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they can extend concessional finance to allstructure, could prioritize financing for recov-countries in need. Development banks couldery and green-linked investments, ensuringalso adopt more flexible criteria for lending.additional financing is used for the SDGs.To complement additional financing from publicAnother proposal is to set up a Fund todevelopment banks, proposals have been madeAlleviate COVID-19 Economics (FACE), withfor new facilities and funds. One proposal hasthe objective of mitigating the economicbeen to set up a Liquidity and Sustainabilityimpact of the pandemic on individuals andFacility (LSF) to address liquidity and financ-the productive sectors of developing coun-ing needs of middle-income countries withtries.10 The fund, which would be channelledstrong macroeconomic fundamentals.9 Thisthrough the MDBs, would have a capital ofpromising facility, which should be equipped 500 billion and provide loans with 50 yearswith an adequate design and governancematurity and a zero or very low interest rate.9United Nations (2020). Financing for Development in the Era of COVID-19 and Beyond: Menu of Options for the Consideration of Heads ofState and Government, Part II, p. 72. www.un.org/sites/un2.un.org/files/financing for development covid19 part ii hosg.pdf; see also,UNECA (2021). Liquidity and Sustainability Facility. PowerPoint presentation, 22 March, 10pp.10 United Nations (2020). Financing for Development in the Era of COVID-19 and Beyond: Menu of Options for the Consideration of Heads ofState and Government, Part II, p. 72-74. www.un.org/sites/un2.un.org/files/financing for development covid19 part ii hosg.pdf.7LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW E M BA R G O E D U N T I L 12:01A M (E S T ) 29 M A R C H 2 0 21MARCH 2021

Liquidity supportAs noted above, central banks across the worlddebt services of participants in the DSSI on theintroduced monetary easing measures on ansame terms. By early March 2021, 46 out of 73unprecedented scale, which helped prevent aeligible countries had benefited from aroundnew global financial crisis. However, massiveUS 5 billion in debt service suspension, withinjections of liquidity are not without risk assavings contributing to the pandemic response.ultra-low interest rates can fuel high asset pricesand speculation. In addition, many developingcountries have not been able to access capitalmarkets because of low credit ratings and corresponding high borrowing costs. At the onset ofthe pandemic these countries faced an impossible choice between: (i) continuing to servicetheir external debts; (ii) addressing urgent needsrelated to combating the pandemic and supporting jobs and income, including through basicsocial protection; and (iii) investing in the SDGsand a more sustainable and resilient future.To support developing countries in need, theIMF temporarily doubled access to its RapidCredit Facility (RCF) and Rapid FinancingInstrument (RFI), providing over US 100 billionto member countries, in addition to the moreHowever, the financial impact of the DSSIhas been blunted by the lack of participationof private creditors, to whom DSSI eligiblecountries collectively owe about one third oftheir total debt service obligations in 2021.Debtors participating in the DSSI were reluctantto request private creditors to join the initiativeout of fear that this could lead to downgradesin their sovereign credit ratings and higherborrowing costs. In addition, some hybrid(semi-public) G20 lenders have opted out of theDSSI. As a result, the DSSI has important gaps.Another gap is that the DSSI eligibility criteriaexcludes nine of the 34 countries with a substantial risk of debt default, which includes somehighly vulnerable small island developing Statesthan US 200 billion delivered by MDBs.(SIDS). In addition, middle-income countriesIn addition, in April 2020, the G20 Financebilateral debt service due in 2021 comparedMinisters endorsed the Debt Service Suspensionto US 16.6 billion for eligible countries11 andInitiative (DSSI) to bolster crisis mitigation inwhile some of them have adequate marketIDA-eligible countries. The DSSI temporarilyaccess to refinance their debts, many do not.suspends debt service payments to bilateralWithout international support these countriesofficial creditors of countries eligible to borrowwill need to cut fiscal expenditures to be ablefrom the IDA plus Angola upon request. Theto service their external debts, curtailingG20 invited private creditors to suspend thetheir response and recovery prospects.not eligible to the DSSI have US 31 billion in11 Kharas, H. and Dooley, M. (2021). Debt Distress and Development Distress: Twin crises of 2021. Working Paper 153. Washington, D.C.:Brookings, 35 pp.8LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW E M BA R G O E D U N T I L 12:01A M (E S T ) 29 M A R C H 2 0 21MARCH 2021

Recommendations to provide liquidity to devel-As of 19 March 2021, the G7 endorsed aoping countries fall into two main categories:“new and sizeable” allocation of SDRs,13 ,an SDR allocation (and reallocation) and anwith most experts recommending betweenextension of the DSSI to temporarily bridge350 billion and 455 billion SDRs (equivalentforeign exchange and fiscal shortfalls.to US 500 billion to US 650 billion) .14 SDRs12are distributed across the IMF members inproportion to their quota shares, with devel-A NEW GENERALALLOCATION OF SDRs Provision of a new allocation of SDRs (asdiscussed by the IMF Board), with a reallocation of SDRs from countries with sufficientinternational reserves to countries facingpersistent external deficits or emergencysituations, including vulnerable and conflict-affected countries. IMF member countries are also urged to consider (i) replenishing the Poverty ReductionGrowth Trust (PRGT) of the IMF and (ii)establishing a new trust fund hosted by theIMF to support middle-income countries intheir response and recovery efforts.The IMF occasionally issues SDRs to supplement IMF member countries’ foreign exchangereserves. A new allocation of SDRs in a crisiscontext is not without precedent: in 2009,during the global financial crisis, the IMF issued182.6 billion SDRs, bringing the total cumulative allocations to about 204.2 billion SDRs,equivalent to around US 294 billion in 2020.oped countries receiving 60.4 percent anddeveloping countries 39.6 percent,15 including3.5 per cent to least developed countries.Thus, to ensure that the new SDRs go tocountries that need them most, IMF membercountries with strong external positions couldvoluntarily reallocate their existing SDRs, eitherbilaterally or through existing mechanisms suchas the IMF’s Poverty Reduction and Growth Trust(PRGT). However, only low-income countriesare eligible to borrow from the PRGT. Theestablishment of a new trust fund to be housedat the IMF should therefore be considered tosupport middle-income countries, and SIDs inparticular, in their response and recovery efforts.In addition to the proposals above, othersuggestions could be considered, throughmultilateral or bilateral arrangements on avoluntary basis, to utilize SDRs, including formaking vaccines available and helping countries, in their response and recovery plans.16Overall, a new SDR allocation combinedwith a range of options to reallocateexcess SDRs to countries that need themmost will send a powerful signal of acooperative multilateral response.12 United Nations (2020). Financing for Development in the Era of COVID-19 and Beyond: Menu of Options for the Consideration of Heads ofState and Government, Part II, pp. 72–74. www.un.org/sites/un2.un.org/files/financing for development covid19 part ii hosg.pdf.13 G7 (2021). Chancellor and G7 Finance Ministers agree milestone support for vulnerable countries. Press release, 19 March. gree-milestone-support-for-vulnerable-countries.14 See for instance Ocampo, J.A. (2021). mpo-2021-03, 5 March; and Gallagher, Ocampo (2020) “It’s time for a major issuance of the IMF’s Special Drawing Rights”, available at wing-Rights.15 According to United Nations classifications.16 Kharas H. and Dooley, M. (2021). Debt Distress and Development Distress: Twin crises of 2021. Working Paper 153. Washington, D.C.:Brookings, 35 pp.9LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW E M BA R G O E D U N T I L 12:01A M (E S T ) 29 M A R C H 2 0 21MARCH 2021

EXTENSION OF THE DEBTSERVICE SUSPENSIONA proposal to encourage private creditorparticipation in standstills is the establishmentof a Central Credit Facility (CCF)17 at financialinstitutions with preferred creditor status suchThe G20 is strongly encouraged to: Extend the DSSI at least until the end of June2022; banks. Countries seeking forbearance couldredirect their interest and principal payments tothe CCF and receive them back as low-interestInclude middle-income countries, in par-loans for specific pandemic mitigation spending.ticular SIDS, conflict-affected and other vul-While not a replacement for creditor coordina-nerable countries that have been seriouslytion, such a facility would allow debtor countriesaffected by the crisis; bilateral and multilat-to initiate a debt suspension process withouteral creditors should consider offering DSSIwaiting for lenders to coordinate. In exchangeterms to these countries on a case-by-casefor releasing the debtor from its obligations tobasis;the private creditor, the relevant amount wouldEnsure that debt relief is additional to exist-be credited to the creditors’ account in the CCF.ing concessional aid. as the World Bank and/or regional developmentBilateral G20 creditors, including hybridlenders, should consider mechanisms toinclude private sector participation in theState-contingent elements in bond contractscan provide another mechanism to increaseprivate participation in future debt standstills.DSSI and in future debt standstills.17 Bolton. P. et al. (2020). Born out of necessity: A debt standstill for Covid-19. CEPR Policy Insight Nr. 103, April.10LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW E M BA R G O E D U N T I L 12:01A M (E S T ) 29 M A R C H 2 0 21MARCH 2021

Debt relief and the CommonFrameworkIn my brief dated April 2020, I urged the inter-could further disincentivize countries fromnational community to consider targeted debtapproaching their private creditors. Despiterelief beyond a moratorium. I commend thethese limitations, the Common FrameworkG20 for establishing the Common Frameworkcan be an effective platform for creditoron Debt Treatments Beyond the DSSI incoordination, which could serve as a startingNovember 2020, a welcome extension of thepoint towards a more universal and permanentinitial focus on providing liquidity supportframework for sovereign debt resolution.towards addressing solvency concerns.Early in the pandemic, the IMF had alreadyprovided debt service relief to its poorest andThe international community is urged to: legal and technical advice on options formost vulnerable members through grants fromdebt and debt service relief to help coun-the Catastrophe Containment and Relief Trusttries in need – including debt swaps, debt(CCRT). The G20’s Common Framework for Debtbuy-backs, credit enhancements, reprofilingTreatment Beyond DSSI extends the provisionor exchanging debt, and/or cancellation –of debt relief to all the DSSI-eligible countries.depending on a country’s specific circum-Its goal is to facilitate on a case-by-case basis atimely and orderly debt restructuring of bilateralofficial debts with members of the G20, includingBuild on the Common Framework to offerstances and debt challenges. Extend the eligibility to debt relief under thehybrid lenders. Other, non-G20 official creditors,Common Framework to other vulnerableas well as private creditors are invited to partici-countries on a case-by-case basis.pate and provide debt relief on the same terms.Three countries have so far requested debtrestructuring through the Common Framework.The Common Framework, however, facessimilar limitations to the DSSI. First, vulnerablemiddle-income countries remain ineligible. Consider other mechanisms that would allowcountries to access the Common Frameworkwithout creating a stigma or compromisingthe credit rating of the beneficiaries, including funds and other instruments within existing institutions.Second, in the absence of additional measuresThe international community should considerto incentivize or compel private creditor partic-an initiative to build on and complement theipation, comparable treatment of commercialCommon Framework, both by reaching a widercreditors will remain challenging in practice.group of countries and by offering capacityThe recent downgrade of the sovereign creditbuilding and legal advisory services to debtorratings of one of the countries that applied forcountries around a range of debt reductiondebt relief through the Common Frameworkstrategies. Its focus would be on (i) maintaining11LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW E M BA R G O E D U N T I L 12:01A M (E S T ) 29 M A R C H 2 0 21MARCH 2021

sound debt management, as well as (ii) freeingthe debtor country’s situation. As it would offerup resources for investment in the COVID-19a wide range of legal and technical advice,response, including securing vaccines, and thecountries that request support through thisSDGs, including climate action. In this context,initiative should not per se trigger a downgradeintegrated national financing frameworks (INFFs)by the rating agencies, unlike what has beencan play a role in helping debtor countriesobserved with the Common Framework. Thedetermine their long-term financial needs.initiative could also help support debtors in debtIn providing debt relief, this complementaryinitiative to the Common Framework wouldconsider a range of instruments and initiatives,including debt swaps, buy-backs, exchanges,and credit enhancements and offer a spectrumof tailor-made relief initiatives depending onrestructuring negotiations with their creditors.In addition, as indicated by the IMF proposalsin the 2020 Annual meetings, internationalfinancial institutions could offer complementarycredits to countries involved in debt restructurings to facilitate reaching an agreement.1818 Ocampo (2021), “Future Development Managing developing countries’ sovereign debt”, available at LIQUIDIT Y AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW E M BA R G O E D U N T I L 12:01A M (E S T ) 29 M A R C H 2 0 21MARCH 2021

The international debt architectureWhile the dramatic impact of the currentneeded, and (ii) to address the underlying causescrisis requires an immediate response, theof unsustainable increases in sovereign debtscrisis has also highlighted the need to addressand prevent their recurrence. An effective debtunderlying challenges, both at national levelsarchitecture should thereby give countriesand in the global architecture. The currentgreater room for investing in sustainabledebt architecture has been ineffective in bothdevelopment and play an important role inpreventing repeated episodes of unsustainableincreasing the resilience and stability of thedebt buildups and in restructuring debts,international financial system in the face ofwhen needed, in an efficient, fair, and durablefuture pandemics or climate-related disasters.manner. It is characterized by numerous gapsin transparency and a lack of clarity about rolesand responsibilities. More importantly, thereare no processes that incentivize all creditorsand debtors to act cooperatively in accordanceto a uniform set of principles and standards.STRENGTHENED ARCHITECTURETHROUGH PRINCIPLES As a basis for the international debt archi-Architecture reform will require new tools,tecture, a wide range of stakeholdersinstruments, and legislative backing, but alsoshould agree on a set of principles anda shift in mindset towards a set of principlesconsiderations.including responsible borrowing and lendingwith fair, transparent, efficient and equitablePossible considerations include the following:workouts. The new architecture must also be aligned with the SDGs and the goals of theParis Agreement, and acknowledge the need totransition to a sustainable, inclusive and resilienteconomy in all of its aspects. Any reforms mustbe based on a process with accepted legitimacyby a wide range of stakeholders that includesDebt transparency and management.Transparency should be promoted in orderto enhance the accountability of the actorsconcerned, which can be achieved throughthe timely sharing of both data and processesrelated to sovereign debt workouts.Paris and non-Paris Club official creditors,Gaps in debt transparency have grown largerprivate creditors, and sovereign debtors. It isover time with more diverse creditors. Thein the interest of all parties that internationalWorld Bank reports that half of all IDA coun-institutions facilitate this process by providingtries do not have adequate capacity in theira space for open dialogue and to build trustdebt management policy and institutions,and transparency in a systematic way.including data collection and reporting.The reform of the international debt architectureBuilding consensus for new norms andshould have two objectives: (i) to facilitatestandards for transparency in debt reportingexpedient, fair and orderly debt workouts, whenand data is the foundation for a

3 LIQUIDITY AND DEBT SOLUTIONS TO INVEST IN THE SDGS: THE TIME TO ACT IS NOW MARCH 2021 Introduction 1 1 This Policy Brief draws on the Financing for Sustainable Development Report 2021 of the Interagency Task Force on Financing for Development as well as Kharas, H. and Dooley, M. (2021). Debt Distress and Development Distress: Twin crises of 2021.