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DSSI) Has Enabled a Fast and Coordinated Release of Additional Resources to Beneficiary Countries to Bolster Their Crisis Mitigation Efforts

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DSSI) Has Enabled a Fast and Coordinated Release of Additional Resources to Beneficiary Countries to Bolster Their Crisis Mitigation Efforts DEVELOPMENT COMMITTEE (Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries) DC2020-0007 October 16, 2020 Joint IMF-WBG Staff Note: Implementation and Extension of the Debt Service Suspension Initiative Attached is the document titled “Joint IMF-WBG Staff Note: Implementation and Extension of the Debt Service Suspension Initiative” prepared by the World Bank Group and International Monetary Fund for the virtual October 16, 2020 Development Committee Meeting. IMPLEMENTATION AND EXTENSION OF THE September 28, 2020 DEBT SERVICE SUSPENSION INITIATIVE EXECUTIVE SUMMARY The COVID-19 pandemic is heavily impacting the world’s poorest countries. Economic activity in the poorest countries is expected to drop about 2.8 percent in 2020. The pandemic spread to these countries has lagged contagion in advanced economies and emerging markets, but some countries have seen a rapid surge. Health challenges may rise and containment measures have come at an economic cost. Overall, the crisis could push 100 million people into extreme poverty and raise the global poverty rate for the first time in a generation. The Debt Service Suspension Initiative (DSSI) has enabled a fast and coordinated release of additional resources to beneficiary countries to bolster their crisis mitigation efforts. It was endorsed by the G20 Finance Ministers in April 2020 and became effective on May 1, 2020. As of end-August, 43 countries are benefitting from an estimated US$5 billion in temporary debt service suspension from official bilateral creditors, accounting for more than 75 percent of eligible official bilateral debt service under the DSSI in 2020. The DSSI supported substantial COVID-19 related spending as participating countries faced major revenue shortfalls. The DSSI has also allowed to make significant progress in enhancing transparency of public debt to help borrowing countries and their creditors make more informed borrowing and investment decisions. The World Bank has published detailed external public debt data by creditor group and potential debt service suspension amounts from DSSI for borrowing countries, facilitating data sharing and coordination among creditors. An extension of up to one year of the DSSI is recommended in view of the continuing financing pressures on the beneficiary countries owing to the pandemic, with the second six months subject to confirmation in a mid-term review, in view of the need for broader participation by commercial and official bilateral creditors. More than half of all DSSI participants are assessed to be at high risk of debt distress or already in debt distress according to debt sustainability analysis as of mid-August 2020. Fiscal monitoring indicates that DSSI participating countries are undertaking substantial COVID-19 related spending even as they face major revenue shortfalls. Analysis based on WEO projections shows that liquidity support will remain essential throughout 2021. A timely decision to extend the DSSI would help countries plan and reap the full benefits of the initiative. Official Use IMPLEMENTATION AND EXTENSION OF THE DEBT SERVICE SUSPENSION INITIATIVE Some modifications of the DSSI are recommended: • First, the DSSI should be extended by up to one year, given the depth of the crisis and elevated financing needs, subject to a midpoint review, with some possible amendments to the April term sheet as discussed below. A timely decision to extend the DSSI, which enables requests for DSSI in 2021 to come even before end 2020, together with adopting common procedures for country requests and other communications that ensure the IMF-WBG are fully informed about any delays in processing DSSI requests, would allow requesting countries to fully benefit from DSSI. • Second, to maximize much needed support to eligible countries, all official bilateral creditor institutions, including national policy banks, should implement the DSSI in a transparent manner using a common published MOU that could clarify which claims should not be covered by the DSSI. • Third, to maximize the ability of DSSI beneficiaries to continue providing extraordinary pandemic support to individuals and firms through health, social and economic spending, and in the spirit of fairness, G20 countries should take all possible steps to urge participation in DSSI by their private and bilateral public sector creditors, regardless of whether they are considered national policy banks or commercial entities. • Fourth, the common MOU should provide clear debt transparency and public debt disclosure requirements which extend to the terms and conditions of public debt (including collateral as feasible) and which are based on a comprehensive statistical definition of public debt. • Fifth, flexibility in the repayment schedule would help avoid exacerbating peaks in debt service burdens. • Sixth, continued fiscal monitoring remains appropriate in 2021 to help ensure priority spending is protected to contain the longer-term economic and social costs from the pandemic and thereby support sustainability. The G20 should facilitate debt resolution for countries with unsustainable debt, including for countries outside the DSSI perimeter. The public debt outlook has deteriorated sharply in DSSI-eligible countries in the first half of 2020. It is important to detect and address insolvent situations upfront. The G20 should therefore facilitate timely and comprehensive debt resolution involving the private sector to restore debt sustainability, to avoid borrowing countries with unsustainable debt burdens undergoing multiple and protracted debt reschedulings. For countries with high risk of debt distress, or that have been assessed to have unsustainable debt, the G20 could consider conditioning DSSI access in 2021 on requesting and working toward a Fund-supported reform program aimed at reducing debt vulnerabilities and addressing debt levels where needed. Building on the approach of the DSSI, it could be useful for G20 creditors to 2 Official Use IMPLEMENTATION AND EXTENSION OF THE DEBT SERVICE SUSPENSION INITIATIVE consider the adoption of a term sheet with principles to guide sovereign debt resolution during the pandemic, as timely and comprehensive resolution would benefit debtor countries and the global economy. To facilitate this process, the Development Committee should consider asking WB and IMF to develop by the end of 2020 a joint action plan for debt reduction for IDA countries in unsustainable debt situations. Strengthening debt management and debt transparency should be top priorities. With the current uncertain outlook for global growth, debt service needs to be carefully managed even for countries where debt remains sustainable. It is important that public debt transparency be based on a comprehensive concept of public debt, and that it extends to the borrowing terms and collateral. The IMF and the World Bank will continue efforts to encourage debt and investment transparency, transparent reporting on debt stocks and flows, and full disclosure by creditors and debtors of the terms of debt restructurings and the rescheduling of any DSSI eligible debt. 3 Official Use IMPLEMENTATION AND EXTENSION OF THE DEBT SERVICE SUSPENSION INITIATIVE Approved By Prepared by the IMF (Strategy Policy and Review, Fiscal Affairs, and Jeromin Zettelmeyer Monetary and Capital Markets departments) and the World Bank’s (IMF) and Marcello Global Macro and Debt Unit in MTI. The IMF team was led by Estevão (WB) Craig Beaumont and Dalia Hakura and included Tamon Asonuma, Claudia Isern, Mike Li, Marisol, Murillo, Kei Nakatani, Joyce Saito and Dilek Sevinc, Carine Meyimdjui (all SPR) and Ally Myrvoda and Kay Chung (MCM). The section on monitoring of spending under the DSSI was led by Kenji Moriyama (IMF-FAD) and included Sofia Cerna Rubinstein, Paulomi Mehta, Keyra Primus and Julie Vaselopulos (FAD). The World Bank team was led by Doerte Doemeland and included Lilia Razlog, Diego Rivetti, Vivian Norambuena, Luca Bandiera, Mellany Pintado Vazques, Sebastian Essl, Vasileios Tsiropoulos, and Marijn Verhoeven (all MTI) and Nada Hamadeh and Evis Rucaj (DEC). The section on monitoring of spending under the DSSI was led by Chiara Bronchi and included Robert Utz, Massimo Mastruzzi (all MTI), Tracey Lane and Srinivas Gurazada (GOV). This paper has benefitted from extensive discussions with an interdepartmental working group. CONTENTS ABBREVIATIONS AND ACRONYMS ____________________________________________________________ 6 INTRODUCTION _________________________________________________________________________________ 7 DSSI IMPLEMENTATION UPDATE _____________________________________________________________ 10 MONITORING OF SPENDING UNDER THE DSSI ______________________________________________ 17 PUBLIC DEBT DISCLOSURE_____________________________________________________________________ 21 NON-CONCESSIONAL BORROWING UNDER DSSI ____________________________________________ 22 LIQUIDITY NEEDS AND DEBT SUSTAINABILITY ______________________________________________ 24 RECOMMENDATIONS __________________________________________________________________________ 33 BOXES 1. Commercial Debt Service and DSSI ___________________________________________________________ 14 2. Debt Service Profile and the Terms of Suspension ____________________________________________ 32 4 Official Use IMPLEMENTATION AND EXTENSION OF THE DEBT SERVICE SUSPENSION INITIATIVE FIGURES 1. Covid-19 Cases in DSSI Countries by Region and the
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