Whither the Common Framework?
The Sovereign Debt Forum hosted a panel discussion, “Whither the Common Framework?” on September 14, 2022. This virtual event, part of a series of SDF webinars on current sovereign debt challenges, focused on the G20’s Common Framework for Debt Treatments beyond the DSSI, greeted as a breakthrough in sovereign debt architecture just two years ago. Georgetown IIEL faculty and SDF directors Sean Hagan and Anna Gelpern facilitated the discussion, featuring insights from current and former officials and private sector experts:
- Guillaume Chabert, Deputy Director, Strategy, Policy and Review Department of the International Monetary Fund
- Lee Buchheit, Visiting Professorial Fellow, Centre for Commercial Law Studies, Queen Mary University of London; Honorary Professor, University of Edinburgh Law School and SDF Founding Director
- Reza Baqir, Senior Fellow, Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School and Former Governor, State Bank of Pakistan, and
- Elena Duggar, Chair, Moody’s Macroeconomic Board, Managing Director and Chief Credit Officer (Americas), Moody’s Investors Service.
When it was launched at the height of the COVID-19 pandemic, the Common Framework promised a fundamental and long-overdue shift in the sovereign debt restructuring regime. For the first time, a coordinated multilateral debt renegotiation framework would include major new creditors—notably, China, India, and the Gulf states—involve all private and official creditors, and allow debt reduction, albeit as a last resort. The need for a broader, more inclusive framework to handle sovereign debt crises has become even more salient since, with persistent inflation, rising interest rates, food and fuel shortages, and the worsening climate crisis—but the Common Framework has yet to live up to the high expectations. Panelists considered the performance and public perceptions of the Common Framework so far, the key challenges ahead, and potential improvements in the context of sovereign debt architecture. Following a series of introductory comments, panelists addressed audience questions on debt sustainability, inter-creditor equity, and institutional design, among other topics. A full recording is available here.
Background
The Common Framework raised expectations for reform because it brought together new and established bilateral official creditors together under one standing mechanism for the first time. It promised to fill a critical gap that opened up in the international financial architecture when creditor governments that had not participated in past episodes of coordinated debt crisis resolution overtook G7 countries as the largest bilateral official creditors to some developing countries.
The Common Framework reflected broad-based recognition that some countries would need more than temporary liquidity relief provided under the G20 Debt Service Suspension Initiative (DSSI) to return to a sustainable debt trajectory. Like the DSSI, the Common Framework is a creditor initiative agreed among all G20 governments, including and extending beyond the membership of the Paris Club of official bilateral creditors. Debtor eligibility is similarly limited to qualifying low-income countries that apply for treatment. Unlike the DSSI, the Common Framework opens the door to net present value (NPV) and principal reduction, albeit only “in the most difficult cases,” provides for negotiated case-by-case relief based on multilateral debt sustainability analysis (DSA), and imports the Paris Club comparability of treatment principle, which contemplates equitable burden-sharing among official bilateral creditors and private creditors. Private creditor involvement had been voluntary under the DSSI; only one creditor suspended debt payments as part of that initiative.
Despite high expectations, only three countries have applied for the Common Framework since its inception. Chad was the first to request debt treatment in January of 2021, and the first to announce the formation of a creditor committee in April, co-chaired by France and Saudi Arabia. The IMF received financing assurances for Chad’s program in June. Although Zambia applied soon after Chad, it took until December of 2021, after its presidential elections, to reach a staff level agreement with the IMF. A creditor committee formed in June of 2022, co-chaired by China and France; it provided financing assurances to the IMF a month later. Ethiopia’s application followed Zambia’s in February of 2021; its creditor committee, also co-chaired by China and France, first met in September of 2021. Although multilateral assessments point to worsening debt distress for sixty percent of low-income countries and a quarter of emerging market economies, no other applications have followed.
Chad, Zambia, and Ethiopia have faced different challenges and taken different paths in their Common Framework negotiations; none has finalized a debt restructuring agreement. All three countries have been negotiating amid political upheavals at home and abroad, domestic economic problems in creditor countries, and the fallout from the war in Ukraine. Chad’s negotiations have stalled over a secured syndicated loan from its largest creditor, Glencore, a commodities trading firm. The loan is serviced directly from the country’s oil revenues; dealing with this loan is essential to ensure that Chad’s IMF program is financed. While Ethiopia hosted an IMF staff visit in the summer, parts of the country remain at war, which complicates both policymaking and debt negotiations. Zambia missed a foreign bond payment in November of 2020, and was last to assemble a creditor committee; however, it has recently secured approval for a program under the IMF Extended Credit Facility, which required financing assurances from official creditors.
As progress stalled, initial praise for the Common Framework gave way to public criticism, including from the IMF and World Bank Group leadership. Civil society and market participants have protested the slow pace of negotiations, lack of clarity about the debt treatment process, and confusion about core concepts, notably comparability. Critics have also pointed to the framework’s limited scope, excluding vulnerable middle-income countries, and its limited engagement with private creditors and other stakeholders, as obstacles to effectiveness.
Panel Discussion
By design, the panel discussion spanned a range of viewpoints. Consensus was neither the goal, nor the outcome. Three distinct perspectives emerged from the exchange among the panelists and with webinar participants:
First, the Common Framework remains a fundamentally sound initiative, but could benefit from targeted reforms on the margins. Outsized “architectural” expectations were bound to be disappointed, and obscure real achievements. The three country cases are uniquely challenging, and the geopolitical context has become even more challenging since November 2020. It took decades for the Paris Club to move beyond rescheduling to debt relief. It took nearly a decade to settle on a model for resolving the 1980s debt crisis. Recent progress in Zambia is meaningful, notably including China’s leadership of the creditor committee and the provision of financing assurances for the IMF program. The Common Framework process has already served as a model for debt negotiations, including for countries that are not formally eligible to apply. Nonetheless, it remains a work in progress, and could certainly benefit from more compressed timelines, more clarity around the process itself, and similarly targeted reforms.
Second, the Common Framework has yet to overcome the “institutional arthritis” it was meant to cure, reflecting distrust among debtor and creditor stakeholders, and a pace that is far too slow to meet the challenges before it. Some participants saw the “arthritis” spreading to the framework itself.
Transparency remains a distant goal. Among other consequences, limited transparency allows reports of parallel negotiations and side deals to circulate, eroding trust. Private creditors complain about being shut out—indicating, at a minimum, confusion about the nature of the Common Framework process and its relationship to other debt negotiations. Multilateral DSAs historically have drawn criticism for opaque assumptions and persistent over-optimism (including concerns expressed in internal reviews), which poses a challenge for building trust.
A country seeking debt treatment in effect volunteers for an experiment with few settled rules and no assurance of an outcome. This is a hard case to make to a finance minister dealing with debt distress. On the other hand, no policy or market benefit comes from delaying the reckoning—failure to deal with debt overhang shrinks domestic policy space, leads to downgrades and loss of market access even before default. Delay is especially problematic in the today’s fraught macroeconomic environment.
Given these problems, broader changes are necessary, including the application of measures that are beyond the Common Framework. Some participants advocated for more robust implementation of existing institutional policies, such as IMF policies on program financing assurances and, related, on lending into private and official arrears, can give the IMF and the debtor greater leverage in the process, help force information sharing and prompt debtors and creditors to come to the negotiating table.
Third, the terms of private sector participation in debt crisis resolution remain unsettled and actively contested. While criticism of the Common Framework has focused on official creditor coordination, distrust and coordination problems persist between official and private creditors, and among private creditors. The rise of collateralized borrowing—partly a function of weak negative pledge commitments and enforcement—has tied up assets and scarce foreign currency revenues. As noted earlier, Chad is a prime example in the Common Framework.
More broadly, confusion surrounding inter-creditor equity norms, particularly the standards for assessing and enforcing comparability among creditors with different motives and constraints, creates powerful incentives to free-ride. If creditors can gain repayment advantage from arbitraging private, official, and other formal labels, they will do so—further eroding trust. Forward-looking contract reforms can help improve the creditor coordination process, but they cannot overcome substantive disagreement about loss distribution.
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Going forward, the risk of short and shallow debt restructurings looms large. A restructuring perceived by the market as failing to solve the debt overhang problem could result in a lower credit rating and weigh on the government’s ability to borrow in the international markets. This problem preceded the Common Framework and is not unique to it, but nonetheless threatens its credibility. Despite recent promising developments, the big question animating the panel—Whither the Common Framework?—will take more time, and much more work to answer.
Anna Gelpern, Sean Hagan, Sarah Ludwick, Mwangala Simataa
