The G20 Common Framework
The Common Framework:
Guiding principle to Zambia’s debt treatment
By Michelo
Maunga
Introduction
Followers
of the Zambian economy’s debt engagements will have read or heard reference to
the G20 Common framework. The arrangement serves as the guiding principle to
the Group of 20, who are the 20 largest economies in the world, in dealing with
debt crises in poorer nations. A relatively new initiative, launched in the
latter stages of 2020, Zambia is one of the first countries to apply for debt
treatment under its auspices, the only other two being Chad and Ethiopia. Little,
however, is known of the specificities of the framework. This together with
teething issues in its implementation has led to several critiques of its
efficacy in as far as expeditiously addressing debt distress.
What is this framework?
The framework was designed with a view to
coordinate negotiations between debt distressed debtors and their creditors. It
allows for harmonization of debt treatments by official creditors that
encompass multilateral, bilateral and private lenders. Prior, negotiations
tended to be disjointed, with those of the Paris club taking place separately
from that of Official Bilateral Creditors and private markets. The Framework
works in close coordination with the Bretton Woods institutions, WBG & IMF,
taking guidance from the latter’s respective country program and Debt
Sustainability Analysis of the World Bank. In this vein, the initiative
stresses reforms mandated by an IMF country program in order to inculcate
prudent public financial management and avert similar future crises. The
framework is summarized in an MOU between creditors and the debtor country,
that stipulates parameters of the debt treatment. These parameters include:
1. The reduction in debt service over
the life of the IMF supported program.
2. The reduction in the Net Present
Value of debt.
3. The extension in repayment periods,
if any.
Inception of the Common Framework
In response
to the ravages of the COVID pandemic, and with the prompting of the IMF and
WBG, G20 countries implemented the Debt Service Suspension Initiative (DSSI).
It facilitated the halting of debt payments by eligible countries enabling them
to focus their resources on managing the pandemic. According to the World Bank,
under it, $12.9 billion in debt repayments were halted. The initiative expired
in December 2021. The DSSI was superseded by the Common framework. Multilateral
institutions and bilateral creditors recognized the increased vulnerability of
low-income countries beyond the Debt suspension. The Common framework was meant
to provide a more lasting solution to the imminent debt crisis, particularly in
Sub Saharan Africa.
Zambia’s Experience
In June
2022, an official creditors committee was instituted for Zambia co-chaired by
France and China. At the second meeting of this committee in August 2022, the
Zambian economic reform programme was endorsed and members made a commitment to
negotiate terms of a restructuring in view of internal laws of creditor countries
and institutions. Other bilateral and private creditors were also implored to
provide debt relief on at least comparable terms.
This in
principle, thus should have set the scene for expeditious debt restructuring.
Time has revealed that this, however has not been the case. The Ministry of
Finance targeted to reach restructuring agreements by end of 2022 or early
2023. The first of these timeframes has elapsed with little certainty if
conclusions will be made in the second. The restructuring process has remained
painfully slow with the Ministry of Finance stating in December that it is yet
to discuss terms of a restructuring. China for instance has been seeking
clarifications on figures that form the basis of IMF assumptions. The
protracted process has not been without effect on the local economy. The Kwacha
has weakened significantly, jeopardizing many of the economic gains of the new
presidency, particularly inflation.
Delays
have, hitherto, been the hallmark of negotiations under the G20 Common Framework.
Three countries have so far applied for debt treatment under it: Zambia, Chad
and Ethiopia. Of these, Chad is the only to have come to an agreement with its
creditors, which was reached late last year. This notwithstanding, criticisms have been
drawn of that county’s agreement. World Bank Group president Mr David Malpass,
for instance, lamented the lack of a Net Present Value reduction in debt. The
blame has been squared at China, in that respect, not only in the case of Chad
but Zambia as well. Chinese officials have tended to offer an extension of
maturities as opposed to debt haircuts, in addition to its purported
foot-dragging in debt negotiations.
Conclusion
The
Ministry of Finance has a mammoth task. Reaching an agreement with the IMF was commendable,
however, securing actual debt restructuring is more important and will be prove
to be more challenging. 2023 thus may be a challenging year for the Zambian
economy as the entire economic transformation agenda of the UPND government is
predicated on debt restructuring. Nonetheless, the author remains hopeful that
eventually debt treatments will be agreed which will bode well for financial
markets, our Extended Credit Facility and the economy.
The Author is
an Economist and member of the Economics Association of Zambia
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