Still too little, too late and no urgency on ‘expanded’ COVID-19 debt relief for developing countries

Expert comment by Dr Stephen Connelly, Dr Celine Tan, Karina Patricio and Chris Tassis from the Centre for Law, Regulation and Governance of the Global Economy (GLOBE)at Warwick Law School:-

"The recent announcement by the G20 and Paris Club official bilateral creditors to extend the Debt Service Suspension Initiative (DSSI) by six months and the proposal to develop a ‘Common Framework for Debt Treatments beyond the DSSI’are a welcome step towards ensuring indebted developing countries receive some relief from the financial pressures of debt repayments in the midst of the COVID-19 pandemic.

"However, these proposals remain very limited and lack ambition in tackling the severity of financial and economic crises facing many developing countries today. They continue to reflect the ad hoc and piecemeal approach that the G20 has adopted in the realm of sovereign financing and debt restructuring throughout the ongoing crisis. Despite the unprecedented nature of the health, social and economic emergency confronting many indebted countries, major creditor states have failed to respond with any comprehensive plan to deal sustainably and equitably with the burgeoning debt crisis.

"The extension of the moratorium on debt service is short and does not deal with the underlying debt stock of countries. There is no binding legal commitment on creditors to participate in the DSSI, and participation in the initiative often requires protracted negotiations with official creditors. The plan does not include commitments by multilateral or private creditors and is ring-fenced to a set of low-income countries, thereby excluding a large number of eligible countries and large amounts of eligible debt. Moreover, countries have been discouraged from participatingin the initiative due to fears over the effect this may have on their credit ratings and therefore ability to access other forms of external finance.

"Six months on from the onset of the COVID-19 pandemic, including two sets of IMF and World Bank meetings, two rounds of G20 meetings, and numerous negotiations with private creditors, the G20 has once again failed to provide a clear roadmap and implementation plan for countries dealing with unsustainable debt burdens.

"There remains uncertainty about the proposed debt restructuring framework and the scope and extent of the plan for sovereign write-downs which will only be finalised at next month’s G20 meeting.

"There needs to be an urgent global deal to tackle the sovereign debt crisis in the developing world triggered by the pandemic that is fast, effective and sustainable. This includes a standstill on public and private debt repayments for indebted countries to allow some fiscal space for health mitigation measures and economic recovery, and a commitment to an equitable and sustainable sovereign debt restructuring mechanism.

"The World Bank president, David Malpass, had recently made a plea to the UK and US to make it harder for creditors to sue the poorest countries and the UK Labour Partyhas called for a change in English law to facilitate this.

"English law governs a significant share of developing country debt. Under the auspices of The IEL Collective Law and Finance Working Group, we have proposed legislation in the UK to suspend enforcement of debt service owed by private creditors of DSSI-eligible countries. While the proposal is limited in its scope to deal comprehensively with the current sovereign debt crisis, it will nonetheless offer an emergency measure that will enable fiscal breathing space for countries to deal with the ongoing pandemic and its economic fallouts."

• Dr Stephen Connelly is Associate Professor at Warwick Law School and Co-Director of the GLOBE Centre, Dr Celine Tan is Reader at Warwick Law School and Co-Director of the GLOBE Centre, Karina Patricio Lima Ferreira is doctoral candidate at Durham Law School and Visiting Doctoral Researcher at the GLOBE Centre and Chris Tassis is a doctoral candidate at Warwick Law School and Assistant Editor of the GLOBE Centre Policy Brief Series.
• For further details on their proposal, please see the GLOBE Centre Briefing Noteand the Debt Suspension Legislation briefing.

16 October 2020