Aldo Caliari comments on the need to reform the common framework for debt. Read the full article here.
Fix the Common Framework for Debt Before It Is Too Late
By Masood Ahmed and Hannah Brown
To address the problem of unsustainable debt levels, the G20 reached agreement in November 2020 on a Common Framework for Debt Treatments which aimed to deal with insolvency and protracted liquidity problems in the DSSI-eligible countries by providing debt relief consistent with the debtor’s capacity to pay and maintain essential spending needs. The value added by the Common Framework was to bring the newer official creditors, notably China which had become the largest official creditor for many developing countries, into a process that was akin to that used to restructure the debt owed to the—mostly OECD—members of the Paris Club. It also stipulated that private creditors would have to provide comparable relief on the debt owed to them but without clarity on how this was to be enforced.
A year later, the Common Framework is struggling to maintain its credibility. Agreement on general principles has proved much harder to translate into operational outcomes. Despite its name, the Common Framework is essentially designed to operate case-by-case. But of the three countries—Chad, Ethiopia, and Zambia—that have so far asked for their debt to be treated, none have been able to complete the process. In the interim, they have continued to service their debt to private creditors and their access to financial markets has been hampered by uncertainty regarding future debt relief. This long, drawn-out process with a vague and uncertain end and no interim relief is both challenging for participating countries and discouraging for other countries with serious debt problems.