How G7 could help the debt-distressed?

News: The G7 leaders are going to meet to discuss various global crises such as war in Ukraine, food insecurity, inflation, backlogged global supply chains, the pandemic response, and climate change.

About G7

Members — Canada, France, Germany, Italy, Japan, the United Kingdom, the US, and the European Union

What are the impact of these issues on low– and middle-income countries?

They are the hardest hit by the Covid-19 and are already facing an escalating debt crisis.

These countries have been pushed into total indebtedness to a 50-year high. For example, at present, more than two dozen countries are at risk of defaulting in 2022. Sri Lanka has become the first country in this line of default.

What are the issues?

These countries are already struggling to recover from the pandemic. Meanwhile, they have to fight new challenges.

The US bank has increased the interest-rate which is driving up borrowing costs globally.

Many lowest-income countries do not have credit ratings. They rely on development finance to make up revenue shortfalls and meet basic needs.

What is the importance of the G7 Grouping to help out low– and middle-income countries?

The members can help these countries manage deteriorating macroeconomic conditions in a number of ways.

(1) The G7 countries are themselves one of the biggest sources of development finance.

(2) The G7 countries are among the largest shareholders of the International Monetary Fund (IMF) and the World Bank. The G7 countries can urge the IMF to issue their SDRs to help numerous low- and middle-income countries to avoid fiscal crises and defaults while still maintaining essential public services.

(3) They are members of forums like the Paris Club of sovereign creditors and the G20 which shape the debt-relief and debt-renegotiation agreements.

(4) All the G7 members, except the US, have already pledged to the IMF’s Resilience and Sustainability Trust. They can urge the US to “recycle” its own unused SDR allocation to support countries in need.

(5) The G7 can help in the conditional debt relief. The leaders can urge fellow G20 countries to extend the Debt Service and Suspension Initiative through 2023and work upon the G20 Common Framework for sovereign-debt restructuring.

(7) The G7 should explore the idea of debt-for-health or debt-for-climate swaps etc. to strengthen health systems and pandemic preparedness and response (PPR). In such a   mechanism, sovereign debt is forgiven in exchange for a country’s commitment to use the freed-up funds to invest in health systems, clean energy, etc.

(8) The G7 countries can urge the IMF to reform its loan regime. Most of these agreements contain counterproductive provisions. For example, the recipient governments are required to cut their public wage bills or reduce their debt-to-GDP ratios. These conditions undermine state capacity, jeopardise essential services, and increase inequality in the medium to long term.

The Way Forward

The international community should find ways to engage constructively with China and private creditors.

In addition, a truly multilateral framework for debt restructuring can be developed.

Source: The post is based on an article “How G7 could help the debt-distressed” published in the Business Standard on 25^th June 2022.