Who are the biggest winners in the G20’s debt-relief programme?

– DSSI, Common Framework and SDRs were designed to ease debt and financing concerns

– $5.7bn in debt payments deferred under the DSSI last year

– Critics say relief measures do not go far enough and have recommended debt cancellation

– Calls for developed countries to pass on their SDR allocations to emerging markets

The economic fallout of the Covid-19 pandemic has led to the establishment of a number of debt-relief and financing options for cash-strapped countries. But just how many emerging markets have benefitted from these initiatives?

Debt was already a big issue before the health crisis. According to the IMF, 36 of the 70 markets classified by the fund as being low income were either at high risk of, or already in, debt distress as of February 2020, prior to the declaration of a global pandemic.

The pandemic exacerbated these concerns, as governments raised debt to fund their national responses to the dual health and economic crises.

Institutional support and relief

As more developing nations sought to restructure their debt, G20 governments, along with international finance institutions, developed a number of initiatives to ease the burden.

Chief among these is the Debt Service Suspension Initiative (DSSI), a G20-run scheme that offers a moratorium on bilateral loan repayments owed to G20 members and their policy banks. Initially rolled out in June 2020, the DSSI, which is available to 73 low-income nations, has been extended until the end of this year.

Complementing that initiative is the G20 Common Framework for Debt Treatments Beyond the DSSI. Established in November last year by the G20 and the Paris Club, a 22-strong informal group of mainly Western creditors, the Common Framework applies to the same 73 countries eligible for support under the DSSI.

It differs from the former, in that it provides relief on a case-by-case basis, with assistance ranging from complete debt restructuring – including reductions in some cases – to the longer-term deferral of debt payments.

Another move designed to ease fiscal concerns was the increased allocation of special drawing rights (SDRs). Managed by the IMF, SDRs are international reserve assets defined by a basket of five currencies – the US dollar, Japanese yen, euro, UK pound and Chinese yuan – which are used by member countries to supplement their own reserves.

On August 2 the IMF’s Board of Governors approved the allocation of $650bn worth of SDRs to bolster global economic recovery. This was the first new allocation since 2009 and by far the largest of its kind, doubling the $318bn in SDRs previously released by the IMF.

While not considered a blanket solution to Covid-19-related economic problems, the allocation of SDRs is expected to help emerging markets address a liquidity squeeze, which in many cases has become more critical on the back of reduced bilateral aid last year.

How much are emerging markets saving?

From the beginning of the DSSI on May 1, 2020 to the end of that year, 43 countries secured $5.7bn in debt relief through the initiative. Of this, $2.5bn came from the Paris Club, which does not include major creditors like China.

Looking at the first half of this year, while an overall DSSI figure is not available, the amount of debt relief granted by Paris Club countries more than halved to just over $1bn. Analysts suggest the total figure could well have followed a similar trend.

In absolute terms, Pakistan has benefitted the most from the Paris Club’s participation in the DSSI, securing $1.4bn in debt deferrals between May 2020 and June of this year, followed by Yemen ($352m), Papua New Guinea ($320m), Cameroon ($263m) and Angola ($201m).

São Tomé and Príncipe was the biggest beneficiary in relative terms, with 63.1% of its public external debt serviced by the scheme. Others that received significant assistance on this front include Yemen (62.4%), Papua New Guinea (47.4%), Cameroon (25.7%) and Guinea (23%).

As for the G20’s Common Framework, which was designed to complement the DSSI by offering longer-term, structural debt relief, just three countries – Chad, Ethiopia and Zambia – had applied for debt restructuring under the initiative as of mid-August. Talks between the applicant countries and relevant parties over the extent and nature of the relief are ongoing.

Despite the considerable options on offer, some analysts say that the relief provided to emerging markets by these mechanisms has been fairly limited in real terms.

For example, the $5.7bn in DSSI debt relief secured between May and end-December accounted for just 12% of the participating countries’ public and publicly guaranteed debt service over the period.

Meanwhile, the European Network on Debt and Development (Eurodad), a civil society organisation, has criticised the fact that multilateral development banks and private lenders are not required to participate.

In a report published in October 2020, Eurodad calculated that 24% of the debt payments due to be made by countries participating in the DSSI between May and December last year were actually subject to potential debt suspension. When expanded to all developing countries – including those not eligible for the DSSI, but excluding China, Mexico and Russia – the initiative covered 1.6% of all debt payments due in 2020.

Calls for reform

Concerns over the effectiveness of such initiatives have led to calls for reform of the mechanisms themselves, and debt restructuring more broadly.

In addition to arguing for private sector creditors to be incorporated into schemes like the DSSI, Eurodad believes that countries with unsustainable debt levels should have a portion of their debt loads cancelled, rather than simply deferred.

Elsewhere, much debate has surrounded the implementation of SDRs, which will be available from August 23.

Given that SDRs are normally allocated based on member countries’ IMF quotas, which themselves are often based on GDP, Eurodad raised concerns that high-income countries would account for two-thirds of the new liquidity, and that low-income markets would have to share $7bn of the $650bn total.

This led to remarks from Janet Yellen, the US Secretary of the Treasury, that G20 countries should pass on their SDR allocations to less developed countries. A number of African and European leaders, including the presidents of France, Rwanda, Senegal and South Africa, wrote an open letter in May 2021 in which they called on wealthier nations to redistribute their SDR allocations to help with Africa’s post-pandemic recovery.

Analysis from Citibank earlier this year suggested that if the allocation followed IMF quotas, it would more than double Zambia’s gross international reserves and increase Zimbabwe’s six-fold. Other emerging markets such as Argentina, Ecuador, Ghana, Kenya and Sri Lanka were also expected to see their foreign exchange reserves rise by more than 10%.

While the exact breakdown of SDR allocations is unknown, the IMF announced on August 2 that around $275bn would go to emerging markets and developing countries.