G20 presidency: A driving force against global debt vulnerability

Discussions on escalating global debt vulnerabilities have taken centre stage. Since 2000, global public debt has surged fivefold, and developing nations now bear nearly 30% of this burden. The most vulnerable are low and middle-income countries, juggling between servicing external debt and meeting critical domestic needs like food and fuel. The repercussions extend far beyond the economic realm, with this complex debt landscape intersecting with issues such as climate change to create a multifaceted crisis. Addressing this demands a coordinated but customized approach to debt restructuring tailored to the unique circumstances of each nation’s debt structure.

At the Voice of the Global South Summit, Prime Minister Narendra Modi in January 2023 stated, “As India begins its G20 presidency this year, it is natural that our aim is to amplify the Voice of the Global South.” Reflecting this aim and guided by the theme of ‘One Earth, One Family, One Future,’ managing global debt vulnerabilities was adopted as a key priority of the Indian presidency.

India has emphasized the imperative to address debt vulnerabilities in low-income and vulnerable middle-income countries. Acknowledging the urgency of this issue, G20 members engaged in extensive deliberations to strengthen multilateral coordination and facilitate coordinated debt treatment for debt-distressed countries.

The subject is not new to the G20. To help countries severely affected by the covid crisis, the G20 launched the Debt Service Suspension Initiative (DSSI) in May 2020. It allowed the poorest nations (specifically, 73 low- and lower-middle-income countries) to pause/suspend debt-service payments if they asked. As the DSSI would have ended in December 2021, the G20 and Paris Club launched the Common Framework in November 2020 to facilitate debt treatment for the 73 DSSI-eligible countries upon their request.

The Indian G20 presidency has prioritized the implementation of the Common Framework in a predictable, timely, orderly and coordinated manner. In eight months of India’s G20 presidency, ongoing debt treatment cases have gained considerable momentum within Common Framework countries (Zambia, Ethiopia and Ghana) and also some outside it (Sri Lanka, for example). The results of these efforts are well documented in the February and July 2023 outcome documents of the G20 Finance Ministers and Central Bank Governors (FMCBG) meetings, laying out clear actions for the future.

Additionally, to accelerate debt restructuring efforts, the Global Sovereign Debt Roundtable (GSDR) was launched in February 2023 through a collaborative partnership involving the International Monetary Fund, World Bank and the Indian G20 presidency. The GSDR represents a historic development, as it brings together all stakeholders in debt restructuring, expanding the exercise beyond the traditional Paris Club creditors to include other creditors, the private sector and debtor nations. G20 finance ministers and central bank governors have expressed strong confidence in the GSDR’s potential to enhance open communication among all stakeholders and improve the debt treatment process, both within and outside the Common Framework.

Building on this momentum, it is crucial to consolidate the progress made and distil the essential elements of debt resolution. First, addressing sovereign debt issues should begin with a comprehensive understanding of the factors causing debt vulnerabilities. Debt problems may arise when countries borrow excessively in foreign currencies they cannot control, leading to potential problems. Servicing sovereign debt, even in local currency, may also be challenging without adequate revenue mobilization.

Second, it is essential to delineate the direct and indirect consequences of policy decisions on debt vulnerabilities. While higher interest rates in advanced economies may not directly cause debt vulnerabilities, extended periods of low interest rates can encourage excessive borrowing in foreign currencies. When interest rates suddenly rise, it can potentially affect nations that have borrowed extensively in this manner. This underscores the importance of emerging market economies effectively managing their inflows of foreign funds.

Concerns persist over the impact of rising interest rates in developed countries on the value of currencies in emerging and developing economies. Such fluctuations can make it challenging for these nations to repay their foreign debts, even if their financial situation was previously stable. In this case, a short-term foreign funding access system, subject to specific conditions, could be beneficial. The threat of defaulting countries being excluded from international finance is a real concern.

Third, enhancing transparency through comprehensive information sharing and stress testing is essential for countries to assess their resilience to interest rate fluctuations and currency value changes. This exercise should be conducted periodically to ensure financial stability while attracting foreign investments. The idea is to do everything possible to stop debt problems from arising in the first place, rather than fixing them afterwards. In this proactive approach, borrowers and lenders alike have significant responsibilities. It takes both to create a problem of excess debt.

In conclusion, effectively tackling the debt crisis requires a collaborative endeavour that transcends the boundaries of debtor and creditor nations. It is imperative to outline a comprehensive array of policy measures to deliver relief to heavily indebted countries, with responsibilities shared among all parties and proactive solutions that pre-empt problems before their emergence.

These are the authors’ personal views.