- A final extension of the Debt Service Suspension Initiative (DSSI) through 31 December 2021 provides a short-term liquidity boost for 26 African countries participating in the scheme.
- The International Monetary Fund’s (IMF) initiative to increase member states’ Special Drawing Rights (SDRs) by USD 650bn are an upside, but the extent to which low-income countries benefit will hinge entirely on implementation plans to be presented in June.
- Private creditors still face considerable uncertainty around how the G20’s Common Framework for Debt Treatments beyond the DSSI will be applied in three initial test cases – Ethiopia, Zambia, and Chad.
DSSI extension: one last time
Last week, the G20 and the Paris Club (PC) creditor nations greenlit a final six-month extension of the Debt Service Suspension Initiative (DSSI) through 31 December 2021. Meanwhile, the G20 also endorsed an International Monetary Fund (IMF) proposal to increase IMF member states’ Special Drawing Rights (SDRs) by a cumulative USD 650bn. Last week’s decisions thus indicate that the G20’s view of the nature of the debt challenge triggered by the pandemic in sub-Saharan Africa (SSA) and elsewhere has not changed; it is still primarily perceived as a liquidity, rather than a solvency, problem. Whether this theory will hold may only become clear by the mid-2020s, when numerous 10-year Eurobonds issued by SSA sovereigns will mature.
Meanwhile, the Common Framework approach, which is supposed to address the solvency aspect, has been slow to get off the ground, with private sector creditors urging greater transparency – and, ideally, a seat at the table – during upcoming negotiations with the first countries to apply for debt treatment under the framework – Ethiopia, Zambia, and Chad.
The DSSI extension comes as no surprise, although the wording (“final”) appears to shut the door on any potential further extension into 2022. Following a one-year grace period, the repayment period for debt payments suspended will be five years, under NPV-neutral terms. Rather than prolonging the DSSI any further, the G20/PC’s aim seems to be to hand responsibility for liquidity problems back to the IMF, with the largest SDR replenishment in the Fund’s history agreed in principle.
SDR replenishment: details matter
However, the details of the SDR disbursement will matter greatly from an SSA perspective. Under the established distribution formula, low- and middle-income countries will benefit the least from a general increase of SDRs, which are allocated according to member states’ GDP size. Ghana’s finance minister, Ken Ofori-Atta, reckons that Africa’s share would amount to merely 5% (USD 33bn), while five times that amount would be needed to address the continent’s liquidity needs. A comprehensive implementation proposal, which should also address how rich countries may be able to transfer ‘surplus’ SDRs to lower-income members (either directly or by replenishing pandemic-related IMF facilities), is expected by June and may be executed as early as August. Crucially, SDRs are a means to improve liquidity but do not replace IMF loans and associated reform commitments needed if debt were to be restructured.
Common framework: next steps
Meanwhile, references in the G20’s and the Paris Club’s respective press communiques to “the coming first meeting of the first creditor committee” suggest that negotiations with debtor countries that requested debt treatment in January (Chad, Ethiopia) and February (Zambia) under the Common Framework have yet to commence officially. No news has emerged so far regarding the IMF’s respective Debt Sustainability Assessments (DSAs), which should form the basis for the upcoming negotiations.
While Chad’s creditors will reportedly convene for the first time this week, the timelines and process for the Common Framework process remain uncertain in Ethiopia and even more so in Zambia. In Ethiopia, official creditors have not yet met, but a preliminary DSA by the IMF and World Bank has now provided the first signals that will shape the Common Framework discussions. IMF Africa Director Abebe Aemro Selassie has said that “Ethiopia’s debt is assessed to be sustainable,” on which grounds the Fund seems to be pushing for a reprofiling rather than a deeper restructuring. In the same vein, State Minister for Finance Eyob Tekalign Tolina tried to reassure bondholders last week by signaling that the government intends to find a “market-friendly” solution for the planned debt treatment, saying that Ethiopia plans to honor its upcoming coupon payment in June and “to raise significant capital from the market in the next couple of years.”
Nevertheless, the eventual outcome will also depend on whether creditor nations pressure the government to take a tougher approach to private sector lenders and how the sequencing of official and private sector negotiations will work. After all, the Common Framework is more stringent in ‘requiring’ equal treatment of all lenders than the DSSI, which only calls for private creditor participation. And even if Ethiopia aims to achieve reprofiling rather than more onerous haircuts, credit rating agencies have signaled that they consider the Common Framework process in itself a credit event.
Overall, Ethiopia still seems a less severe case (and based on the preliminary DSA, more of a liquidity than a solvency problem) than Zambia, where the road to restructuring has followed a different order. Recall that Zambia first requested private sector restructuring and then defaulted before requesting debt treatment under the Common Framework. Although negotiations with the IMF have repeatedly stalled, both the government and the Fund are under pressure to keep talking in the context of the Common Framework process. Selassie hopes to conclude talks “in the next few weeks.” Still, timelines are tight, and the political backdrop remains anything but conducive to clinching a deal – and even perhaps finalizing a DSA – before elections on 12 August.
Both country cases highlight the uncertainty facing private sector creditors concerning the Common Framework process. A 13 April letter from the Institute of International Finance (IIF) to the G20 urges “[g]reater clarity as to the processes and governance of any official creditor committee established on individual country cases under the Common Framework” and calls for inclusion of private sector creditors “early in the process via regular briefings, consultation, and exchange of data.”