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The upcoming G20 summit under India’s chairmanship provides an opportunity to help reach consensus on areas of global concern, particularly those affecting the Global South. a quick solution to the debt problem in debt-stressed countries; reforming multilateral development banks (MDBs) to improve financing for new challenges such as climate change; and a coordinated approach to cryptocurrency regulation are some of the areas that are likely to focus on, and on which consensus will be sought.
Quick resolution of the debt crisis
Debt problems have increased manifold in low- and middle-income economies. India is putting more emphasis on debt relief under the G20 Common Framework.
The total external debt of low- and middle-income countries rose to $9 trillion in 2021 – more than double what it was a decade ago. Due to rising interest rates and slow growth, approximately 60 percent of poor countries are at high risk of debt crisis or are already in crisis.
When Kovid began to affect the countries’ financial systems in a negative way, the G20 countries launched the “Common Framework”. The common framework treats applications from countries seeking loans on a case-by-case basis. A creditors’ committee is convened to discuss the details of debt restructuring. As China has emerged as a major lender in recent years, bringing the country into line with Western Paris Club lenders, G20 official lenders and private lenders has proven a challenging task.
In particular, China has pushed to include MDBs in sovereign debt restructuring under the common framework. This position has been opposed by the international community as it would force the MDBs to make cuts, which would weaken their priority creditor status.
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Currently, only Zambia, Ghana, Chad and Ethiopia have requested debt relief under the Common Framework. However, due to the impasse in the talks, the debt settlement is delayed for all four countries.
During its G20 chairmanship, India has been successful in facilitating the formation of creditor committees for Ghana and Sri Lanka (beyond the CF), and sought an early agreement on debt treatment for Ethiopia.
Zambia’s debt settlement agreement finally took place in June 2023, with India as a lender or creditor. Additionally, the Indian G20 chairmanship has partnered with the International Monetary Fund (IMF) and the World Bank to establish the Global Sovereign Debt Roundtable (GSDR) to strengthen communication between stakeholders within and beyond the common framework.
Along with the institutional environment, India will seek to achieve consensus on the need for speedy debt resolution for countries suffering from debt crises.
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MDB patch
There is a growing realization that MDBs should increase their financing for low-income countries (LICs). Low-income economies face several challenges arising from the pandemic, geopolitical conflicts, high inflation, exchange rate fluctuations and unsustainable debt. These economies are most vulnerable to climate change and need additional financing to strengthen their countries’ resilience to climate change.
MDBs are uniquely positioned to meet these challenges because they provide low-cost, long-term financing, policy advice and knowledge sharing. While private lenders have emerged as an important source of lending, gross disbursements by MDBs have not kept pace with the growing challenges facing low- and middle-income countries. This requires fundamental reforms of how the MDB works.
Under India’s G20 chairmanship, an independent expert group was established to strengthen multilateral development banks. A key objective of the expert group was, among other things, to propose a roadmap for improving financial capacity so that MDBs can be better equipped to finance a range of challenges, from climate change to health.
Another objective of the expert group was to present a full range of estimates of the financing needs needed by and from MDBs. The expert group recommended that the MDB should have the three goals of eliminating extreme poverty, promoting shared prosperity and contributing to global public goods. The global public interests here broadly include climate change, biodiversity conservation, the global water cycle, and pandemic preparedness and response.
The expert group recommended that the MDB must significantly increase its lending to meet its triple targets. The group estimates that developing countries will need additional spending of US$3 trillion annually. Of which $1.8 trillion will be required for climate action and $1.2 trillion to meet the Sustainable Development Goals.
To increase its lending capacity, MDBs need to review their capital adequacy frameworks and work towards new ways of mobilizing funding, including access to central bank liquidity and greater participation from the private sector. These measures will help make additional funds available for MDBs to lend to developing economies.
So far, the expert group’s recommendations have not been accepted by the G20 finance ministers. Just “considered” them. If the G20 leaders can agree on a roadmap for MDB reform, it would be an important contribution of India’s G20 chairmanship to reforming the global financial architecture.
International agreed standard for crypto regulation
While many countries have created frameworks to regulate cryptocurrencies, India is pushing for a comprehensive and coordinated approach to crypto regulation. In this context, India has published its Presidency note emphasizing the need to include risks specific to emerging markets in the ongoing work of international organizations. The IMF and the Financial Stability Board have introduced policy documents outlining their approach to the regulation, monitoring and supervision of both crypto-assets and markets.
India requested a summary document on crypto regulation. The summary document that has been distributed to G20 members brings together the risks identified by each institution and their interactions. The paper highlights the increased macroeconomic risks from crypto-assets that emerging and developing economies may face, which will require further policy responses. The document also includes a roadmap for future work.
This roadmap is expected to be a central topic of discussion at the upcoming G20 summit. If the roadmap is approved by the G20, the formulation of a comprehensive global regulatory framework for crypto-assets will be one of the key contributions of India’s G20 chairmanship.
(Radhika Pandey is Associate Professor and Anandita Gupta is Research Fellow at the National Institute of Public Finance and Policy (NIPFP). Opinions expressed are personal.)
(Editing by Shiv Pandey)
(Click here to read this article in English.)
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