In recent years, the world has witnessed extensive discussions surrounding the debt sustainability of high-risk countries. However, the burden of public debt is not confined to a select few; it’s a growing concern across the globe. Advanced countries are grappling with public debt levels not seen since World War II, while emerging markets are mirroring the debt crisis of the 1980s. Alarmingly, forty percent of low-income countries, 24 out of 60, are at high risk of debt distress, which can lead to significant disruptions in economic activity and employment.

Amidst these pressing challenges, India has been actively working to build consensus at the G20 summit. The aim is to create a tangible framework that can aid debt-ridden low-income economies globally. India recognises that addressing these debt vulnerabilities is crucial, especially for nations in the Global South.

There are two critical aspects to consider:

1. The importance of financial discipline

* Countries facing or recovering from debt crises are placing greater emphasis on financial discipline. They’ve learned the hard way that imprudent fiscal management can lead to dire consequences.

* Other nations, observing the struggles of countries in debt crisis, are taking a proactive stance to avoid making similar missteps.

2. India’s leadership in debt restructuring

* India has consistently highlighted the need for a robust framework on debt restructuring to assist countries grappling with mounting debt problems.

* Over 70 low-income countries are currently burdened by a collective debt of USD 326 billion, illustrating the urgency of addressing this issue.

To accelerate global debt restructuring efforts, the Global Sovereign Debt Roundtable (GSDR) was launched earlier this year. This joint initiative of the International Monetary Fund (IMF), World Bank, and the G20 Presidency aims to enhance communication among key stakeholders and facilitate effective debt treatment. The GSDR focuses on improving debt restructuring processes, emphasising process and standards without delving into specific country cases. It has committed to enhancing information sharing during the early stages of debt restructuring, addressing concerns over delays in securing debt treatment for defaulting countries.

The Global Financial Safety Net (GFSN): A triple objective

* The GFSN seeks to provide precautionary insurance against crises, supply liquidity during crises, and incentivise sound macroeconomic policies.

* It operates across four layers:

1. Countries can self-insure by utilising foreign reserves or fiscal space at the national level.

2. Bilateral swap lines exist between countries to provide protection.

3. Regional Financing Arrangements offer regional-level protection.

4. The IMF serves as the global financial backstop.

In response to these challenges, borrowers and lenders can take several policy priorities to make a difference:

1. Ensuring financial sustainability

* Borrowers must meticulously plan fiscal spending and deficit, maintaining public debt on a sustainable path.

* Consideration of potential returns on projects and the ability to repay through increased tax revenues before taking on new debt is crucial.

* Lenders must assess the impact of new loans on the borrower’s debt position before extending fresh credit, safeguarding both parties from future financial difficulties.

2. Comprehensive and transparent reporting

* It is imperative that all countries adhere to comprehensive and transparent reporting of public debts.

* Institutions responsible for recording, monitoring, and reporting debt need strengthening in many developing countries.

* Creditors should allow more extensive disclosure of borrowing terms and conditions.

* Greater transparency regarding public debt liabilities can prevent the accumulation of large “hidden” liabilities that may eventually turn into explicit government debt.

3. Promoting official creditor collaboration

* Collaboration among official creditors is vital, particularly in debt restructuring cases involving non-traditional lenders.

* Given the significant debt levels held by new creditors, effective coordination among official creditors becomes critical for resolving debt crises.

In conclusion, as global debt challenges continue to escalate, India’s active involvement in initiatives like the GSDR and the IMF’s efforts to strengthen the Global Financial Safety Net reflect a commitment to finding sustainable solutions. By promoting financial discipline, fostering greater transparency, and enhancing collaboration among key stakeholders, the international community can collectively address the mounting debt burdens faced by countries worldwide.

This article is authored by Pramod Kathuria, founder and CEO, Easiloan.

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