The G-20 Common Framework Needs Upgrades to Prevent a Global Debt Crisis

The G-20 Common Framework Needs Upgrades to Prevent a Global Debt Crisis
Sri Lankan auto rickshaw drivers line up to buy petrol near a fuel station in Colombo, Sri Lanka, April 13, 2022 (AP photo by Eranga Jayawardena).

On July 30, Kristalina Georgieva, managing director of the International Monetary Fund, or IMF, received some good news: A committee of official creditors co-chaired by China and France announced that it was “committed to negotiate” the terms of a debt restructuring deal and willing to provide financing assurances for Zambia. These commitments, which are key to unlocking a three-year, $1.3 billion loan promised by the IMF, mean that the G-20’s Common Framework for Debt Treatments, a policy aimed at addressing what could become a global debt crisis, may soon have its first success story. World Bank president David Malpass described the official creditors’ meeting as providing “some sign of hope.”  

So far, only Chad, Ethiopia and Zambia have requested debt treatment under the Common Framework since it was established in 2020, and progress on their negotiations has been very slow. But as inflation rates spike and interest rates rise, many other countries are facing looming sovereign debt crises. For some, economic conditions have triggered political instability, such as in Sri Lanka, where massive protests pushed former President Gotabaya Rajapaksa from office in July. A mechanism for debt restructuring is more important than ever—but to be effective, the Common Framework will need to address certain issues that limit broader debtor country participation.

In the late 2010s, many governments took advantage of low global interest rates to expand their borrowing. Private investors were paying little attention to political risk, focusing instead on finding higher yields. Many governments issued bonds on private markets for the first time. Others used natural resource revenues to secure funds or shifted some of their borrowing from foreign to domestic currency debt. China’s emergence as an important source of finance further facilitated government borrowing.

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