UPSC Prelims 2022 Q4: G20 Common Framework for Debt — Explained

With reference to the "G20 Common Framework", consider the following statements:

1. It is an initiative endorsed by the G20 together with the Paris Club.

2. It is an initiative to support Low Income Countries with unsustainable debt.

Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Answer: (c) Both 1 and 2

Statement-wise explanation

  • 1: correct — The G20 Finance Ministers and Central Bank Governors endorsed the "Common Framework for Debt Treatments beyond the DSSI" at an extraordinary virtual meeting on 13 November 2020. Their statement says the framework "is also endorsed by the Paris Club". Annex I calls it "a common framework for the G20, which is also agreed by the Paris Club". So it is a joint G20–Paris Club initiative.
  • 2: correct — The G20 adopted it because of "significant debt vulnerabilities and deteriorating outlook in many low-income countries". It covers the countries eligible for the Debt Service Suspension Initiative (DSSI): all IDA countries and UN Least Developed Countries, 73 in total. Unlike the DSSI, which only postponed payments, it allows case-by-case restructuring, including cuts in net present value, for countries whose debt is unsustainable.

How to eliminate

Statement 2 is the easier one. The words 'Common Framework for debt treatment' in the tag point to debt relief, and G20 debt relief since 2020 has been aimed at poor, debt-distressed countries. Statement 1 needs one fact: Paris Club creditors have handled sovereign debt restructuring since 1956, so any G20 debt framework would logically be built with them. No word like 'only' or 'solely' signals a trap, and both statements describe the same initiative from two sides (who backs it and whom it helps). Fact to remember: G20 + Paris Club, November 2020, for the 73 DSSI-eligible countries, and it brings in non-Paris Club creditors such as China and India.

Know more

From payment pause to restructuring

When COVID-19 hit, the G20 launched the Debt Service Suspension Initiative (DSSI) in May 2020. It only postponed payments owed to official bilateral creditors. It ran until December 2021, suspended about $12.9 billion of debt service, and 48 of the 73 eligible countries took part (World Bank). For countries whose debt could not be repaid at all, the G20 and Paris Club agreed the Common Framework in November 2020.

How the Common Framework works (Annex I, G20 statement, 13 Nov 2020)

  • The process starts only when the debtor country requests it.
  • The amount of relief needed is set by an IMF–World Bank Debt Sustainability Analysis, and the debtor must have an IMF-supported programme.
  • It covers public and publicly guaranteed debt with an original maturity of more than one year.
  • All G20 and Paris Club creditors negotiate together. This brings in creditors that are not Paris Club members, such as China, India, Saudi Arabia and Turkey.
  • Terms are recorded in a non-binding MoU. Write-offs are allowed only in "the most difficult cases".
  • Comparability of treatment: the debtor must get terms at least as favourable from its private and other official creditors.
Feature DSSI Common Framework
Launched May 2020 Nov 2020
Nature Temporary payment suspension Case-by-case restructuring
Eligibility 73 IDA/LDC countries Same 73 DSSI-eligible countries
Private creditors Encouraged to join Comparable treatment required

Cases: Chad, Ethiopia and Zambia applied first, in 2021. Ghana applied later. Countries that are not DSSI-eligible, such as Sri Lanka, have had their debt treated outside the framework.

In the news

The DSSI ended in December 2021, which left the Common Framework as the G20's main debt-relief tool. Through 2021–22 the first cases were under negotiation: Chad, Ethiopia and Zambia. Debt distress in developing countries was widely in the news before the 2022 Prelims.

NCERT Concepts to Revise

  • Sovereign debt restructuring: The Common Framework is a G20-endorsed process for sovereign debt restructuring, so this term defines what the framework delivers.
  • Comparability of treatment: Comparability of treatment is a core rule of the framework, binding debtors to seek equal relief from private creditors.
  • Official Creditor Committee: Each Common Framework case is negotiated through an Official Creditor Committee of bilateral government lenders.
  • Sovereign default: Countries apply to the framework to avoid or resolve sovereign default when their debt becomes unsustainable.
  • External debt: The framework treats external public debt owed to foreign official and private creditors.

Read more