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Global public debt is currently just three percentage points short of touching 100% of gross domestic product (GDP), a level not reached even during the global financial crisis of 2008-09. There are chances of a further worsening of this debt distress, depending on the length and prolongation of the covid pandemic’s impact. The debt-to-GDP ratio of low-income developing countries witnessed a rise to 50% in 2020 from 44% the previous year. The gloomier part is that around half of the low-income countries today are at high risk of debt distress or in actual debt distress, and these debts are mostly driven by higher private debt in contrast to other segments. This marked shift in the composition of debt and its servicing towards commercial and non-Paris Club lenders has resulted in increased borrowing and servicing costs, fiscal deficits, non-favourable contractual terms and also non-disclosure clauses on lending terms, making debt resolution harder.

The new picks of debt
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The new picks of debt

Is debt really bad? Not entirely so. Simply speaking, a debt is good when the resources raised are directed at developmental purposes and servicing that debt does not exert too much pressure on government assets. Once it crosses the optimum threshold (for example, the optimal general government debt-to-GDP ceiling for India is considered to be around 60%), debt tends to become unsustainable.

Several countries had already reached unsustainable levels of debt by 2019, a problem that has been exacerbated by the pandemic. This surge in debt has created substantial challenges for their economies, as they were left with reduced revenues after a collapse in economic activity amid the pandemic. In many, revenue collections after debt servicing remain inadequate for providing support to citizens and meeting their development goals, making further borrowing unviable. Debt servicing itself has become a herculean task for these debt-laden economies, plunging millions of people into poverty and economic despair.

The Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatment: Recognizing the need of the hour, the G20 and Paris Club, with the support of the International Monetary Fund and the World Bank, came up with a temporary debt relief plan for 73 eligible countries, known as the DSSI. Though initially formulated to be in force from May-December 2020, the DSSI has got a one-year extension up to December 2021. The World Bank has reported that since its inception, the initiative has provided debt relief of over $5 billion to over 40 eligible countries.

Although the DSSI provided some additional fiscal space from debt-service payments to these countries, it faces several challenges in meeting its objectives, mainly on account of limited participation by the private sector, low levels of bilateral debt and the fear of rating downgrades. Issues related to the quality and transparency of debt data have also prevented a few countries from fully realizing the initiative’s benefits. Moreover, the DSSI only provides temporary relief to the liquidity problems of a country, and the unsustainable debt levels in several countries require a longer-term structural debt treatment plan.

In recognition of these challenges, the Common Framework for Debt Treatment was given shape in November 2020 to bring together all official creditors and ensure fair burden-sharing by them. Under this framework, debt treatments would be initiated at the request of a debtor country on a case-by-case basis. The aim is to have different debt treatment for countries with sustainable and unsustainable debt levels. The advantage would be that with each country facing different forms of debt challenges, debt treatment would be tailor-made to their specific requirements. It also holds out the possibility of covering debt-service payments for a longer period, with the whole or part of these covered. Moreover, it requires the debtor country to seek treatment from private creditors that is at least as favourable as the treatment from official bilateral creditors.

So far, Chad, Ethiopia and Zambia have requested debt treatment under the Common Framework. Chad has no eurobonds or publicly traded debts, and has one major commercial external oil-backed loan (Glencore Plc and its syndicate of lenders), making it a suitable candidate for the framework. With coordination among all creditors, Chad could emerge as the first successful case of debt treatment under it, paving the way for more eligible countries to receive debt relief. Chad has been able to negotiate a package for debt restructuring with its sovereign bilateral creditors that include China, India, France and Saudi Arabia, with the final outcome of it now resting on the decision to be taken by Glencore.

India and the DSSI: Over the past few decades, India has emerged as an important source of medium-long term developmental financing for low- and middle-income countries, mainly through lines of credit (LOCs) extended by India Exim Bank. As a G20 member, India is committed to participate in the DSSI and provide debt service moratoriums to borrowers requesting it.

According to the World Bank, India’s bilateral claims on DSSI-eligible countries totalled $6.4 billion at the end of 2019. Out of the 60-plus countries for which LOCs have been extended, 45 are in-principle eligible for debt relief, and account for around 80% of the total credit extended.

In conclusion, ensuring the transparency of debt data and implementing a mechanism for a periodic review of the debt treatment provided could go a long way towards supporting low-income countries.

Sara Joy is an economist with India Exim Bank. These are the author’s personal views.

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