G20 nations have agreed to freeze bilateral government loan repayments for low-income countries until the end of the year as part of a plan to tackle the health and economic crises triggered by the coronavirus pandemic and prevent an emerging markets debt crunch.
The group of developed and developing nations also called on private creditors “to participate in the initiative on comparable terms” and asked multilateral development banks, such as the IMF and World Bank, “to further explore the options for the suspension of debt service payments over the suspension period”.
“We support a time-bound suspension of debt service payments for the poorest countries that request forbearance,” the G20 said in a statement after finance ministers held an online meeting on Wednesday. “We agreed on a co-ordinated approach with a common term sheet providing the key features for this debt service suspension initiative.”
Mohammed al-Jadaan, finance minister of Saudi Arabia — which is currently chairing the G20 — said the debt assistance involved could be worth “north of $20bn”. He added that any assistance from private sector creditors would be on a voluntary basis, but said: “We encourage them to consider it in support of these countries and the people of these countries.”
“Considering the speed, the spread and the severity of Covid-19 . . . this requires a very strong, bold and significant action by the G20 and by the world,” Mr Jadaan said.
The moratorium on bilateral government debt repayments will begin on May 1. It will apply to the 76 countries that are eligible to receive assistance from the World Bank’s International Development Association, which works with the poorest countries, as well as all nations defined as least developed countries by the UN. Eligible countries must be “current” on any debt service payments to the IMF and the bank.
Concerns have mounted about the debt sustainability of lower income countries that borrowed heavily in the years after the 2008 global financial crisis and now lack the resources to deal with the health and economic crises triggered by the Covid-19 pandemic as they grapple with high debts, fiscal deficits, plummeting revenues and weakening currencies.
Many poorer nations have shuttered large parts of their economies, while vital sources of employment, revenue and foreign currencies earnings have collapsed, including tourism and remittances. Commodity exporters are also enduring the additional blow of the plunge in oil and metal prices as global demand freezes, as well as the closure of mines.
Countries receiving bilateral development assistance are estimated to be due to make repayments of about $40bn to external creditors this year.
The G20 called on the IMF “to explore additional tools that could serve its members’ needs as the crisis evolves” but fell short of calling for a new allocation of the fund’s “special drawing rights”, reserve assets that would offer a cash injection to many countries facing a sudden depletion of foreign exchange reserves.
Earlier drafts of the G20 statement seen by the FT included such a call but it appears to have been withdrawn after opposition led by the US.
IMF officials say the fund’s current resources are helping governments deal with the immediate needs, but greater support will be required over the longer term.
Kristalina Georgieva, IMF managing director, welcomed the G20 initiative and said the fund planned to triple its concessional lending.
She said the IMF was “urgently seeking $18bn in new loan resources for its Poverty Reduction and Growth Trust”, its concessional lending vehicle, adding that the fund would also need at least $1.8bn in subsidy resources.
The Jubilee Debt Campaign, a UK-based charity, said the G20 deal represented an important step forward, but added that “suspending payments rather than cancelling means countries will continue to pile up interest and face even bigger debt levels next year”.
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“We urgently need G20 governments to commit to engaging in a UN process to agree a comprehensive and enforceable way to cancel debts down to a sustainable level, ready to be implemented in 2021,” the group said. “Otherwise, today’s debt suspension will be next year’s debt crisis.”
The G20 said creditors would consider a possible extension of the moratorium once they had taken into account the liquidity needs of eligible countries.
Countries receiving the assistance would be required to commit to using the relief to “increase social, health or economic spending in response to the crisis”, the G20 statement said. A monitoring system is expected to be put in place by international finance institutions, such as the IMF and World Bank.
China, the biggest bilateral lender to many poorer nations, has granted debt relief to creditor nations in the past but has preferred to do so on a bespoke basis rather than as part of any co-ordinated effort. Its foreign ministry told the FT last week that it was willing to talk to low-income countries individually about their debt challenges, while noting that past repayment problems had been resolved bilaterally.
However, China appeared to have signed up to the G20 initiative, which the statement said would involve “all bilateral official creditors”.
One official involved in the G20 negotiations said there would be scope for bilateral arrangements to be agreed within broad parameters that applied to all lenders.
“What we have seen over the past few weeks is anything but issues and politics, what we have seen is very clear solidarity and commitment to put together an action plan,” Mr Jadaan said. “We have an agreement from all G20 members on the action plan . . . and making sure we continue that co-ordination towards recovery.”