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BRIEF June 10, 2020

Debt Service Suspension Initiative: Q&As

The following are questions and answers related to the Debt Service Suspension Initiative.

 

How do official bilateral creditors implement the initiative?

The Paris Club has articulated a Memorandum of Understanding (MoU) explaining in detail how the broad parameters of the DSSI are to be translated into revised lending agreements. In addition, we understand that some non-Paris club creditors also intend to use this MoU. Other non-Paris Club creditor countries have not yet been clear about their detailed parameters. As a consequence, some official lending institutions appear to be asking for conditions not currently being required by Paris Club creditors. It is encouraged that non-Paris Club G-20 creditors either adapt the Paris Club MoU or articulate clearly a common MoU to avoid demands by different creditors that are not in line with the G-20 term sheet and communiqué.

What are the uncertainties observed by the countries eligible for participating in the DSSI?

In some countries, the authorities see modest benefits of DSSI owing to the composition of their debt (they have no or limited exposure to official bilateral creditors). Some countries have indicated concerns that application for DSSI participation might send a negative signal about their creditworthiness.

In addition, some official lending institutions from G-20 creditor countries appear to be taking the view that the DSSI does not apply to them, or that it applies only with respect to a subset of DSSI-eligible borrowers, such as the 47 UN LDCs. Please find a list of countries eligible for the DSSI here.

Several countries have expressed concerns whether non-payment to official creditors prior to the signing of bilateral legal agreements could inadvertently place them in default. The G20/Paris Club has clarifed that this is not the case. Others have expressed concerns about default clauses, particularly in a limited number of commercial bank loan agreements, which they will need to address by consulting with their legal advisors and creditors.

Are countries participating in the DSSI subject to a non-concessional borrowing ceiling?

The DSSI does not impose any non-concessional borrowing ceilings on countries other than those required under the IMF’s Debt Limits Policy and the World Bank’s Sustainable Development Finance Policy (SDFP). Countries that are not required to have non-concessional borrowing ceilings under an IMF program or the SDFP will not need to implement ceilings under the DSSI.

How does DSSI participation affect credit-rating agencies’ assessments of the creditworthiness of participating countries?

Uncertainties around how private participation in DSSI will be handled have triggered concerns in some countries about a deterioration in their credit ratings beyond what would be expected during a severe global recession. Credit rating agencies have made it clear that suspending debt service owed to official bilateral creditors would, by itself, be unlikely to have rating implications; indeed, such relief would increase the financing available to the government for essential health and social spending due to the coronavirus outbreak.

Nonetheless, as of May 28 2020, one agency, Moody’s, had placed two participating countries (Ethiopia and Pakistan) on a negative watch citing, among other factors, the G20's call for private sector creditors to participate in the DSSI on comparable terms.1 Furthermore, all three major credit agencies have made it clear that requesting private sector participation on G20-comparable terms could lead to a downgrade (although this might be temporary).

Do private creditors participate in DSSI at the moment?

The Institute of International Finance has engaged in ongoing discussions with private creditors and has agreed on terms of reference for voluntary private sector participation. These could help increase the potential for broad voluntary participation by private creditors and encourage countries to request private sector participation, in part by providing clarity to credit rating agencies on the call for participation by private creditors in the DSSI.

Why is debt transparency so important to the DSSI?

Comprehensive, accurate, and timely public debt data are critical for borrowers and creditors to take informed decisions on fiscal and debt policies—and for countries to manage financial risks. Yet important gaps in data coverage and quality remain. In about 80 percent of Debt Sustainability Analyses in IDA countries, public debt data cover central government and loan guarantees. Coverage needs to be expanded to include other forms of public debt, especially those arising from state-owned enterprises and other contingent liabilities—and data quality should be improved. Analysis suggests that potential losses from contingent liabilities in many low-income countries could be steep—as much as 12 percent of GDP.

Strong cooperation of all creditors is needed to support comprehensive disclosure of public debt as part of the DSSI.

Participating countries commit to disclose all public sector financial commitments (debt), respecting commercially sensitive information. This would involve full disclosure by creditor and lending institution of information on public and publicly ­guaranteed debt public debt and debt service payments suspended under the DSSI. ­

How will debt service savings under DSSI be monitored?

A key DSSI objective is to provide financial resources to help eligible countries battle the COVID-19 pandemic. Accordingly, a requirement to participate in the initiative is that the beneficiary country commits to use these resources to safeguard social, health or economic spending in response to the crisis. The country also commits to work closely with the IMF and the World Bank, which are expected to put in place a monitoring system.

IMF and World Bank staff are coordinating the development of a suitable and feasible monitoring system. The framework will be as simple as possible and will draw on existing public financial management reporting systems and revenue and spending aggregates. The monitoring system would aim to compare outturn data for health and social spending (including COVID-19-related items) with 2020 pre-COVID budget (if available) or 2019 estimates.

 

1Moody’s notes that consistent with its approach globally, the review period will allow the rating agency to assess whether the country’s participation in the initiative would likely entail default on private sector debt, notwithstanding the intended voluntary nature of private sector participation and the fact that the country has not, to Moody's knowledge, indicated interest in extending the debt service relief request to the private sector; and, if so, whether any losses expected to arise from that participation would be consistent with a lower rating.