A Good but Incomplete Start to Debt Relief
After initially responding to the pandemic-induced economic crisis with an initiative to postpone developing countries' debt payments, the G20 has now come back to the table to offer a more plausible solution. But the new common framework for restructuring sovereign debt should be merely a first step in a longer process.
LONDON – A global collapse in economic activity during the COVID-19 pandemic has significantly increased the risk of debt distress in many countries, pushing the poorest ones to the brink. In response, various international organizations have unveiled a number of initiatives to forestall circumstances necessitating between responding adequately to the public-health crisis and servicing existing debts.
Most notably, the G20 has established a Debt Service Suspension Initiative (DSSI), that allows the world’s poorest countries to suspend official bilateral debt-service payments until next year. And this month, G20 leaders adopted a new common framework to address sovereign-debt restructuring needs on a case-by-case basis.
For poorer countries grappling with the pandemic, debt not only limits their fiscal space for responding to the crisis but also forecloses on future development. Faced with the sudden costs of the COVID-19 crisis, many countries that are already struggling to service existing debt have needed fresh financing, only to find that it is too difficult or expensive to borrow more. And even if they can manage to do so, the additional debt burden will hamper them for years, limiting their prospects for growth and development.