The G20 Common Framework for Debt Treatments

Subject: IR

Section: International body

Context:

Despite significant relief measures brought on by the COVID-19 crisis, about 60 percent of low-income countries are at high risk or already in debt distress. In 2015 that number was below 30 percent.
New variants are causing further disruptions to economic activity. COVID-related initiatives such as the G20 Debt Service Suspension Initiative (DSSI) are ending.
We may see economic collapse in some countries unless G20 creditors and other private sector creditors agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated.
In such a scenario, the Common Framework for debt treatment beyond the DSSI (Common Framework) is an important program.
It is an initiative endorsed by the G20, together with the Paris Club, to support, in a structural manner, Low Income Countries with unsustainable debt.
The Common Framework considers debt treatment, on a case-by-case basis, driven by requests from eligible debtor countries.
In response to a request for debt treatment, a Creditor Committee is convened. Negotiations are supported by the IMF and the World Bank, including through their Debt Sustainability Analysis.
The idea is that the debt treatment under the Common Framework should be accompanied by reforms ensuring the future sustainability of public debt, and consistent with the parameters of an Upper Credit Tranche (UCT) IMF-supported program.

Problems faced

But so far, only three countries—Chad, Ethiopia, and Zambia—have made requests for debt relief under the Common Framework. And each case has experienced significant delays.
In part, these delays reflect the problems that motivated the creation of the Common Framework in the first place.
These include coordinating Paris Club and other creditors, as well as multiple government institutions and agencies within creditor countries, which can slow down decisions.

Steps to be taken to speed up G20 Common Framework for Debt Treatments

With policy space tightening for highly indebted countries, the framework can and must deliver more quickly.
First, greater clarity on the different steps and timelines in the Common Framework process is vital. Alongside earlier engagement of official creditors with the debtor and with private creditors, this would help accelerate decision making.
Second, a comprehensive and sustained debt service payment standstill for the duration of the negotiation would provide relief to the debtor at a time when it is under stress, as well as incentivize faster procedures to get to the actual debt restructuring.
Third, the Common Framework should clarify further how the comparability of treatment will be effectively enforced, including as needed through implementation of the IMF arrears policies, so as to give greater comfort to creditors and debtors.
Last but not least, the Common Framework should be expanded to other highly-indebted countries that can benefit from creditor coordination. Timely and orderly debt resolution is in the interest of both debtors and creditors.