While global debts were on an upward surge pre-Covid, the pandemic further fuelled debt distress by upending debt sustainability and lengthening the list of debt defaulters. According to the World Bank, in 2020, Covid-19 prompted the largest one-year rise in debt since World War II.

Debt crisis severely limits financing for development such as education and health and these subsequently often cause political crises such as civil unrest and collapse of government and set back years of economic growth and gains as evidenced in Sri Lanka.

The pandemic caused economic shutdowns, a fall in commodity prices, capital outflow and currency fluctuation. In addition to all this, governments of low-income countries had to redirect available resources toward combating the virus.

The recent post-pandemic supply disruptions and the Russian - Ukrainian war has led to inflation and sharp rise of food and fuel prices. Being net importers of food (particularly wheat) and oil, African countries had to drain their financial coffers to pay for these commodities.

To curb the running inflation, central banks across the world hiked interest rates. The aftermath of the Covid-19 compounded by the triple catastrophe of fuel, food and interest spike has significantly increased debt-servicing costs for low-income countries, where most African countries lie.

The World Bank estimates that 60% of African states are currently in, or at high risk of debt distress. It has become obvious that Africa’s debt situation is unsustainable and by extension without debt forgiveness or relief, the debt crisis risks short and long-term economic prospects that much of the continent had depicted. Default rates are rising in Africa and the world, and demand for debt restructuring has heightened.

The international community did take some steps in mitigating the crisis. With prod from the Bretton Woods Institutions, the G20 countries constituted the Debt Service Suspension Initiative (DSSI) under which $12.9 billion in debt-payments owed by 43 out of the 73-eligible countries was suspended between May 2020 and December 2021.

This allowed countries to concentrate their financial resources in fighting the pandemic and sustaining livelihoods. Similarly, in November 2020, the G20 countries and Paris Club of creditors, established the Common Framework for Debt Treatment. The framework was designed to provide debt-relief to DSSI-eligible countries consistent with their capacity to pay and maintain essential expenditure needs.

Thus, aiding the countries in debt restructuring, dealing with insolvency and long-drawn-out liquidity problems. The framework managed to rope in new creditors such as China and India who have in recent times overtaken the Paris Club members as the biggest lenders.

Not only are these measures far from solving the developing economies debt crises but they come with hitches affixed to their rolling out. Stigma is attached to countries that request for relief under the Common Framework as this can cause a deep in their sovereign credit ratings.

In the past, developing countries like those from Africa borrowed from wealthy western countries and the International Financial Institutions (World Bank and IMF). In recent years, the list of creditors has expanded to include countries like Turkey, China and India, multilateral institutions like development banks and Export-Import Banks. Countries such as African states have issued bonds in the international markets that have been held by a wide range of investors that include individuals, investment banks, pension funds, hedge funds and insurance companies.

With the increase of creditors comes an increased coordination challenge as witnessed with the common framework. General principles such as one requiring private creditors to provide comparable relief on debt owed to them to guarantee fair burden sharing and overcoming the collective action challenge, have proved much difficult to operationalize. Private creditors own the majority of the claims (60%), and albeit the official creditors own a minority of claims, the common framework relies dominantly on their support.

Sentiments that private creditors are benefitting at their expenses, preclude official creditors from accepting more debtor friendly terms. This has slowed down decisions for the three countries, Chad, Ethiopia, and Zambia that have requested for relief. Furthermore, debtor countries are also apprehensive about having to bear the burden of private debt regardless of having undergone debt restructuring under the common framework.

Hence, the mere three countries that have expressed interest. Further delays were complications caused by specific factors that the countries (Zambia, Ethiopia, and Chad) had to undertake to restore debt sustainability.

Moreover, financial support has been scaled-up owing to IMF-supported programs such as allocations for emergency lending and $650 billion for Special Drawing Rights (SDR). $21 billion of this amount was directly allotted to low-income countries. To substantially magnify the impact of the SDRs, the G20 leaders pledged further support by on lending $100 billion of their drawing rights.

For effective debt restructuring: quick and comprehensive recognition of all debts; coordination with and among creditors and finally a road map for reforms to achieve debt sustainability are prerequisites.

Improvement in the common framework for debt treatment is therefore very critical. Recommendations that have been put to the fore have been that: clarity be made on operational elements such as steps and timelines for official creditors and incentivize participation of private creditors in the framework.

Comparability of treatment of relief by private creditors is a contentious issue that needs to be addressed. To attenuate interim cash flow issues and provide some relief, while the debt restructuring process unfolds, debt service payments should be frozen.

Last but not least, it has become a popular opinion that the eligibility for support under the framework should be extended to other heavily indebted lower-middle-income countries.

Debt levels are on the rise. Debt distress is not only affecting low-income countries or developing economies. Emerging economies are also increasingly experiencing debt vulnerability.

Debt distress threatens macro-economic stability and by dwarfing priority expenditures, it sets back short term and long-term gains in development. International support needs to be galvanised to assist member countries in need to manage risks and resolve the distress. In addition, developing countries need to make debt relief high on their political agenda.

The writer is Strategic & Technical Advisor and lead gender mainstreaming at Never Again Rwanda.