The representatives of the Paris Club creditor countries agreed on 31 March 2020 with the Government of the Federal Republic of Somalia to restructure its external public debt. This was the first ever “virtual” negotiating meeting of the Paris Club. The Paris Club congratulates Somalia for having reached its Decision Point under the enhanced initiative for the Heavily Indebted Poor Countries (enhanced HIPC Initiative) in March 2020.

This agreement was concluded under the so called “Cologne terms” designed by the Paris Club to provide interim debt relief as part of the HIPC Initiative. This leads to the immediate non-ODA debt cancellation of US$ 1.4 billion in debt owed by Somalia to Paris Club creditors.

Somalia is expected to reach its HIPC Completion Point by 31^st March 2023 or earlier and receive the remainder of the debt reduction envisioned under the enhanced HIPC Initiative already endorsed by the international community in 1999. On an exceptional basis, considering Somalia’s very limited capacity of payment, and provided that it continues to implement satisfactorily an IMF supported program, no payments are expected from Somalia until at least 31^st March 2024.

Several creditors intend on a bilateral basis to grant additional debt relief to Somalia beyond the terms set today in the Paris Club agreement.

Somalia is committed to devote the resources that otherwise would have gone to Paris Club creditors to priority investments, as identified in its ninth National Development Plan (NDP-9). Somalia is also committed to seek comparable debt relief from non-Paris Club creditors.

Representatives from Kuwait Fund for Development, Saudi Fund for Development and the Abu Dhabi Fund for Development also attended the meeting as observers. They expressed their support to the terms of the agreement between the Paris Club and the Government of Somalia and indicated their willingness to provide to Somalia comparable terms under the framework of Enhanced HIPC Initiative and in accordance with terms and conditions adopted by their respective Boards of Directors.

The representatives of the Paris Club members expressed their commitment to implement the final component of debt relief contemplated under the enhanced HIPC Initiative as soon as Somalia meets the conditions to reach the Completion. The IMF and the World Bank currently estimate that those creditors will then have delivered total debt relief of approximately US$ 1.7 billion (in net present value terms). This amount does not include additional efforts that Paris Club members intend to provide at completion point.

Background notes

1. The Paris Club was formed in 1956. It is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by borrower countries.

2. The members of the Paris Club which participated in the reorganization of the Federal Republic of Somalia’s debt were the governments of Belgium, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, the Russian Federation, Spain, the United Kingdom and the United States of America.

Observers at the meeting were representatives of the government of the Brazil, Canada, Finland, Korea, Sweden and Switzerland, as well as the International Monetary Fund, the International Development Association, the African Development Bank, the European Commission and the Secretariat of the UNCTAD. Kuwait, the Saudi Arabia and the United Arab Emirates also observed this reorganization

3. The delegation of Somalia was headed by Dr. Abdirahman D. BEILEH, Minister of Finance. The meeting was chaired by Mr. Guillaume CHABERT, Co Chairman of the Paris Club, Assistant Secretary at the Directorate-General of the Treasury of the French Ministry of Economy and Finance.

Technical notes

1. Somalia’s economic program is supported by a three year arrangement under the Poverty Reduction and Growth Facility and an Extended Fund Facility, both approved by the Board of the International Monetary Fund on 24 March 2020. Somalia reached the decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative in March 2020.

2. The stock of debt owed to Paris Club creditors and to participating non-Paris Club creditors as of 31^st October 2019 was estimated to be more than US$ 3.0 billion in nominal terms, of which more than 99% consisted of arrears and late interest.

3. The cut-off date (1^st October 1984 for Somalia) is defined when a debtor country first meets with Paris Club creditors. It is not changed in subsequent Paris Club treatments. In accordance with Paris Club rules, credits granted after this cut-off date are not subject to rescheduling or cancellation. In this case, on an exceptional basis, all these amounts were deferred until after 2024. The cut-off date is designed to protect credits granted by Paris Club creditors after this date. It therefore helps restore access to credit for debtor countries after a Paris Club treatment.

4. This agreement consolidates around US$ 2.7 billion, most of which is composed of arrears and late interests. It cancels a total of US$ 1.4 billion and reschedules around US$ 1.3 billion. These rescheduled amounts will be addressed for debt relief when Somalia reaches Completion Point.

5. On an exceptional basis, creditors have also agreed to defer until after 2024 the repayment of arrears accumulated by Somalia on short term and post cut-off date debts, the maturities falling due during the consolidation period under the post cut-off date debts as well as all moratorium interest due during the consolidation period on the rescheduled and deferred amounts.

Paris Club and the IIF: Discussion on debt vulnerabilities, sustainable financing and debt transparency

Paris, June 18, 2019 - Delegates representing official and private creditors participated to the 19th Annual Meeting of the Paris Club and the Institute of International Finance (IIF) to discuss debt vulnerabilities in emerging markets and developing countries. The meeting gathered all 22 Paris Club members, as well as the 3 ad hoc participants to the Paris Club (China, India and South Africa) and Saudi Arabia as the upcoming G20 Presidency. It also gathered more than fifty representatives from the private sector. The IMF and the World Bank also took part in this meeting. This annual meeting is a unique event designed to foster dialogue and cooperation between all creditors, official and private alike, and to reflect recent developments and longer-term trends in the field of sovereign debt.

Against the backdrop of growing concerns about rising public debt levels in several emerging and developing countries, combined with the increasing complexity of debt composition, official and private creditors exchanged views on debt vulnerabilities and perspectives for going forward. Notably, participants discussed the financial situation of countries in debt distress or with significant debt vulnerabilities in Latin America, Sub-Saharan Africa and Southern Asia.

Participants also discussed how to address the infrastructure gap in emerging markets and developing countries, and cover related financing needs, while keeping debt on a sustainable path. They also shared views on the use and features of climate-resilient debt instruments, which could provide debt service relief in countries regularly affected by natural disasters.

Finally, participants discussed ways of enhancing debt transparency to benefit lenders and borrowers alike and ultimately improve debt sustainability through sounder financing practices. In this context, the IMF reported on the implementation of the G20 Operational Guidelines for Sustainable Financing and the IIF presented its work on the Voluntary Principles for Debt Transparency, which was supported by the G20 in Fukuoka. These voluntary Principles provide a framework for private creditors to publicly disclose details on lending to low-income developing countries.

The Paris Forum, an informal body gathering sovereign lenders and borrowers willing to discuss challenges related to sovereign debt issues, organized on May 7th 2019, with the support of the Japanese G20 Presidency, a high level conference on how to ensure sound and sustainable financing for development.

This Conference brought together more than sixty international decision-makers, including around forty countries represented by some thirty Finance Ministers and Central Bank Governors as well as Heads of International Financial Institutions, in particular, Christine Lagarde, Managing director of the IMF ; David Malpass, President of the World Bank Group and Angel Gurria, Secretary-General of the OECD, and Senior Representatives from the civil society (academics, NGOs) and the private sector.

Participants discussed the best ways to meet the financing needs of developing countries and how to reach sustainable development goals, while keeping debt on a sustainable path and ensuring a level playing field for all actors.

Rising debt vulnerabilities worldwide, and notably in developing countries, is a growing source of concern for the international community. This conference allowed participants to build a common understanding on debt vulnerabilities and deliver recommendations to promote a sound and sustainable financing of development.

Conclusions from this high level conference will feed into the G20 Finance Ministers and Central Bank Governors' meeting, to be held in Fukuoka on 8-9th June 2019, as well as the joint IMF-World Bank agenda on debt vulnerabilities.

The video of the conference can be found here (to get the original or English version, click on the flag at the top right of the video): https://www.tresor.economie.gouv.fr/Articles/2019/05/13/conference-de-haut-niveau-du-forum-de-paris

In addition, a recent publication made by academics on debt restructuring is available at the following address: https://piie.com/publications/working-papers/how-restructure-sovereign-debt-lessons-four-decades

The 2018 annual report of the Paris Club is now available on the Paris Club website.

2018 was a year of strengthening cooperation among all stakeholders. The Paris Club thus deepened its working relationship with non-Paris Club creditors and developed the dialogue between lenders and borrowers at conferences organized under the auspices of the Paris Forum.

In 2018, the activity of the Paris Forum continued to diversify. In addition to the annual conference that brought together representatives of over forty lenders and borrowers in June, a second regional conference of the Paris Forum was organized in Saint Kitts & Nevis in April on the theme of financial resilience and debt management. A workshop on the costs and benefits of collateralized sovereign debt was also organized in October in the margins of the IMF and World Bank Annual Meetings. These events confirmed the uniqueness of the Paris Forum in its role of sharing information and experiences on sovereign debt issues.

Background notes

1. The Paris Club was formed in 1956. It is an informal group of creditor governments that main role is to coordinate official creditors during debt restructuring.

2. The members of the Paris Club are: Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, the Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, the United Kingdom and the United States of America.

3. The publication of an annual report, since 2008, is an example of Paris Club creditors’ commitment to enhance the transparency of the Club’s work and functioning.

4. The 2018 Paris Club annual report comprises four main chapters:

-- a chapter on the Paris Club’s major role in the international financial architecture for sovereign debt issues,

-- a chapter on the challenges ahead, regarding the costs and benefits of collateralized sovereign debt,

-- a chapter on the Paris Club's engagement with the private sector to promote greater debt transparency and debt sustainability,

-- a chapter on contingent debt instruments to increase the resilience of borrower countries to external shocks.

In addition to these four main chapters, the annual report includes a presentation of the role of the Paris Club as well as its current claims on sovereign borrowers.

Costs and benefits of collateralized sovereign debt

24 lending and borrowing countries and 4 international financial institutions and organizations gathered on October 11th, 2018 at the Paris Forum Workshop, which was held in Bali in the margins of the IMF and World Bank Annual Meetings, to discuss the costs and benefits of collateralized sovereign debt.

Recent developments regarding collateralized sovereign debt raised issues regarding its impact on debt sustainability and on debt restructuring. The Paris Forum Workshop’s goal was to analyze the cost and benefits of collateralized sovereign debt and discuss how to better take into account these debt instruments when assessing debt sustainability.

Collateralized sovereign debt may be seen by borrowing countries as an opportunity to fulfill development financing needs, as it can enhance credit access (when conventional financing is unavailable) and finance large capital expenditures. On the side of creditors, be them private or sovereign bilateral lenders, collateralized debt enhances their seniority as an asset securing the transaction - when economic conditions worsen, creditors are more likely to be paid than other conventional creditors.

However, in many cases, there is little evidence that collateralized debt brings more benefits than costs in the long term. Participants stressed during the workshop that these benefits may turn into risks and even imperil the borrowing country’s debt sustainability, especially when the level of collateralized debt is high:

1. Lenders tend to base their lending decision on the value of the collateral, rather than on the borrower’s financing capacity to service its debt. This may lead to overborrowing and delay economic adjustment until a debt restructuring becomes unavoidable.
2. These complex instruments might lead to “creative accounting” and misreporting of debt in the overall debt sustainability analysis.
3. In some borrowing countries, collateralized sovereign debt represent the larger share of the overall debt and sometimes of overall revenues, reducing the borrowing country policy flexibility by earmarking revenues or export earnings. It also encourages a “race to seniority” between lenders, while discouraging conventional borrowing. Some multilateral and official lenders have included a negative pledge clause in their contracts, which prevents a borrower from pledging any assets.
4. When a borrower’s debt is unsustainable and needs to be restructured, the resolution may be constrained i) as collateralized debt lenders consider themselves as more senior than conventional lenders, obscuring the creditor hierarchy and setting hurdles in burden sharing; ii) by the legal complexities that are often attached to the loan contract; iii) by the hidden debt that the borrowing country may have excluded from its balance sheet.

To deal with these challenges, participants highlighted the need to improve debt transparency and sustainable lending practices as little is known on the scale of collateralized debt in developing countries.

Participants agreed that sharing data is a first step, but it does not solve the race to seniority nor legal issues when it comes to debt restructuring. In a debt restructuring process, creditor coordination will be a key challenge to provide timely and orderly resolution of the debt crisis and ensuring fair burden-sharing among creditors.

Collateralized debt is a complex issue that need to be discussed in debt fora, and addressed by IFIs and the G20. The Paris Forum is committed to engage in deeper discussions on this matter during its next annual conference.