World Bank data shows that about 40 per cent of governments eligible for the G20 Debt Service Suspension Initiative (DSSI) had not participated.The Group of 20 nations (G20), representing the world’s major economies, announced a debt relief scheme for the poorest countries in mid-April 2020, as the Covid-19 pandemic was spreading worldwide. This scheme – the DSSI – is offered to all borrowers from the International Development Association arm of the World Bank and all the least-developed countries, as defined by the United Nations. As of early October, the World Bank listed 73 countries that qualified for the initiative; 29 of them did not participate.
The decision to not apply often reflects cost-benefit considerations of governments that also borrow externally from commercial lenders. In some cases, sovereigns with access to commercial debt allegedly fear losing market access if they take up the offer to delay debt payments. Sovereigns could be seen as defaulting if debt suspension extends to commercial lenders.
Furthermore, the DSSI scheme is temporary – set up to help low-income economies cope with the fallout of Covid-19. The initiative does not alleviate the structurally high debt burdens many sovereigns are facing; savings have been viewed to be small, offering only temporary liquidity relief.
Another key aspect is that DSSI is not offering debt relief, only postponement.
“The suspended payments have to be repaid in the future,” says S&P Global Ratings credit analyst Kim Eng Tan. “The scheme is meant to be neutral to lenders in terms of net present value, and borrowers were initially expected to repay the suspended amounts within four years from the end of the period of the DSSI.”
This repayment period was extended to six years in October. The initiative, therefore, helps to address liquidity problems faced by sovereigns but does not reduce their overall debt burden.
The G20 and debtor countries have, so far, had little success in getting commercial lenders to participate in the debt suspension.
“Future efforts to provide greater debt reliefs for low-income countries can increase participation rates if they are able to address the issues that the non-participating sovereigns face. This could improve the efficacies of these schemes if they are rolled out,” Tan says.