Why in news?

• 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.

What’s in today’s article?

• Issue of unsustainable debt levels
• News Summary

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".
  • 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.

What are the steps taken by the 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.

News Summary: G20 finance meet

Key highlights of the speech delivered by PM Modi

• 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.