sharing arrangement of the executive.
• Coalition governments usually occur when no single party has achieved an absolute majority after an election. 
• A party not having a majority is common under proportional representation, but not in nations with majoritarian electoral systems.
• The first time that Independent India saw parties stitching up a coalition government at the Centre was in 1977, right after the Emergency.
• The first successful coalition government in India which completed a whole five-year term was the Bharatiya Janata Party (BJP)-led National Democratic Alliance with Atal Bihari Vajpayee as Prime Minister from 1999 to 2004.
• About the earlier regimes of Modi government:
• Modi’s first two terms saw several reforms such as the introduction of the Goods and Services Tax (GST) and the creation of the Insolvency and Bankruptcy Code.
• The Modi government failed to bring about reform of land acquisition.
• During the second term, the Modi government could not convince farmers about the farm reforms and was forced to repeal them.

What were the notable reforms brought by the previous coalition governments?

P V Narasimha Rao government:

• The biggest example is the whole host of reforms during the P V Narasimha Rao-led government, which was essentially a minority government. 
• It discarded centralized planning and opened the Indian economy to global completion by removing the license-permit raj. 
• The country also became a member of the World Trade Organisation.

Deve Gowda government:

• The Minister P Chidambaram came out with what is still referred to as the “dream budget”. 
• It placed faith in the Indian taxpayers and cut tax rates — both personal income tax, corporate taxes, and customs duties.

Atal Bihari Vajpayee-led National Democratic Alliance (NDA) government:

• India framed the Fiscal Responsibility & Budget Management (FRBM) law for fiscal rectitude, and limited the government’s ability to borrow within prudential limits.
• The Vajpayee-led coalition further advanced the push towards disinvestment of loss-making Public Sector Undertakings (PSUs) and focused on boosting rural infrastructure and connectivity through the PM Gram Sadak Yojana.
• The very first NDA also brought in the Information Technology Act, in 2000, that laid the foundation for the bustling e-commerce giant that India is today.

Manmohan Singh-led United Progressive Alliance (UPA):

• One of the initiatives in the educational sector is Sarva Shiksha Abhiyan to initiate the Right to Education Act.
• Right to Information Act, which boosted transparency in India’s democracy, and the Right to Food, which ensured that no Indian should go hungry.
• The UPA brought in the Mahatma Gandhi National Rural Employment Guarantee Act (MG-NREGA), which provided minimum employment to the rural poor.