Sovereign debt relief mechanisms and reflection on their effect – By: .
By Huang Meibo and Niu Dongfang
For a long time, the West placed Africa on the margins of global development. Even before the COVID-19 pandemic, African countries’ reliance on debt was on the rise. During the Latin American debt crisis of 1982, the debt relief approach was used to address the over-indebtedness of developing countries. This approach was then applied in dealing with the debt crisis in African countries. Key measures include traditional debt relief practices, the Heavily Indebted Poor Countries (HIPC) Initiative, the Multilateral Debt Relief Initiative (MDRI) and the Service Suspension Initiative. Debt Relief (DSSI) of the G20 by 2020. These debt relief mechanisms are mainly implemented under the leadership of Western creditor countries and Western-led international financial institutions. With the realization of the independence of African countries and the deepening of debt relief, it is gradually being realized that while these debt relief mechanisms alleviate some of the debt burden of debtor countries, African countries often fall into the structural financial power of the West and become subject to the power of the Western world. Creditors to African countries come from multiple sectors and are dispersed.
To deal with the African debt crisis, the traditional methods of bilateral and multilateral debt relief and the new methods of multilateral debt relief have been used at the same time. The first is mainly Paris Club debt relief and traditional multilateral creditor debt relief, and the second was HIPC and MDRI. Fundamentally, the current international system of debt governance does not provide a definitive and long-term solution to Africa’s debt problems and, worse, even erodes the sovereignty of African countries in some respects to the detriment of the prospects for development of Africa. The Paris Club, G20 finance ministers and central bank governors agreed on the DSSI in April 2020, where official bilateral creditors agreed, for a limited period, to suspend payments from the service of the debt of the poorest countries (73 low- and lower-middle-income countries) requesting suspension. By the end of December 2021, 48 of the 73 countries eligible for debt relief had participated in the Initiative and the Common Framework, and repayment of maturing debts of up to $12.9 billion had been suspended. However, there were still 25 countries that had not participated. The G20 DSSI and its common framework had brought much-needed funds to Africa while having many negative impacts.
First, undermine the credit ratings of debtor African countries. After the 2008 financial crisis, the tightening of global financial supervision and regulation resulted in the contraction of cross-border lending activities by banks in developed economies. But international capital flows in the form of bonds and investment portfolios have grown tremendously, followed by significant changes in the sovereign debt structure of developing countries. A growing number of African governments are actively seeking new financing from private creditors. At the end of December 2021, 25 debtor countries were still clearly indicating that they would not participate in the DSSI, even though 17 of them were already at medium to high external debt risk. This means that a considerable number of debtor countries would choose fiscal austerity, cut other development spending, and continue to meet their sovereign debt servicing responsibilities even when faced with severe fiscal difficulties. .
Second, to provide leverage for international financial institutions to interfere in the domestic politics and economy of debtor countries. In September 1987, the IMF launched a Special Program of Assistance (SPA) for low-income countries facing debt difficulties in sub-Saharan Africa, which marked the first coordinated action by the international community on the protracted problem of Africa’s debt. In 2020, the IMF and the World Bank continued their usual conditional approach, obliging debtor countries to disclose all information on public debt and to place their budgetary expenditures under surveillance after debt reduction. They also made participation in the common framework a prerequisite for receiving matching funds. This will undoubtedly compress the policy space of African countries that urgently need to tackle debt and financial difficulties. The macroeconomic policies, economic systems and development strategies of the participating countries may be affected and limited by these international financial institutions, which amounts to the transfer of part of their economic sovereignty.
Third, Increase the dependence of African debtor countries on international financial institutions. Since the pandemic, bilateral creditors, for the sake of risk control, have tended to refrain from signing new loan agreements. African countries then become more dependent on the support of multilateral institutions and are pushed to turn to the IMF for financing. The debt crisis and sovereign debt relief are often the main reasons for the increase in the multilateral debt of African countries. In all previous debt crises, in order to solve debt problems, debtor countries with low creditworthiness fell into the “debt spiral” of “paying back previous borrowings by borrowing new ones” from the institutions multilateral.
Fourth, debt relief may lead to a decline in the overall flow of international development assistance. In the 1990s, the two main debt relief mechanisms, the HIPC initiative and the MDRI, were also used as a means of financing development for developing countries, which had led to additional problems of debt relief. debt. For example, under E-HIPC, debt relief would contribute to poverty reduction by freeing up additional resources, such as IMF fundraising through the sale of gold and the international community to push certain OECD countries to increase their aid budgets, among other things.
Therefore, while the DSSI, made in response to the impact of the pandemic, may offer respite to African debtor countries, those joining the Common Framework must commit to a package of macroeconomic or economic reform clauses expected by developed countries while labeling themselves bearers of “unsustainable debt”. In addition, they are increasingly dependent on the supply of financing from multilateral institutions, which allows developed countries to further entrench the unequal relationship between debtor countries and creditor countries in the international sovereign debt market through the sovereign credit rating system and the resulting multilateral framework. . This may be the underlying reason why 25 debtor countries refused to participate in G20 debt relief programs. Going forward, African countries may still face challenges caused by the cyclical fluctuation of debt and its adverse effects on long-term economic growth.
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(The authors are China-based news commentators.)