For example, as mentioned earlier, under the Paris Club and the Common Framework a major issue of contention is how to share the burden fairly among creditors. However, there is also the question of the burden on the debtor. For this, it’s important to understand how far each creditor can go to reduce interest rates and maturities, every time. This will of course be different for every creditor, depending on what they have lent for. Arguably, if a creditor has lent money for a very profitable enterprise, within a pool of less profitable projects lent to by others, that creditor should have to relieve less than others. This is a different concept of comparability, but equally important.
On the other hand, a major issue for borrowers (but not yet a consideration of the Common Framework) is the fact that by defaulting, even on a set of loans that constitute a small proportion of their overall debt, borrowing countries can find themselves shut out of access to future finance for years. This has held back many countries from joining the framework and led to some going to extreme lengths to avoid missing what are – to creditors – small payments. In a modern, insolvency-based framework, debtors should be protected from such actions.
This means borrowers – before they begin negotiations with creditors – need to understand their individual creditors and creditor behaviour. What interest rates and maturities do borrowers usually get from different creditors? What debt relief and on what terms have various borrowers managed before? What is the best outcome any borrowers have ever extracted – and how – and can they all do better this time?
Towards an international bankruptcy court
The second step is to create the equivalent of a bankruptcy court or administrator for proceedings. Unlike the IMF, this would have to be an independent, non-lending membership organisation.
Headquartered in an African or other non-creditor country, primarily staffed by African or non-creditor experts, it would, on demand, review proposals by creditors for debt relief, for one borrower or several borrowers together, having been furnished by member borrowers with all underlying information (including contracts that may be classified).
Like a bankruptcy court, this organisation would determine whether relief is adequate or not, providing a “verification mechanism” for coordinated relief to go ahead. The organisation would not need to provide representation – unless requested – but it would be able to share information across member borrowers and advise on that basis.
Benefits of a modernised framework
What might have happened for Zambia if such a modernised framework existed in November 2020?
Zambia could have both drawn on its own experience as well as been supported by the administrator organisation to convene with other relevant borrowers to discuss its debt with various creditors – such as China – and what it could negotiate. Zambia could have done the same for private sector debt, as well as multilateral debt, devising specific strategies or “pitches” to each, depending on their typical lending terms and what they have lent for.
In this case, Zambia would have had to visit China to pitch for relief. But this visit could have taken place immediately without the IMF or Paris Club. Importantly, in principle agreement of relief would not be conditional on Chinese banks knowing how much debt relief Zambia is getting from the private sector, or vice versa. It would simply be conditional on Zambia announcing that it will seek relief from every single one of its creditors, and having or planning to make their pitch, advised on and approved by the administrator, within a specified timeline.
Once all pitches are done, the Zambian government and the administrator would announce the proposed outcomes – in millions of dollar terms from each creditor – and relief would proceed. No information would need to be shared about underlying debt or contracts with other creditors or even with citizens, unless the Zambian government decided to or had a national law to require this. This would protect Zambia from interference in its national affairs and bilateral relationships. And it would mean every creditor – including the IMF where relevant – helps, even if differently.
Yes, under a borrower-centric debt-relief framework creditors might have to cough up a little more, especially in the short term. But remember – Zambian taxpaying citizens have an average annual income of $1,140, compared to US or Chinese tax paying citizens with over $70,000 and $12,000 on average per year respectively. There is no question of who should do more in a global financial crisis, downturn, pandemic or climate crisis, so that the current and future growth engines of the world – often in the African region – can recover.
The fact is, there are multiple, economically sound and development-friendly solutions to overhauling the Common Framework. The key to finding these solutions is to escape creditor-driven narratives and concepts such as moral hazard, and the bind of a creditor-centric, colonial-origin institution such as the Paris club. If domestic law can progress, so can international law.
Freed of these binds, countries like Zambia may have a chance of getting efficient, lasting debt relief and focusing on a fresh start for growth, the ultimate primary goal.
Hannah Ryder is the CEO of Development Reimagined, an independent African-led international development consultancy based in Beijing. This Op-ed article was originally published on African Business. The views expressed in it are those of the author and do not necessarily reflects African Newspage’s editorial policy.