Why securing debt forgiveness for poor countries is so hard

Updated: Nov 12, 2020


To pay the creditors or to support its people who suffered from the pandemic – that is the challenging question for governments in many poor countries. It was a great relief for them when the G20 group agreed to prolong the Debt Service Suspension Initiative (DSSI) in which the debt-service payments were halted until July 2021. This will allow them to stay focused on wrestling with Covid-19 and the economic impact brought by it.

According to the International Monetary Fund (IMF), public debts in those countries rocketed from 29% of GDP to 43% last year and were expected to further increase to 49% this year. With taxpayers themselves struggling to make ends meet, the governments are facing difficulties in terms of collecting tax revenues, which in turn jeopardises their ability to repay the foreign investors. This is evident as a third of DSSI-eligible countries are either drowning in debt distress, or are on their way to it, according to the World Bank. In fact, 73 countries such as Ethiopia, Mozambique and Zambia, are expected to repay over $31bn debt by December.

Albeit the central banks’ lower-than-ever interest rate and the international financial institutions’ generous fund have come to the rescue; this is not a long-term solution to the desperate countries. Suspension of debts is, by all means, different from writing off the debt. The true solution lies in debt restructuring where massive defaults can be avoided. However, it is apparent that borrowers’ concern of their worsening financial position put them off from signing up to it. This could be seen when the G20’s encouragement for private creditors to collaborate failed to improve the situation as it is the poor countries which were reluctant to cooperate. The underlying reasons stemming from the worry of downgrading credit has led to the strong resistance to approach rating agencies.

As if this was not bad enough, the lenders’ side is experiencing issues as well. The “Paris Club”, once deemed as having mostly rich countries’ governments as its members, was once the one capable of calling for any restructuring. This is no longer true. Around 33 countries owed a quarter of their debts to China; although the black horse of the 21stcenturies insisted that it should be excluded from the scheme as it was not an official lender.

It may be a relieve to learn that G20 has reached consensus in promoting a “common framework” for debt restructuring. This means that G20 creditors and private sector will be treated alike in the undertaking of the restructuring. It would be even more of a relieve if China can coordinate its lending agencies to join the scheme. Nonetheless, we will only know more about the details in November after the summit is held.


LLB student at The London School of Economics | Communication Officer at Japan Society at LSE

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