DEBT SERVICE SUSPENSION INITIATIE

 

Background

On April 12, Prime Minister of Pakistan, Imran Khan (PMIK), urged the world leaders, the UN Secretary-General, and heads of financial institutions across the globe to give debt relief to developing countries like Pakistan so that they could combat the deadly Covid-19 in a better way. Highlighting the need for such a relief, PMIK said that the biggest challenge for nations in the developing world was to save their people from dying of the pandemic and hunger due to extended lockdowns triggered by the disease. Three days later, United Nations (UN) Secretary-General, Antonio Guterres, echoed PMIK’s call for a global initiative for debt relief saying such a measure must be an “important part” of the response to the coronavirus pandemic sweeping the world.

Introduction

Following the G20 Finance Ministers and Central Bank Governors Meeting on 15 April, held virtually, the G20 nations agreed to a time-bound suspension of debt service payments for the poorest countries that request forbearance. This initiative, called the Debt Service Suspension Initiative (DSSI), is a part of G20 Action Plan and is meant to address the Covid-19 pandemic and the significant health, social and economic challenges it continues to pose for governments around the world. In this regard, the G20 Communiqué mentioned: 

“We support a time-bound suspension of debt service payments for the poorest countries that request forbearance. We agreed on a coordinated approach with a common term sheet providing the key features for this debt service suspension initiative, which is also agreed by the Paris Club. All bilateral official creditors will participate in this initiative, consistent with their national laws and internal procedures. We call on private creditors, working through the Institute of International Finance, to participate in the initiative on comparable terms. We ask multilateral development banks to further explore the options for the suspension of debt service payments over the suspension period, while maintaining their current rating and low cost of funding. We call on creditors to continue to closely coordinate in the implementation phase of this initiative.”

Eligible countries

The Initiative applies to the 76 countries that are eligible to receive assistance from the World Bank’s International Development Association, and to all nations defined as ‘least developed countries’ by the United Nations. Eligible countries must be current on any debt service to the IMF and the World Bank, so countries with arrears to those institutions will be ineligible to participate. The overall amount of relief will depend on how many countries request to benefit from the DSSI.

Criteria for participation

The G20 agreed on a common term sheet setting out the key features and conditions to be eligible for debt relief as follows:

Access to the Initiative will be limited to countries which:

• have made a formal request for debt service suspension from creditors; and
• are benefiting from, or have made a request to IMF Management for, IMF financing including emergency facilities (RFI/RCF).

In addition, each beneficiary country will be required to commit to:

• use the created fiscal space to increase social, health or economic spending in response to the crisis, with a monitoring system expected to be put in place by the IMF and World Bank;
• disclose all public sector financial commitments (debt), while respecting commercially sensitive information. Technical assistance is expected to be provided by the IMF and World Bank as appropriate to achieve this; and
• contract no new non-concessional debt during the suspension period, other than agreements under the Initiative or in compliance with limits agreed under the IMF Debt Limit Policy or World Bank Group policy on non-concessional borrowing.

Implementation of DSSI

The Paris Club has articulated a Memorandum of Understanding (MoU) explaining in detail how the broad parameters of the DSSI are to be translated into revised lending agreements. In addition, some non-Paris Club creditors also intend to use this MoU. Other non-Paris Club creditor countries have not yet been clear about their detailed parameters. As a consequence, some official lending institutions appear to be asking for conditions not currently being required by Paris Club creditors. It is encouraged that non-Paris Club G-20 creditors either adopt the Paris Club MoU or articulate clearly a common MoU to avoid demands by different creditors that are not in line with the G-20 term sheet and communiqué.

Monitoring

A key DSSI objective is to provide financial resources to help eligible countries battle the Covid-19 pandemic. Accordingly, a requirement to participate in the initiative is that the beneficiary country commits to use these resources to safeguard social, health or economic spending in response to the crisis. The country also commits to work closely with the IMF and the World Bank, which are expected to put in place a monitoring system.

IMF and World Bank staff are coordinating the development of a suitable and feasible monitoring system. The framework will be as simple as possible and will draw on existing public financial management reporting systems and revenue and spending aggregates. The monitoring system would aim to compare outturn data for health and social spending (including Covid-19-related items) with 2020 pre-Covid budget (if available) or 2019 estimates.

Who has applied so far?

As of September 28, 2020, as many as 46 countries from regions all over the world have applied for a relief. Africa made up the bulk of the applications with 30 nations seeking assistance under DSSI. So far, the DSSI has helped 43 countries defer $5 billion in official debt service payments, freeing up funds to finance social, health and economic measures in response to the pandemic.

Relief for Pakistan

Pakistan owes $20.7 billion to 11 members of the Group of 20 rich nations. Out of this sum, an amount of $1.8 billion would mature by December 2020. The $1.8 billion amount included $1.47 billion as principal loans and $323 million as interest. Pakistan will have to pay $613 million as Saudi debt and $309 million as Chinese debt, $23 million to Canada, $183 million to France, $99 million to Germany, $6 million to Italy, $373 million to Japan, $47 million to South Korean, $14 million to Russia, $1 million to UK and $128 million to the United States.

In May 2020, Pakistan formally requested G20 for debt relief with a commitment of “not contracting new non-concessional loans, except those allowed under the IMF and World Bank guidelines”. In response, the Paris Club of creditor nations, in June, agreed to suspend debt service payments from Chad, Ethiopia, Pakistan, and Republic of Congo as part of the DSSI.

Need for extension

According to the IMF officials, the debt crisis of the Covid-19 pandemic will keep increasing if the required changes are not made to international debt architecture. If suspended, the money can be used to ease financial constraints being brought in by Covid-19. This will free up scarce money that can be used to mitigate economic and human impacts of the pandemic. On these terms, the IMF insists on extending the debt service suspension of G20. The officials believe that more transparency should be brought in government borrowing.

In this regard, Prime Minister Imran Khan has also called for extending the G20’s Debt Service Suspension Initiative for at least another year. While addressing a high-level summit on the ‘Financing for Development in the Era of Covid-19 and Beyond’ on the sidelines of the 75th session of the United Nations General Assembly, PMIK presented different suggestions such as DSSI and making the vaccine for virus available to all and said that the request for forbearance under this initiative should not affect the country’s credit rating, since this is due to force majeure, and not mismanagement. Secondly, Imran said, the multilateral development banks should also participate in the debt suspension initiative, and thirdly, other short-term measures which could cover both official and private creditors, including debt swaps for health, climate and SDGs; debt buy-backs; re-profiling debt; and regional resilience funds, should be considered.

 

The writer is a member of staff.