Central idea: Surging global debt

• Reiterating that addressing the growing sovereign debt distress globally was a priority for India’s G20 presidency.
• Globally, at least 21 countries are in default or seeking restructuring.

G20 discussion on Sovereign Debt

At the 2023 Spring Meetings of the IMF and the WB Group, the Global Sovereign Debt Roundtable (GSDR) has agreed on urgently improving information sharing on macroeconomic projections, at an early stage of debt restructuring processes.

About GSDR

• A platform established in Feb 2023, co-chaired by IMF, World Bank, and India (G20 Presidency).
• Comprises official bilateral creditors, private creditors, and borrowing countries.
• Aims to build common understanding among stakeholders involved in debt restructuring and address shortcomings in the process.
• Focuses on process and standards, not meant to discuss country cases or replace existing restructuring mechanisms.

General factors responsible for Debt Distress

• High Public Spending: When governments spend beyond their means, they must borrow to finance their spending. This can lead to the accumulation of debt over time, especially if the government’s spending is not matched by a corresponding increase in revenue.
• Decline in Exports: When a country’s exports decrease, it can lead to a decline in foreign currency earnings, making it more difficult for the country to service its foreign currency-denominated debts. This situation can be especially challenging for countries that rely heavily on exports for their economic growth.
• Weak Institutions: When institutions are weak, it can be difficult to implement effective policies and reforms that can address debt issues. This can make it challenging for countries to improve their debt situation, leading to a cycle of economic decline and further debt accumulation.
• Dependence on Commodities: Commodity prices can be volatile, and when they decline, it can lead to a decline in government revenue, making it more challenging to service debt obligations. This situation can be exacerbated when countries borrow heavily to invest in their commodity sectors, leading to a further accumulation of debt.
• Demographic Changes: Aging populations and declining birth rates, can also contribute to debt distress. These changes can lead to declining economic growth, increased public spending on pensions and healthcare, and declining tax revenues. This situation can be challenging for countries that have high levels of debt and limited resources to address these demographic challenges.

Immediate triggers

• Slow recovery from COVID-19: Pandemic has had a severe impact on the global economy, leading to a significant decline in economic activity, and causing many countries to accumulate high levels of debt as they try to support their economies and people.
• High food and energy prices: Another factor contributing to debt distress is high food and energy prices. These prices have been rising in recent years, putting a strain on the budgets of many countries, particularly those that are heavily dependent on food and energy imports.
• Russia’s war in Ukraine: This has also contributed to debt distress in some countries. The geopolitical instability and economic sanctions that have resulted from the conflict have had a severe impact on the economies of many neighboring countries, leading to a build-up of debt.
• Escalating Climate impacts: The increasing frequency and severity of natural disasters such as floods, hurricanes, and droughts have led to significant economic and social costs for many countries. These costs have contributed to the accumulation of debt as countries try to rebuild and recover from these events.
• Depreciating domestic Currencies: As the US dollar strengthens, it becomes more expensive for EMDEs to service their dollar-denominated debts, leading to higher debt burdens. This makes it more expensive for them to import goods, leading to higher inflation and increasing debt burdens.

Implications of the looming Debt Crisis

• Developmental damage: With so many countries reeling under food scarcity, energy shortages, and high inflation, among other problems, a looming debt spiral presents a complex developmental challenge.
• Misery of masses: Debt distress has real socio-economic consequences. When countries accumulate high levels of debt, it can lead to heightened inequality, increased levels of poverty, and inadequate economic growth.
• Humanitarian damage: As the government tries to deal with the debt burden, it may have to cut back on essential social programs and infrastructure projects, leading to a decline in the standard of living for the population.
• Food insecurity: Due to the swelling import bills for wheat, rice, and maize, these countries (ex. Pakistan) may not have sufficient foreign currency to purchase enough food to feed their populations.

Possible solutions

• The G20 report calls for a reform of the Common Framework, which is a debt restructuring mechanism that was established by the G20 in 2020 to help countries address their debt burdens.
• The report proposes three pillars to address the issue:

1. Credible public creditors: The first pillar involves public creditors granting significant cuts in debts to bring a distressed country back to debt sustainability and help it achieve its development and climate goals. This means that public creditors, such as multilateral development banks, should provide debt relief to the most debt-distressed countries.
2. Private and commercial creditors: It implies that private creditors, such as bondholders and banks, should also provide debt relief to the most debt-distressed countries. For the remaining debt, the government should issue new bonds for private creditors, backed by a guaranteed fund.
3. International financial institutions: It can provide credit enhancement. This means that countries that are not at risk of debt distress can receive support from international financial institutions to improve their credit ratings and access financing at more favorable rates.

Roadmap for India

• Utilizing G20 residency: India has assumed the G20 presidency at a time when the global economy is facing uncertainty, making it a challenging task to address debt distress, initiate action, and devise a coordinated relief framework.
• Role as a global rescuer: As a major creditor of Sri Lanka and some heavily-indebted countries in Africa, India has provided $4 billion in assistance to Sri Lanka.
• Negotiate debt relief: Under the G20’s leadership, India should provide guidance and help negotiate commitments to debt relief before the crisis worsens global economic conditions.
• Promoting inclusive trade: To achieve this, India can facilitate debt suspension and debt relief and by granting unhindered market access to these countries for inclusive trade and shared prosperity.
• Emphasis on tradable sectors: To promote shared prosperity, an emphasis should be laid on the development of tradable sectors, with priority given to the informal sector, lower-income groups, and conflict-affected regions.

Conclusion

• Overall, India’s leadership in the G20 is crucial for addressing debt distress, negotiating commitments to debt relief, and promoting inclusive and sustainable development in heavily-indebted countries.
• By facilitating debt relief and promoting tradable sectors, India can help these countries achieve their development goals and reduce the impact of the debt crisis on their populations.