The United States, China and other G20 countries recently agreed for the first time on a common approach for restructuring government debt as the coronavirus crisis leaves some poorer nations at risk of default. Citing the scale of the COVID-19 pandemic and “the significant debt vulnerabilities and deteriorating outlook in many low-income countries,” G20 finance officials agreed more help was needed than a current freeze in official debt payments that runs out at the end of June.
Major creditors, including China, will be expected to follow the joint guidelines agreed by the G20, which lays out how debt deemed to be unsustainable can be reduced or rescheduled. International Monetary Fund Managing Director Kristalina Georgieva called the framework a historic achievement and said it should increase private sector participation and speed up a resolution in cases where debts were unsustainable. “Let’s be very frank here. We are not out of the woods. This crisis is not over. We need further support through debt relief and fresh financing,” she told G20 officials. African states alone face a financing gap of $345 billion through 2023, she has warned.
The coronavirus crisis has exacerbated problems for the poorest countries, 50% of which are now in or at risk of debt distress and in an early sign of its impact, Zambia is on the brink of becoming Africa’s first COVID-era sovereign default. IMF Managing Director Kristalina Georgieva last week said African states alone faced a financing gap of $345 billion through 2023 to deal with the pandemic and its economic impact.
Under the new framework, creditor countries will negotiate together with a debtor country, which will be expected to seek the same treatment terms from private-sector creditors. The scheme borrows heavily from rules established by the Paris Club group of mostly wealthy nations established in 1956, which until now was the only joint forum for negotiating debt restructurings. Eric LeCompte, a United Nations adviser on debt and executive director of Jubilee USA Network, said the inclusion of private-sector creditors was a significant step but criticized the G20 for failing to include middle-income countries.