Redress the balance

An international debt management system should be established to strike an effective equilibrium between debt sustainability and development

The novel coronavirus pandemic has brought great challenges to the financial situation and liquidity of developing countries, low-income countries in particular, further aggravating their already heavy debt burden. With the pandemic still raging around the world and some countries mired in debt defaults, there are mounting uncertainties.

International responses from multilateral, regional and bilateral levels are playing a positive role in dealing with the debt issues. However, new problems have emerged in the implementation of debt relief plans. For example, there is a large variation in creditors' willingness to participate in debt relief. Furthermore, differences in the methods, procedures and standards of debt relief have been amplified, undermining international cooperation on debt relief for developing countries. This requires the members of the international community to transcend their differences and work out an effective response plan.

To put it in a nutshell, coping with the debt problem of developing countries requires a more balanced, comprehensive and rational plan. Specifically, the following four sets of relations should be properly dealt with.

To start with, the international community should find the right balance between debt relief and support for sustainable development. The improvement of a country's debt problem ultimately depends on a country's economic recovery and growth, of which developing countries have a very clear understanding. To this end, African nations have put forward the Dakar Consensus, criticizing the exaggeration of their debt risks by some Western countries and airing grievances about the development expenditure and borrowing limits imposed on African nations.

In sharp contrast, creditors of developing countries care more about support from their international partners on trade, investment, industries and infrastructure, especially financing support for sustainable development. According to International Monetary Fund forecasts, Africa's demand for external financing from 2020 to 2023 will be as high as $900 billion, with a gap in external financing of $130 billion to $410 billion waiting to be identified. Inevitably, African countries attach great significance to the inflow of funds aimed at supporting their sustainable growth.

Second, the international community should find the right balance between bilateral debt relief and collective debt relief efforts. The G20 group of leading economies aims at providing debt relief to low-income countries through the Debt Service Suspension Initiative (DSSI). However, the debt relief agreement has limited effects. One reason is the initiative does not benefit those emerging economies with debt issues, which carry more economic weight and larger potential influence. Another reason is that it is far from enough to rely only on the debt relief efforts of bilateral official creditors. The released liquidity will to a great extent be absorbed by multilateral and private creditors who choose not to participate in the debt relief agreement.

Worse still, when some countries, such as Zambia, seek debt relief assistance from private financial institutions, such as the holders of eurobonds, they are often faced with the risks of sovereign credit rating downgrades or even bond defaults, which will further undermine their creditworthiness and make it harder to obtain new financing. Therefore, to prevent "disorderly defaults and more complicated debt restructurings", the international community should be committed to building a framework for collective debt relief actions and giving full play to the collective advantage in debt relief. The international community should promote coordination between different means of debt relief, such as development financing support from the World Bank and the IMF's financial support policies, including the Special Drawing Rights, debt relief tools, expanded DSSI, and flexible participation of private financial institutions.

Third, the international community should find the right balance between appeals for debt relief and difficulties in practice. The debt problems of low-income countries are often closely associated with problems in their development. Mounting debt burdens could directly lead to a decrease in development expenditures such as on healthcare, poverty alleviation and education. Therefore, calling on debt relief for low-income countries has always been an important mission for some international organizations and non-governmental organizations. However, in reality, debt relief is a very complicated issue that concerns the creditors' domestic coordination in terms of politics, interests and decision-making, concerns the establishment of a debt resolution framework for global joint actions and, most importantly, concerns the progress of financing projects and follow-up capital inflows. Therefore, to realize debt relief goals and avoid possible consequences that may be caused by debt relief, the international community should carry out extensive consultations based on practices of different stakeholders to find a sustainable solution to the debt problem.

Last but not least, the effectiveness of debt relief endeavors ultimately depends on the balance between short-term debt relief and medium-and long-term debt management. Short-term debt relief could ease the debt burden and fiscal burden of countries in debt distress, but could cause new problems in the medium to long term. For instance, the Heavily Indebted Poor Country Initiative and the Multilateral Debt Relief Initiative improved the debt sustainability of countries involved through direct debt relief, but also encouraged irrational and irresponsible borrowing, therefore making some countries plunge into the vicious circle of borrowing, seeking debt relief, then borrowing again.

The ongoing debt relief should draw lessons from previous experiences. In the short run, easing the liquidity crunch and debt repayment burden has the highest priority. The international community should respect the concerns and interests of different members and unleash the potential of existing policies and initiatives through close cooperation. In the medium to long term, the international community should take the debt problem as a precious opportunity for strengthening dialogue and collaboration on principles, methods and mechanisms of debt management, therefore jointly establishing an international debt management system that effectively balances development sustainability and debt sustainability.

The author is an associate research fellow at the Centre for West Asian and African Studies at the Shanghai Institutes for International Studies. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.