The Finance for Development Lab welcomes original contributions and proposals from policy-makers, researchers and other experts. This inaugural commentary takes stock of the Chad debt deal, drawing important lessons for future cases. We hope this dedicated space can help further conversations on today's most pressing issues in the field of international development finance.
What the Chad debt deal means for creditor coordination in support of low-income countries
Applying to the Common Framework should not be an automatic trigger for credit rating downgrade
They co-chaired the Creditor Committee for Chad.
Dr Ryadh M. Alkhareif
Saudi Arabia’s Deputy Finance Minister for International Affairs
President of the Paris Club and Director General of the French Treasury
44 of the 73 poorest nations are at high risk of debt distress or already in debt distress, seriously impairing their ability to protect their own people and develop their economies in a sustainable way.
On January 9th 2023, an agreement was achieved between the Republic of Chad and its official creditors under the Common Framework representing a breakthrough in the field of debt treatments for low-income countries. The lessons learned from this deal can help to support other countries requesting relief under the Common Framework.
A milestone for multilateral debt treatments
In January 2021, Chad was the first country to request a debt treatment under the “Common Framework” endorsed by the G20 and the Paris Club under the G20 Saudi Arabian presidency.
What is significant is that under the joint chairmanship of France and Saudi Arabia (which at the time, held the Presidency of the G20), China, India and Paris Club members formed a creditor committee to address Chad’s debt vulnerabilities. Last January, the committee reached an agreement and delivered, which unlocked the IMF programme. The strong engagement of all parties, which was unprecedented, was critical to achieve this result.
In this agreement, official creditors committed to preserve Chad’s debt sustainability in the event of a downturn in oil prices for example, or any event creating a financing gap. They no longer need to provide a debt treatment in the short term, as Chad’s economy is currently bolstered by high oil-related revenues.
Bringing private creditors on board
Another major achievement is the fact that the country’s largest private creditor was incentivized to reprofile its debt immediately. This was a pressing need, as this creditor benefitted from accelerated reimbursements when oil prices soared. Its effort to preserve Chad’s debt sustainability - in parallel with the official creditors’ commitment - was needed to allow the IMF assistance to continue.
Ensuring that all lenders, including private ones, make comparable efforts was a key objective of the Common Framework from the start. It was successfully achieved, thanks to regular and direct dialogue throughout the process.
A framework recognizing creditor diversity
The Paris Club has accumulated first-hand experience over its 60-year existence with coordinated debt restructuring and the scope of this group is growing: Brazil became a member in 2016 and South Africa a prospective member in 2022. More than a third of Paris Club debt treatments were also signed by non-Paris Club creditors.
In parallel, the share of private creditors in low- and middle-income countries’ external debt, as well as non-Paris Club creditors, increased by 145% and 65% respectively between 1995 and 2021.
Exploring new forms of coordination thus became unavoidable. This is precisely why the Common Framework for low-income countries was adopted.
Which lessons learned for future cases?
After Chad, three more countries requested a debt treatment under the Common Framework, the latest being Ghana last December, after Ethiopia and Zambia. Other countries needing debt relief might follow suit and come to the Common Framework for help.
For their sake, what could we do better?
- First, pace. We should reduce delays, from the debt-ridden country’s application to the moment when parties shake hands on specific debt-treatment terms. Progress is ongoing: building on Chad’s experience, it took half as long for official creditors to provide financing for Zambia after having formed an official committee.
- Second, more clarity. Debtor countries have many questions regarding the Common Framework processes. We hope that, building on the Chad experience and the ongoing cases, a consensus can be reached on a simple “user manual”.
- Third, communication. Applying to the Common Framework should not be an automatic trigger for credit rating downgrade: the need or not for debt treatment is independent of the request and the debt treatment itself is designed through a case-by-case approach. This emphasizes the need for having an open channel of communication among all stakeholders, including the credit rating agencies.
Multilateral coordination is the only way to deal with debt vulnerabilities
The Common Framework is the only efficient and credible way to tackle debt vulnerabilities for low-income countries. It could also inspire new ways of coordination for the benefit of debt-laden middle-income countries, which are not eligible to the Common Framework. The fact remains that their major creditors are part of both the G20 and the Paris Club. Coordination among them would ensures swiftness, while stalemates would increase the probability of losses for both creditors and debtors. It would also ensure that some lenders do not benefit from more favorable terms than others.
We need to ensure the swift and robust implementation of the Common Framework—first for Zambia, Ghana and Ethiopia, and then for other vulnerable nations. We need to work collectively on exploring possible ways to further step up the work under the Common Framework for the benefit of all. It must be a top priority for all official creditors in order to protect hard-won development gains and help build a brighter future.
The Finance for Development Lab welcomes original contributions and proposals from policy-makers, researchers and other experts in the field of development finance. If you wish to submit a piece, please contact firstname.lastname@example.org.