The G7 ducks the challenge of the debt crisis

The G7 restated their commitment to the Common Framework as a solution for unsustainable debt in the global South. The framework aims to provide debt treatment on a case-by-case basis for eligible countries that request it. But there are a few problems. The first is that only 73 of the world’s poorest countries are eligible to apply, leaving many countries with unsustainable debt excluded from the process. The second is that the Common Framework is an ad hoc process, meaning there is no way to guarantee debt relief if a country applies to the initiative. Outcomes are reliant on successful negotiation with creditors which can be challenging and lengthy processes. To date, progress within the Common Framework has failed to match the urgency of the situation, with only one creditor committee set up so far for one of the three countries that have applied. Neither of these issues were addressed by the G7, despite the US Treasury Secretary Janet Yellen showing her support for the expansion of the Common Framework to middle-income countries last month.

The Common Framework is also failing to include private creditors in the process. While the G7 stated that they expected private creditors “to provide at least as favourable debt treatment in line with the Common Framework”, they did not take any steps to make it happen, in the face of private creditors’ almost complete failure to engage so far. Instead, they continue to rely on exhorting them to do the right thing. The obvious way to secure private sector participation would be to introduce legislation that would force their hand, but once again this was not mentioned.

The G7 finance ministers have initiated a Private Sector Working Group to explore improving the terms of loan contracts. This might lead future loan contracts to make debt restructuring easier for poorer countries. However, it does nothing to address the debt crisis many countries are facing right now. Based on past experience, we might also expect that any changes will be voluntary, meaning that lenders can simply ignore them in drafting contracts – and global South governments will be in a weak position to insist. It also seems likely that the Working Group will once again exclude global South governments and civil society.

In keeping with a focus on the private sector, the G7 called on commercial lenders to improve transparency in their lending, specifically asking them to “adhere to the Institute of International Finance’s Voluntary Principles for Debt Transparency and to submit information on their sovereign lending to the OECD transparency data portal”. These requests are not new, and they are also not binding, meaning private creditors are free to choose whether they engage or not. We can be confident that a request to observe their own representative body’s voluntary code will not transform private creditor behaviour.  Likewise, the OECD portal in its current form is expected to contribute little to private creditor transparency as it will be voluntary, will leave out multiple forms of private loans and will only make some of the data public.

Transparency of G7 governments was also raised, with the finance ministers committing to undertake a self-assessment in line with the G20’s Operational Guidelines for Sustainable Financing and to publishing their own creditor portfolios by the end of 2021 following in the footsteps of the UK government who did this earlier this year. While this was a step forward for the UK government in its transparency, the data published is still far from being fully accessible.

G7 leaders also pledged resources to support lower- and middle-income countries develop better infrastructure. This is being seen as a challenge to China’s Belt and Road Initiative which has been lending money to poorer countries for infrastructure such as trains, roads and ports since 2013, but has also been criticised for saddling borrowing countries with too much debt. The terms of the new G7 plan are unclear, including how they intend to finance it and whether the finance will come in the form of loans.

Lastly, the G7 reiterated support for a new allocation of Special Drawing Rights (SDRs) which could see the equivalent of $650 billion worth of SDRs created and distributed this summer to countries in proportion to their IMF voting quotas. The G7 called for wealthy nations to ‘recycle’ some of their SDRs to poorer countries but made no contribution to the debate over how this should happen, leaving the door open for reallocation to come in the form of loans that could increase debt levels.