Evidence for IDC inquiry on Debt relief in low-income countries

Submitted by: Jubilee Scotland

Jubilee Scotland is a non-profit organisation which campaigns for the cancellation of unjust and

unpayable debts which continue to thwart sustainable development efforts. We conduct research and prepare briefs; we put on workshops for the public; we organise meetings, events and campaigns. Founded as a continuation of the Jubilee 2000 coalition, we have been campaigning for more than 20 years.

Jubilee Scotland welcomes this inquiry, noting that:

●        we are concerned about current debt levels in low-income countries, they are the highest they have been since the early 2000s.

●        the new Common Framework for Debt Treatments offers no additional mechanisms for making private lenders take part in debt restructuring, which is a significant hindrance to making progress on debt relief.

●        the UK is in a unique position to make a difference in the area of low-income debt relief since 90% of Common Framework country bonds are governed by English law and the UK has the largest proportion of known private lenders of any country.

1. The current debt levels in low-income countries

1.1               Many low- and middle-income countries are struggling with slow economic growth and high external debt levels. At end-2020 the combined external debt stocks of low- and middle-income countries were $8.7 trillion.[1]

1.2              The average external debt payments of governments were 14.3% of government revenue in 2021. In 2010 these payments only made up 6.8% of government revenue. That is an increase of 120% between 2010 and 2021.[2]

1.3              For most countries the rises in external indebtedness are not matched by the growth of gross national income and exports.[3]

1.4              Out of 69 low- and middle-income countries being assessed by the IMF for debt default risk it was found that: nine of these countries are already in default on some external debt; 30 are at high risk of debt distress; 23 are at moderate risk and seven are at low risk.[4]

1.5               According to the World Bank: “A large-scale shift in the approach to debt transparency is needed to help countries assess and manage their external debt risks and work toward sustainable debt levels and terms.”[5]

2. The impact on development of high levels of debt – including the ability of countries to respond to climate change and the pandemic

2.1              High levels of debt prevent countries from spending the necessary resources on development, including within the areas of health, education and climate adaptation. Every day $107 million leaves 68 countries in the global south to pay lenders instead of being invested in social protection or economic recovery.[6]

2.2              Lower income countries are spending five times more on debt payments than on adapting to climate change.[7]

2.3              According to Unicef: “In many countries, debt payments outweigh government budgets for social expenditure. Even before the current crisis, one fifth of LMICs spent more on debt service than on education, health and social protection combined.”[8], and there is a clear connection between this imbalance and high levels of child poverty.

3. An examination of where low-income debt is concentrated, and who holds the debt

3.1              In a review of data from the World Bank International Debt Statistics database Debt Justice found that: “In 2022, of external debt payments due to be paid by low and lower middle-income governments, 47% are to private lenders, 27% multilateral institutions, 12% China and 14% governments other than China.”[9]

3.2              China has emerged as one of the largest creditors to low- and middle-income countries. At the end of 2020, low- and middle-income countries’ combined debt to China was $170 billion, which represents a rise of 11 percent in China’s external debt stock.[10]

3.3              There is a large issue around transparency on public debt. Sovereign bonds (public listed securities issued by sovereign governments under foreign currency and governing laws) are a part of this problem since they can be bought and traded by investors across the world with little transparency and oversight.[11]

4. Lessons learned from previous debt-relief initiatives such as the Highly Indebted Poor County (HIPC) Initiative, Multi-lateral Debt Relief Initiative (MDRI) and Debt Service Suspension Initiative (DSSI)

4.1              The type of debt cancellation achieved through HIPC and MDRI relied on public institutions[12] while bailing out private lenders. Partly because there was no mechanism to compel private creditors to take part in the debt cancellation.[13]

4.2              While the World Bank, the African Development Bank, the IMF, the Inter-American Development Bank, and all Paris Club creditors provided their share of debt relief under the HIPC Initiative, others did not: “Smaller plurilateral institutions, non-Paris Club official bilateral creditors, and commercial creditors, which together account for about 26 percent of total HIPC Initiative costs, have so far only delivered a small share of their expected relief.”[14]

4.3               In 2018, 14 Low Income Developing Countries that had previously received HIPC/MDRI debt relief were considered to be in debt distress or at high risk of debt distress. [15]

4.4              HIPC proved unable to prevent a new build-up of unsustainable debt, which has undermined the development and poverty reduction achieved through the HIPC initiative.[16]

5. How the pandemic has impacted debt levels, and the implications of the Debt Service Suspension Initiative closing at the end of 2021

5.1              Prior to the COVID pandemic, many developing countries were in a vulnerable fiscal position with already elevated external debt. COVID-19 brought the debt to record highs.[17]

5.2              The external debt stock of low- and middle income countries in 2020 rose, on average, by 5.6 percent, for some even reaching double digits as high as 20% increase.[18]

5.3              Deferred official debt payments under the DSSI are expected to be repaid in full between 2022 and 2024. The 46 countries that have requested participation in the DSSI will be required to pay back not only the $5.3 billion of postponed payments, but also the $71.54 billion of pre-existing commitments, plus any other debt contracted after 2018. [19]

5.4              In 2020, only 44% of DSSI-eligible countries had a debt-to-GNI ratio at or below 60% and in seven percent of DSSI-eligible countries it exceeded 100%. In 2020, 21% of DSSI eligible countries had a debt-to-export ratio over 250%.[20]

6. The implementation of the Common Framework for Debt Treatment

6.1              Chad, Ethiopia and Zambia applied for a debt restructuring using the Common Framework in 2021, but none have had debt restructured to this day.[21]

6.2              When a country applies for a debt restructuring under the Common Framework a Debt Sustainability Analysis is undertaken by the IMF to assess how much debt needs to be cancelled in order to make it sustainable. However, the IMF does not have a clear definition of “sustainable debt” which is a problem for implementation.

6.3              The Common Framework does not provide any additional mechanisms for making sure private creditors cancel debt on the same terms as bilateral lenders. This can lead to a situation where willing creditors end up bailing out creditors unwilling to take part in the restructuring or a situation where the debtor becomes unable to finalise a restructuring deal with anyone. The G20 has stated that private creditors should provide debt relief on at least the same terms as bilateral creditors, however the implementation of this is difficult.[22]

7. The relative merits of debt cancellations compared with debt relief

7.1              Debt cancellation refers to the situation when there is an agreement between the debtor and the creditor that an outstanding debt no longer needs to be repaid.

7.2              Debt relief can include cancelling debt, but can also be a matter of changing interest rates or adjusting the payment schedule for a debt.

7.3              The main aim of debt relief, restructuring or cancellation should be to ensure that debts become sustainable and that the solution prevents new build-up of unsustainable debt.

7.4              However, preventing new unsustainable debt to accumulate is a complicated matter, as noted by The World Bank “Beyond debt relief, long-term debt sustainability requires efforts by borrowers, lenders, and donors to promote prudent borrowing, suitably concessional finance, sustained economic growth, diversified exports, and greater access to markets in developed countries.”[23]

8. The criteria used to determine eligibility for debt relief schemes, and whether this should be expanded to, for example, middle-income countries

8.1              Several middle-income countries in or at risk of debt default could benefit from being eligible for the Common Framework.

8.2              Rather than pushing for an expansion of Common Framework eligibility to include middle-income countries, it would be relevant to suggest a reclassification of the income groups themselves, which currently places some vulnerable countries into the category of “middle-income”: “low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,045 or less in 2020; lower middle-income economies are those with a GNI per capita between $1,046 and $4,095; upper middle-income economies are those with a GNI per capita between $4,096 and $12,695; high-income economies are those with a GNI per capita of $12,696 or more.”[24]

9. What role the UK Government could and should play in low-income debt relief – both through bilateral and multi-lateral initiatives

9.1              Private lenders in the UK account for 30% of the debt owed by the 73 countries eligible for debt relief under the G20 initiative launched during the Covid-19 pandemic - this is higher than both Chinese and US private lenders combined. The UK can play a key role in improving debt relief mechanisms and incentivising private lenders to engage in debt relief.[25]

9.2               The UK is in a unique position to make a difference in the area of low-income debt relief since around half of international private debt contracts (with public information) are governed by English law and 90% of bonds of countries eligible for the Common Framework are governed by English law.[26]

9.3              Both the IMF[27] and World Bank[28] have called on the UK to pass legislation to make collaboration with private creditors on debt restructuring easier.

10. The role of the private sector in low-income debt relief, the role of the City of London and UK financial system, and how private debt holders can be incentivised to participate in debt relief programmes.

10.1              It is key that private lenders take part in debt restructuring to ensure that debt is reduced to a sustainable level and to prevent a new build-up of unsustainable debt.

10.2              In order to incentivise private lenders to take part in debt relief the UK could either: Replicate the UK Debt Relief (Developing Countries) Act, making it impossible for creditors to sue for more than they would have received if haven taken part in the Common Framework for debt restructuring (or other internationally agreed debt restructuring); OR the UK could make debt restructuring agreements binding for all private creditors if the agreement is supported by at least two thirds of private creditors.