Sansad TV Perspective: Global Debt Distress

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: ‘Global Debt Distress’.

Anchor: Vishal Dahiya 

Guests:

1. Jayant Dasgupta, Former Ambassador WTO
2. Dr. Rajan Sudesh Ratna, Deputy Head, South and South-West Office, United Nations, ESCAP
3. Dr. Aruna Sharma, Member, Digitisation Committee
4. Dilip Chenoy, Chairman, Bharat Web3 Association (BWA)
5. Dhanendra Kumar, Former Executive Director for India in the World Bank

Context: Indian Finance Minister Ms. Sitharaman co-chaired a meeting of the global sovereign debt.

Highlights of the discussion:

• Introduction
• Global Debt Distress
• Factors
• Way Ahead

Introduction:

• Reiterating that addressing the growing debt distress was a priority for India’s G20 presidency, Union Finance Minister Nirmala Sitharaman has emphasized debt transparency, information-sharing, clarity on the comparability of treatment, predictability, and timeliness of the restructuring process as key principles that should govern the process. 
• Sitharaman made the remarks while co-chairing a meeting of the global sovereign debt roundtable along with the heads of the IMF and World Bank in Washington DC. 
• At least 21 countries are in default or seeking restructuring. 
• IMF managing director Kristalina Georgieva said that 15% of low-income countries are already in debt distress; another 45% are vulnerable; and a quarter of emerging economies are at high-risk. 
• A report by the UN Conference on Trade and Development says that high-interest rates combined with soaring debt levels will add to the crushing effect on developing countries over the coming years to the tune of at least $800 billion. 
• Among its recommendations, UNCTAD says that an urgent focus on the reform of global debt architecture is required to adequately address developing countries’ needs.

Also read: April 2023 Global Sovereign Debt Roundtable [UPSC Current Affairs]

Status of Global Debt Distress:

• The debt distress is very serious and the COVID-19 pandemic has worsened the situation.
• The scenario has prompted the G20 to take two major initiatives:
  • A common framework for low-income countries that could alleviate their debt problem.
  • Debt Sustainability Suspension initiative which says that the moratorium should be given.
• The problem of increasing debt in the world still continues as some of the low-income or highly indebted middle-income countries’ growth has not increased.
• The debt-to-GDP ratio has increased by almost 20% for advanced countries, 10% for middle-income countries, and 7% for low-income countries. These percentages are above the debt they were carrying before the pandemic.
• The situation worsens if the unemployment rate is high, and GDP and the overall growth of the economy are less.

Factors contributing to the crisis:

• The scenario of public debt was already in a poor situation before the pandemic. For instance, the overall Asia Pacific ratio of government debt to GDP in 2019 was 40.6%, which further increased to 50% in 2021.
• According to a study by UN ESCAP, Japan’s ratio of government debt to GDP ratio is 262%. For Singapore, Bhutan, Maldives, and Sri Lanka it is 160%, 132%, 125%, and 103%, respectively.
• The COVID-19 pandemic was a catalyst as governments across the world had to invest in public health, economic stimulus, vaccines, social security nets, etc.
• The revenue generation for governments was badly hit as trade and manufacturing went down.
• The Russia-Ukraine conflict also deepened the crisis. It eroded the countries’ capacity to service the debts.
• It is estimated that in 2021, developing countries paid $400 billion to service the debt. This is twice the amount that they received in Official Development Assistance.
• China’s debt trap diplomacy has also impacted countries like Zambia, Angola, Sri Lanka, and Pakistan.
  • However, it is not the only factor in the economic collapse of such countries. It was also attributed to a high level of corruption and poor management of funds.
• Many countries were not able to raise additional domestic revenue and their ability to service debt. Moreover, many countries don’t have an effective system to manage public finances.
• There is opaqueness in the amount of money lending programme.
• Countries are not able to structure their debts quickly which further worsens the situation.
• Bilateral lending has gone up drastically. Earlier only World Bank and IMF had a strict presence in the lending business.
• The projections for 2023 and 2024 are also not very encouraging.

Way Ahead:

• Major lenders like the Paris Club and China should be on the same page for debt sustainability analysis.
• There should be a consensus between multilateral institutions, private creditors, and governments across the world.
• A graded response for tackling the situation should be followed.
• The solution should be timely with desired clarity and predictability.
• The most important aspect is the comparability of treatment between institutions like the IMF, World Bank, Asian Development Bank, etc.
• There should be a public debt registry for developing countries that allows both lenders and borrowers to access their data. This would boost transparency, strengthen debt management, reduce the risk of debt distress, and improve access to finance.
• An independent sovereign debt authority that engages with creditor and debtor interests both institutional and private is urgently needed.
  • Such an authority would provide coherent guidelines for suspending debt payments in a disaster situation.
• The contractual terms should be aligned and strengthened.
• Debt transparency has to be increased.
• Multilateral loans should be distinguished from bilateral loans. 
• The member countries of multilateral institutions should agree on a common approach to restructuring official bilateral loans.
• The concept of Veto power should be reviewed.
• There should be collated data about sovereign debt, bilateral debt, or debt through export imports.
• Strengthen the G20 Common Framework for debt treatment. The three prescribed measures are:
  • Timely debt relief.
  • Include vulnerable middle-income countries in the group.
  • Develop a mechanism for private creditors.
• Improve the debt resolution at the borrowing contract stage by:
  • Promoting collective action clause.
  • Promoting state contingent clause through automatic debt relief in emergency situations.
• Promote common principles and norms for debt restructuring which covers improved coordination among debtors and creditors and other stakeholders.

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