(2) Efforts on Debt Issues
Support through public financing can greatly contribute to achieving economic growth when developing countries can effectively use the funds they receive through loans. However, if repayments become difficult due to circumstances unforeseen when taking out the loan and countries become overburdened with excessive debt, it could potentially inhibit sustainable growth for the developing countries. Such issues must essentially be resolved by the indebted countries themselves by putting forward reforms and other efforts. However, should their excessive debt stand in the way of their development path, the international community must respond (see Response to Debt Issues of Developing Countries regarding the response on debt issues for developing countries impacted by the spread of COVID-19).
At the G8 Gleneagles Summit (the United Kingdom) held in 2005, the G8 countries agreed on a proposal called the Multilateral Debt Relief Initiative (MDRI) to reduce 100% of the debts that the Heavily Indebted Poor Countries (HIPCs)* owed to the IMF, the International Development Association (IDA), and the African Development Fund (AfDF). As for the debt issue faced by the poorest countries, 39 countries have become eligible for the Enhanced HIPC Initiative Note 5, which further expands existing international debt relief initiatives for HIPCs and enables complete debt reduction among others. 36 of these countries have received comprehensive debt reduction as a result of having attained a certain level of economic and social reforms as of the end of FY2019.
Furthermore, some low-income and middle-income countries, other than HIPCs, may owe heavy debts, and appropriate measures must be taken to make sure such debts do not prevent their stable medium to long-term development. In 2003, the Paris Club Note 6 adopted a new Paris Club approach to debt restructuring (the Evian Approach), which focuses more on the debt sustainability of recipient countries, especially low-income and middle-income indebted countries other than HIPCs, and takes comprehensive debt relief measures for a country that faces difficulty concerning their repayment capacity due to their large debt volume, as long as the country meets certain criteria.
However, in recent years, there are some cases among low-income countries in which they accumulate official debt again, despite having received debt relief through the Enhanced HIPC Initiative and MDRI. Thus, there are concerns in regards to their debt sustainability. The reasons behind this situation are pointed out to be the increase in loans from emerging donor countries and private creditors, including the provision of untraditional and non-concessional loans such as secured loans, as well as the fact that indebted countries lack the capabilities to gather and disclose their own debt data and appropriately manage their debt. Given this situation, discussions are being conducted in the G20 toward ensuring enhanced debt transparency and debt sustainability in low-income countries. At the 2019 G20 under Japan’s Presidency especially, cooperation from both indebted countries and government and private creditors were called upon, and progress in specific initiatives was confirmed at the Finance Ministers and Central Bank Governors’ Meeting held in Fukuoka and the G20 Osaka Summit.
In April 2020, in order to respond to the impact of the spread of COVID-19 on low-income countries, the G20 and Paris Club agreed on the “Debt Service Suspension Initiative (DSSI),” which temporarily allowed these countries to suspend official debt service payments until the end of 2020. In October 2020, a six-month extension to the DSSI suspension period was agreed upon from the perspective that countermeasures against COVID-19’s impact were still necessary. Furthermore, in November 2020, the G20 and Paris Club agreed on the “Common Framework for Debt Treatments beyond the DSSI (Common Framework)” for debt relief for DSSI-eligible countries. In addition to steadily implementing the suspension of debt service based on the DSSI, the G20 and Paris Club will also individually provide debt treatments as needed based on the requests of DSSI-eligible countries under the Common Framework.
One of the factors that can significantly affect debt sustainability of countries, including low-income countries, is infrastructure investment. Infrastructure projects such as ports and roads come at a large cost, and debt repayments can become a significant burden for the borrowing country. When financing infrastructure projects, it is necessary for both the borrowers and lenders to fully consider debt sustainability, and loans without consideration of debt sustainability are criticized as a “debt trap” by the international community. The “G20 Principles for Quality Infrastructure Investment,” endorsed by the leaders of each country at the G20 Osaka Summit in 2019, incorporated the importance of considering macro (country)-level debt sustainability as well as project-level financial sustainability. They also include the principles of openness, transparency, and economic efficiency in view of life-cycle cost. Each G20 country is required to implement these principles as an international standard in their infrastructure investments and to work to ensure that these principles are implemented in the countries receiving loans.
● Japan’s Efforts
In providing ODA loans, Japan makes its decisions based on the careful consideration of the cooperation structure, debt repayment ability, operational capacity, credit protection measures, etc. of the recipient countries. In most cases, the recipient countries do repay their loans, but there are also exceptional cases in which they face serious difficulties in their repayment due to events that could not be foreseen when they received ODA loans. In such cases, based on international agreements such as the aforementioned Enhanced HIPC Initiative and Paris Club agreements, Japan takes debt relief measures such as debt rescheduling Note 7, cancellation, and reduction only when they are absolutely necessary. As of the end of 2019, Japan has cancelled ODA debts worth a total of approximately ¥1.129 trillion toward 33 countries since FY2003. However, in 2020, as well as in 2019, no debt cancellation measures have been taken.
From the perspective of ensuring debt sustainability, an important element of the G20 principles, Japan is engaged in improving the capabilities related to public debt and risk management among management personnel at the finance ministries of developing countries through contributions to international organizations, as well as through trainings and the dispatch of experts by JICA. For example, Japan has dispatched debt management and macroeconomic policy advisors to Ghana, Zambia, and other countries and made new contributions to the trust funds of the IMF and World Bank, supporting the capacity building of indebted countries.
- Note 5: An initiative agreed at the Cologne Summit (Germany) in 1999.
- Note 6: The Paris Club is an informal group of creditor countries to discuss the rescheduling of public debts. The name of the Paris Club derives from the fact that France has chaired meetings and invited creditor countries to Paris upon requests from indebted countries.
- Note 7: Debt rescheduling is one form of debt relief, wherein payment is postponed for a certain period of time in order to reduce the burden of debt payment on the indebted country.