State of play
According to the International Monetary Fund, the difficult debt situation of low-income countries has eased somewhat since the Covid-19 pandemic. However, these countries remain especially vulnerable due to sustained global uncertainty and the many other crises that have since emerged. Even though most developing countries are considered to have sustainable debt levels at present, many still face significant challenges. High interest payments and growing refinancing needs are putting mounting pressure on public budgets.
Key figures on low-income country indebtedness
As a result, countries experiencing particularly severe financial difficulties may require debt restructuring in the coming months and years. Before 2020, debt restructuring arrangements were negotiated mainly within the framework of the Paris Club – an informal association of 22 “traditional” creditor countries (mostly large and small developed countries in the Global North). Over the last 20 years, however, the creditor structure has evolved significantly, especially for low-income countries: China is now the largest bilateral public lender, and private investment has increased significantly. Multilateral development banks also remain indispensable partners when it comes to providing low-interest loans for these countries. In many cases, the IMF has granted additional loans for the purpose of stabilising the balance of payments.
In order to ensure that the world’s poorest countries have access to efficient, coordinated and sustainable debt restructuring under these changing conditions, the G20 and the Paris Club established a “Common Framework for Debt Treatments” in November 2020. The Common Framework aims to provide customised, country-specific debt restructuring based on the following principles:
- Creditor countries belonging to the G20 or Paris Club must coordinate their debt restructuring measures.
- Debtor countries must participate in an IMF macroeconomic stabilisation programme.
- Private creditors must provide comparable treatment.
Solutions
The German Federal Ministry of Finance supports a number of measures to help heavily indebted countries find a way out of their financial distress.
- The Finance Ministry backs efforts to improve and expedite the implementation of the Common Framework for Debt Treatments.
- The Common Framework has already achieved significant results in the case of four countries: Zambia, Chad, Ghana and Ethiopia. In all four cases, the debt treatment plans have produced new efficiency gains.
- Within the G20, Germany is advocating at the highest political level for structural improvements to the Common Framework. The aim is to impose greater rigour and thus improve the Common Framework in terms of its reliability, speed, structure and coordination.
- Initial results include the publication of a “lessons learned” note relating to the first countries to have benefited from debt treatment under the Common Framework.
- Germany also advocates and promotes creditor coordination for highly indebted countries that need to restructure their debt but are not participants in the Common Framework.
- To ensure that distressed countries can be assisted in an effective and sustainable way, the Finance Ministry is also working towards improvements in the collection and dissemination of debt data in order to enhance debt transparency.
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Key players
On the international stage, a number of groups and institutions have been working at various levels to develop solutions for heavily indebted countries and to foster productive dialogue between creditor and debtor countries.
The G20 is the main forum for discussing international regulatory frameworks. This informal group of the world’s 19 leading developed and emerging economies, plus the European Union, was founded in 1999. Together, the G20 countries currently account for over 80% of global gross domestic product, three-quarters of world trade and roughly two-thirds of the world’s population. G20 meetings are regularly attended by representatives from other countries (such as Spain, which is a permanent guest) and international organisations (such as the IMF, the World Bank, the United Nations and the OECD).
The G20’s efforts made an essential contribution to stabilising national economies and financial markets in the aftermath of the global financial crisis in 2008–2009. Increasingly, the forum places a focus on intensifying forward-looking cooperation to prevent new crises, learning from experience, and making economies more resilient.
The G7 is an informal forum comprised of seven of the world’s leading economies – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States – plus the European Union. It grew out of the first “world economic summit”, which was held in 1975. Russia joined the group in 1998, but its membership was suspended in 2014 after its annexation of Crimea.
G7 governments formulate joint positions on global policy issues when they meet for annual summits. Their talks focus on key issues such as the global economy, foreign and security policy, development, and climate action. Due to the G7’s informal structures, the rotating annual presidency plays a particularly important role, because the presidency not only organises the G7 meetings and summits in a given year but also sets the policy agenda. In addition to cooperating at the level of heads of state and government, the G7 also holds separate meetings attended by finance ministers and central bank governors. This is called the “Finance Track” (see below).
The Paris Club was established in 1956 by a group of creditor countries with the aim of finding coordinated solutions to the payment difficulties experienced by debtor countries. Its membership basically overlaps with the membership of the OECD, and Germany is represented by the Federal Ministry of Finance.
The Paris Club deals only with bilateral debt that debtor countries owe to other government lenders. Debtor countries wishing to conclude a Paris Club rescheduling agreement must successfully implement an IMF adjustment programme. These programmes contain binding agreements on macroeconomic and fiscal policy frameworks as well as institutional changes designed to place the country’s economy on a sound footing.
The IMF’s creation was agreed at the United Nations Monetary and Financial Conference (also known as the Bretton Woods Conference) in July 1944. The IMF was then formally established in December 1945. Germany has been a member since August 1952. Any country that is willing to fulfil the IMF’s requirements in terms of monetary policy consultation and cooperation can join the organisation. The Federal Minister of Finance is Germany’s representative on the International Monetary and Financial Committee, which monitors the stability of the international monetary system and advises the IMF’s Board of Governors.
The IMF’s main objectives are to intensify global monetary policy cooperation, safeguard financial stability, facilitate international trade and boost employment and sustainable growth. The organisation’s primary task is to safeguard the stability of the international monetary system, the exchange rate regime and the international payment system, which together make it possible for individuals, companies and governments to do business with each other.