In April 2020, as the impact of the COVID-19 crisis was roiling over advanced and emerging economies, the Debt Service Suspension Initiative (DSSI) stood as a major policy innovation: the G20 aimed at providing fiscal breathing space to 73 developing countries. Yet, this mechanism was often criticised, for falling short of its participation objectives, and, on the other hand, for being insufficiently ambitious in light of the fiscal challenges.
As the consequences of the Russian invasion of Ukraine are materialising, the question is coming back: is there a good emergency mechanism to cushion a new financial shock?
Looking back at this experience, this post evidences that (i) the DSSI effectively benefitted the most vulnerable countries, yet with a limited impact owing to (ii) three key impediments to application (market sentiment, Chinese influence, IMF program requirement) and (iii) an uneven creditors' participation. Going forward, impactful emergency measures on the debt front should therefore be more comprehensive on the creditor side.
A reasonable take-up: DSSI beneficiaries were more affected and more indebted than their eligible peers.
The DSSI provided a much-needed fiscal breathing space to 48 developing countries, including large economies such as Pakistan or Kenya. They altogether rescheduled a total of USD 12.9bn[1] of debt service that came due between May 2020 and December 2021, representing c. 4% of their fiscal revenues over 2020 and 2021[2]. This allowed the beneficiary countries to allocate more funds to mitigate the health, social and economic impact of the COVID shock.
Figure 1. Over half of the 73 eligible countries participated in the DSSI
DSSI-participants evidenced on average a weaker economic resilience and public debt situation than their non-participating peers. Indeed, economic activity contracted by -0.5% on average across participants over 2019-21, as compared to an expansion of +1.3% for non-participants. Besides, participants entered the crisis with a higher level of public indebtedness, averaging 55% of GDP at end-2019 against less than 40% of GDP for the non-beneficiaries. The primary fiscal balance was relatively similar in the two groups, at c. -0.7% on average.
Figure 2. Participating countries were more indebted on average.
Three key impediments: market reactions (at the onset), Chinese influence, and IMF program requirement.
Eurobond issuers were initially concerned that a DSSI application would deteriorate their market perception. There was indeed a fear that requesting a debt service suspension would be interpreted as a sign of distress by market players, which could trigger credit rating downgrades - even in the absence of default of payment. This is typically why some sovereigns have initially paced out their application to the DSSI, and some others – such as Cote d’Ivoire – sought to reassure private creditors by publicly stating that commercial debt would be excluded from the debt suspension perimeter.
These concerns eventually dissipated and Eurobond issuers crowded in. A 18 of the 27 eligible countries with outstanding bonded debt finally applied to the DSSI. This proportion is constant when focusing on the pool of large external bond issuers (defined as having over USD 2bn of sovereign bonds outstanding at end-2019): out of the 9 DSSI-eligible large issuers, 6 did apply to DSSI (Angola, Cote d’Ivoire, Kenya, Pakistan, Senegal, Zambia) and only 3 refrained (Ghana, Mongolia, Nigeria). Ex post, several studies[2][3] have further shown that - against initial expectations - the participation to the DSSI did not raise sovereign borrowing costs, but was associated with a significant reduction in sovereign bond spreads.
Figure 3. International bond issuers did not refrain from participating to the DSSI.
Chinese influence may also have discouraged some countries from seeking a debt suspension under the DSSI. Eligible countries were indeed faced with a policy trade-off between, on the one hand, seeking a short term debt suspension and, on the other hand, securing new financing to cover existing debt service - and possibly funding new projects. Of course, the latter option was not financially sustainable in the long term. However, it was politically attractive, as it could strengthen diplomatic ties with a wealthy creditor - China - and, domestically, support ambitious economic development plans. That is why some DSSI eligible sovereigns have been wary of requesting a debt suspension from China, as hinted by the Chairman of the Paris Club[4].
Finally, the condition to request an IMF program stood as another deterrent. DSSI application were conditioned on the request of an IMF program, even without conditionalities, so that the Fund could monitor the impact of the debt suspension. As IMF programs are often negatively perceived domestically, such a pre-requisite could also have been perceived as a political cost for some governments[5].
A subdued creditors' participation: official lenders had different approaches, while private creditors did not join.
The Paris Club members actively supported the DSSI initiative. They fully executed the requests received from 42 countries for a total of USD 4.6bn of debt service[6]. In this regard, the Paris Club secretariat actively assisted the beneficiaries as well as the Paris Club members (as creditors) in the execution of the debt suspension agreements.
Non-Paris Club creditors – including China – also participated in the initiative, yet in a less transparent and systematic approach. They altogether provided c. USD 8.3bn of debt service suspension, which is almost twice as high as the Paris Club contribution. China stood here as the largest single contributor, with reportedly c. USD 5.7bn of debt service suspended under the DSSI according to a recent Chinese study[7] – including c. USD 1.4bn of debt suspension from CIDCA and China Exim, and USD 0.7bn from the Development Bank[8]. However, these efforts were reportedly conceded through bilateral negotiations, at the expense of process efficiency and transparency.
Last, but not least, private creditors did not participate at all in the DSSI effort[9] and indirectly benefitted from official sectors' support. It is true that private creditors had no strong incentives to join, as long as they did not foresee an immediate risk of default: ironically, this risk was even cushioned under the DSSI, as efforts were conceded by official creditors. Besides, governments often refrained from seeking private creditors’ contribution, being wary of adverse creditworthiness implications of such a move. As a result, external private creditors were served c. USD 18bn of debt payments over 2020-21 from the DSSI beneficiaries, of which USD 2.5bn of bond-related payments.
Bottom-line: the DSSI was a useful financial safety net, effectively deployed in a very few weeks into the crisis. Its impact could have however been magnified with a more comprehensive creditors' participation, outside of the Paris club. In the next instalment of this series of blogpost, we will focus on the deferred amount which are now coming due.
[1] IMF, April 2022, WEO Database
[2] IMF, August 2021, Has the DSSI Helped Lower Sovereign Spreads of Participating SSA Countries?
[3] Lang, Mihalyi, and Presbitero, 2021, Borrowing costs after debt relief
[4] Financial Times, December 2021, Chinese loans deter poor nations from seeking debt relief, says Paris Club chair
[5] Eurodad, October 2020, The G20 Debt Service Suspension Initiative Draining out the Titanic with a bucket?
[6] Paris Club, February 2022, The Paris Club has fully and successfully implemented the DSSI and its extension
[7] Nedopil, Yue, March 2022, China’s Role in Public External Debt in DSSI Countries and the Belt and Road Initiative (BRI) in 2020
[8] China Ministry of Finance, November 2021, Minister of Finance Liu Kun was interviewed by reporters on the G20 debt agenda
[9] One exception: a national development bank was technically classified as a private creditor - see IMF, September 2021, Joint IMF-WBG staff note: DSSI fiscal monitoring update