Historic Debt Pact of G20 to help poor countries hit by COVID-19

The G20 countries for the first time agreed on a common framework to restructure government debts. This is because COVID-19 crisis has left the poorer countries at risk of failing to repay the loans.

Earlier the G20 countries agreed on G20 Debt Service Suspension Initiative. Now, it is being signed as a pact with an upgraded framework. The pact has been made mandatory for the member country governments.

About the Pact

The creditor countries will negotiate with the debtor country based on the new guidelines. The new guidelines under the debt pact of G20 lays out how debt deemed to be unsustainable can be rescheduled or reduced. The pact was initiated after Zambia announced that it cannot pay an overdue Eurobond by the deadline of November 13, 2020.

This is the first time India, China and Turkey have come together under a single debt restructuring process. The pact makes it mandatory for all the public creditors to participate.

Rules of the pact

The scheme borrows heavily from rules established by Paris Club group. The Paris Club group was established in 1956 by group of wealthy nations. Until now, it was the only joint forum for negotiating debt restructurings.

About Paris Club

It is an informal grouping that meets on monthly basis at Paris. The main objective of the grouping is to find workable solutions to payment problems faced by debtor nations. It has 19 member countries. Most of them are Scandinavian countries, European countries, USA and UK.

Concerns of the Pact

• It does not force the private sectors to accept the debt cancellations.
• The debt restructuring does not include middle-income countries.
• The signing of the pact was delayed as China was reluctant.

Why was China reluctant to accept the pact?

China has been reluctant to acknowledge the need of reduction or cancellation of debts because, China accounts to 63% of overall debt owed to G20 countries as of 2019. China is the biggest bilateral lender to more than hundreds of projects under its Belt and Road initiative. Most of the debtor countries owed by China are from Africa.

In June 2020, China held an online China-Africa summit where COVID-19 debt situation was discussed. According to the summit, around 40 of 77 of these developing countries are located in sub-Saharan Africa. It has been estimated that Chinese debt to African countries amount to 150 billion USD. China holds a third of sovereign debts of Africa.

Month: Current Affairs - November, 2020