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Editorial Articles

Issue no 51, 18-24 March 2023

G20 FM Meet: Roadmap for Debt Resolution Scripted

Shishir Sinha

Following the first G20 Finance Ministers and Central Bank Governors (FMCBG) Meeting held in Bengaluru under the auspices of India's presidency, Finance Minister Smt. Nirmala Sitharaman presented the Chair's Summary during a press conference. Despite offering a concise response to the first inquiry posed by the media, the Minister gave a comprehensive picture of the matter at hand. Specifically, she shared her thoughts on the statement in the Chair's summary which referenced agreement on the language of debt resolution for vulnerable economies. The inquiry came on the heels of the International Monetary Fund (IMF) Chief Kristalina Georgieva's acknowledgment earlier that day of disagreements pertaining to the restructuring of debt for distressed economies. On a question on debt resolution for vulnerable economies would function, the Minister's response was succinct yet meaningful. She stated that "This morning's statement is before the consensus has arrived, so there are no divergences now. On the debt issue we have come to the same page,". If this was a big achievement of the first G20 FMCBF meeting, another big development was that India succeeded in gaining international support for its apprehensions pertaining to cryptoassets, which resulted in the G20 agreeing to adopt a roadmap for preparing a global crypto-assets regulation framework. The meeting also managed to take forward issues such as reforming Multilateral Development Banks (MDBs), implementing climate change framework; sustainable finance for achieving sustainable, resilient, inclusive and equitable economic growth; strengthening the global health architecture for pandemic prevention, preparedness and response; preparing globally fair, sustainable and modern international tax system; pressing need for the international community to step up its efforts to effectively combat money laundering, terrorism financing, and proliferation financing to enhance the integrity and resilience of the international financial system, beside many other matters of mutual concern. However, the only disappointing factor was that the meeting could not adopt a Communique as Russia and China did not agree on paragraphs relating to condemning war and such a declaration cannot be made with footnote. Rather, the meeting ended with the issuance of G20 Chair's summary and Outcome Document which gave an insight on what was agreed upon and the roadmap for future.

Debt Resolution: The seriousness of the debt problem can be understood from a paper titled "Avoiding 'Too Little Too Late' on International Debt Relief" (October, 2022) published by the United Nations Development Programme (UNDP) under lining the need for Common Framework for Debt Treatment where it has been said that 54 countries that are home to more than half of the poorest people on the planet need urgent debt relief. The agency warned in the paper, "Without action, poverty will rise and desperately needed investments in climate adaptation and mitigation simply will not happen”. Various estimates suggest as much as $400 billion of international market debt could be at the heart of the problems. This is more critical for India as two of its neighbours - Sri Lanka and Pakistan are in the list of economies that have either defaulted on their international debt or are on the verge of doing so

Sri Lanka defaulted on its international debt for the first time in its modern history last year after a combination of factors including economic mismanagement and pandemic led to a full-blown economic crisis along with social unrest and forced the then President to flee. The new government reached a provisional agreement with the IMF in September for a near US$3 billion support programme, but complex negotiations with the likes of China, India and Japan that have lent Sri Lanka huge sums mean a debt resolution pact is still to be finalised. Pakistan, with a series of political disruptions combined with natural calamity faced a situation when paying for basic goods became extremely difficult. Now, there is a serious risk of Pakistan joining the list of defaulters. It desperately needs the IMF to release an overdue tranche of $1.1 billion from an existing bailout programme. This nation is also looking at China to fulfill its promise of a $700 million loan. But with its debt-toGDP ratio already in the 70 per cent danger zone and between 40 and 50 per cent of the government revenues earmarked for interest payments alone this year, it will soon need more. These two are just examples. The list also has nations such as Ghana, Egypt, Tunisia, El Salvador, Zambia and of course Ukraine, beside others. As economies are interlinked, economic disruptions in almost one fourth of all the nations have the potential to disrupt the entire global economy. Sensing this, Prime Minister Shri Narendra Modi set the tone of the G20 FMCBG meeting by flagging the threat of unsustainable debt levels to the financial viability of many countries even as he urged G20 membernations to focus on the most vulnerable citizens and strengthen multilateral development banks to meet global challenges. Initially, there were some indications that the meeting might not give a concrete solution. Even on the morning of last day of the meeting, the Managing Director of the IMF talked about differences. However, as the day progressed, a statement from the IMF, itself, gave indication about some positive development. In a statement issued after the meeting, IMF Managing Director Kristalina Georgieva strongly endorsed efforts to strengthen the debt architecture and improve the speed and effectiveness of debt resolution, keeping in mind rising debt vulnerabilities in many countries. Sovereign debt vulnerabilities, which were already in an elevated state before the pandemic, have been exacerbated by the shocks stemming from COVID-19 and Russia’s Military operation in Ukraine. This is particularly the case for developing and low-income countries with very limited policy space and huge development needs. "We must enhance dialogue and collaboration on debt issues. This is the goal of the new Global Sovereign Debt Roundtable (GSDR): to bring together creditors-official, old and new, and private-and debtor countries to discuss key issues that can facilitate the debt resolution process. We launched the GSDR under the auspices of India's G20 presidency last week at the deputies' level, followed by an engaged and constructive principal meeting earlier today (February 25). We will further build on this discussion during the World BankIMF Spring Meetings in April," she said. Finally, in the evening efforts yielded results when the Chair's summary and outcome statement recognised the urgency to address debt vulnerabilities in low and middle-income countries. Strengthening multilateral coordination by official bilateral and private creditors is needed to address the deteriorating debt situation and facilitate coordinated debt treatment for debt-distressed countries. It reiterated G20's stand on all the commitments made in the ''Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)'', including those in second and final paragraphs, as agreed on November 13, 2020 and endorsed the need to step up the implementation of the Common Framework in a pre-dictable, timely, orderly and coordinated manner. "We welcome the conclusion of debt treatment for Chad and call for a swift conclusion of the work on debt treatment for Zambia and Ethiopia. We also look forward to the rapid formation of the official creditor committee for Ghana to work on the requested debt treatment. Further, we look forward to a swift resolution to Sri Lanka's debt situation," the statement read. Further the meeting tasked the International Financial Architecture Working Group to develop a G20 Note on the Global Debt Landscape in a fair and comprehensive manner

Crypto Assets: Contrary to the debt issue, there was unanimous voice on the regulation of crypto assets from the beginning. Most importantly, India managed to get support from all on its stand. India has always maintained that crypto assets are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any legislation on the subject can be effective only with significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards. India's Central Bank, Reserve Bank of India, has repeatedly flagged the downsides of crypto currencies. In an effort to broaden the dialogue around crypto assets, a seminar titled "Policy Perspectives: Debating the Road to Policy Consensus on Crypto Assets" was organised on the sidelines of the FMCBG meeting. During this seminar, India proposed a joint technical paper by the International Monetary Fund (IMF) and the Financial Stability Board (FSB) to help in formulating a regulatory architecture for crypto assets. It may be noted that despite the rapid evolution of the crypto universe, currently, there is no comprehensive global policy framework for crypto assets. Taking note of deliberations held in this seminar, the Chair's Summary and Outcome Document Complimented ongoing work by the FSB and international standard setters to ensure that the crypto-assets ecosystem, including so-called stablecoins, is closely monitored and subject to robust regulation, supervision, and oversight to mitigate potential risks to financial stability. "We also welcome the IMF Discussion Paper on the macro-financial implications of Crypto Assets. We look forward to the IMF-FSB Synthesis Paper which will support a coordinated and comprehensive policy approach to cryptoassets, by considering macroeconomic and regulatory perspectives, including the full range of risks posed by crypto assets," the statement added. Later, giving a sense of what transpired during the main meeting the Finance Minister Smt. Sitharaman highlighted opinions expressed by various participants: The Canadian Central Bank Governor cautioned that crypto assets should not be given a regulator seal of approval without a well-thought-out approach to regulation. The World Bank stated that the views of all developing countries should also be included in all policy frameworks. Similarly, European Central Bank (ECB) thanked India for putting crypto on the priority map. Taking it forward, RBI Governor Shri Shaktikanta Das, who was co-chair of FMCBG along with the Finance Minister, said that multiple options are under consideration. But it's too early to speak on what will be the eventual architecture, he said. But yes, "there were views that it should be regulated with a view to control and check its proliferation, to control its risks. There were opinions expressed saying that the option of a ban or prohibition should also be considered. But this is a work in progress," the Governor added. Further, Shri Das reminded the delegates that every country is sovereign. "The countries will take their decisions. But once something is agreed in the G20, naturally it would be expected that countries would, by and large, follow whatever is the agreed position," he said. He also highlighted that there is now wide recognition and acceptance of the fact that crypto-currencies, or crypto assets, or crypto products, or by whatever name one calls it, "they involve several major risks to financial stability, to monetary systems, to cyber security issues, and to overall financial stability and they need to be looked at." IMF has already come out with a discussion paper. After this and discussion at first FMCBG, a schedule has been drawn for taking the discussion on regulation for framework forward. First, side events are proposed on crypto assets at the IMF-World Bank Spring Meetings in April in Washington. Then, FSB will finalise its high-level recommendations on the regulation, supervision and oversight of global stablecoins crypto-asset markets and activities by July this year and that will be discussed during the next FMCBG meeting in Gandhi Nagar. BIS (Bank for International Settlement) will submit a report on analytical and conceptual issues and possible risk mitigation strategies related to crypto assets. Finally, the IMF and the FSB will jointly submit a synthesis paper integrating the macroeconomic and regulatory perspectives of crypto assets in September 2023 and that will be discussed during the leadership summit under India's presidency.

No Communique: US, France, Spain, Japan and G7 nations resisted any change in the language of the Bali Declaration related to the Russia-Ukraine crisis. The said declaration issued on November 16, 2022, noted that the war in Ukraine further adversely impacted the global economy. Leaders reiterated their country’s positions as expressed in other fora, including the UN Security Council and the UN General Assembly, where a resolution deplored in the strongest terms, the aggression by the Russian Federation against Ukraine and demanded its complete and unconditional withdrawal from Ukraine. "Most members strongly condemned the war in Ukraine and stressed it is causing immense human suffering and exacerbating existing fragilities in the global economy - constraining growth, increasing inflation, disrupting supply chains, heightening energy and food insecurity, and elevating financial stability risks. There were other views and different assessments of the situation and sanctions. Recognising that the G20 is not the forum to resolve security issues, we acknowledge that security issues can have significant consequences for the global economy," the declaration had said. The Footnote, as part of Chair's summary categorically mentioned that Paragraphs 3 and 4 of the document (read Chair's summary. Paragraphs 3-4 related with war), as taken from the G20 Bali Leaders' Declaration, were agreed to by all member countries except Russia and China. Because of this, no communique could be issued at the end of the first FMCBG.

(Shishir Sinha is a Senior Delhi-based journalist covering Business and Economy. He can be contacted at hblshishir@gmail.com)

 Views expressed are personal.