First G20 Finance Ministers and Central Bank Governors under India’s G20 Presidency meeting began in Bengaluru. PM Modi addressed the meeting via video message.

 

Key highlights of PM Modi’s speech

  • Raised the issue of unsustainable debt levels in many countries — PM Modi flagged the threat to financial viability of many countries from unsustainable debt levels.
  • Reform in multilateral institutions —
      • PM Modi said trust in international financial institutions has eroded “partly because they have been slow to reform themselves”.
      • In this context, he called upon the custodians of the leading economies and monetary systems of the world to bring back stability, confidence and growth to the global economy.
  • Highlighted after-effects of the Covid-19 pandemic — The Prime Minister said many countries, especially developing economies, are still coping with the after-effects of the Covid-19 pandemic, which delivered a once-in-a-century blow to the global economy.
  • Made a reference to the rising geopolitical tensions —
      • He also made a reference to the rising geopolitical tensions in different parts of the world, without naming the Russia-Ukraine war directly.
      • There are disruptions in global supply chains. Many societies are suffering due to rising prices. And, food and energy security have become major concerns across the world.
  • Attention must be given to the most vulnerable citizens — Only by creating an inclusive agenda, will the global economic leadership win back the confidence of the world.
  • Highlighted role of technology in the world of Finance —
      • In the world of finance, technology is increasingly dominant. During the pandemic, digital payments enabled contactless and seamless transactions.
      • PM cited India’s experience of creating a highly secure, highly trusted, and highly efficient public digital infrastructure.
      • He said that India’s digital payments ecosystem has been developed as a free public good.
      • This has radically transformed governance, financial inclusion, and ease-of-living in the country.

 

How big is the issue of unsustainable debt levels in many countries?

  • According to a new policy brief published by the United Nations Development Programme (UNDP), 52 low and middle-income developing economies are either in debt distress or at high risk of debt distress.
      • This accounts for more than 40 percent of the world’s poorest people.
  • 25 developing economy governments have external debt service payments higher than 20 percent of total revenue – the highest number of countries in more than 20 years.
      • External debt is the portion of a country’s debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions.
      • Debt service refers to the money required to pay the principal and interest on an outstanding debt for a particular period of time.
  • The UNDP report added that a 30 percent haircut on their public external debt stock in 2021 could help save up to $148 billion in debt service payments over eight years.
      • Specific to debt restructuring, a haircut is the reduction of outstanding interest payments or a portion of a bond payable that will not be repaid.
      • In other words, a debt haircut refers to part of the debt being “written off”.
      • For e.g. When a bank takes a ‘haircut‘, it means it accepts less than what was due in a particular loan account.
  • In December 2022, World Bank had said that the world’s poorest countries owe $62 billion in annual debt service, a year-on-year increase of 35%, warning of a rising risk of defaults.
  • India’s neighbours Sri Lanka, Bangladesh and Pakistan have sought a bailout from the IMF over the past year due to a sharp economic slowdown caused by the Covid-19 pandemic and the Russia-Ukraine war.

 

Steps taken by world leaders to address the issue –

  • Debt restructuring along with inflation control and harnessing digital progress were also listed as crucial policy priorities by IMF.
  • Under the G20 Presidency, India has been pressing for ways to tackle the aggravated debt vulnerabilities facing developing nations mainly on account of the continuing geopolitical tensions and the pandemic.
  • In order to help vulnerable countries, creditors are preferring to have a haircut (debt forgiveness).
  • On the other hand, there are group of countries, led by China, who are using rescheduling with lower interest rates as to tool to help these vulnerable countries.