## The Common Framework: Utilizing its Flexibility to Support Developing Countries’ Recovery

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---

### I. Background
- Publication date: June 24, 2021.  
- Authors: Craig Beaumont and Dalia Hakura.  
- The COVID-19 pandemic has exacerbated debt vulnerabilities in many developing countries.  
- The G20 and Paris Club have endorsed a Common Framework (CF) for coordinating official creditors to provide debt treatments for countries eligible for the Debt Service Suspension Initiative (DSSI).  
- A total of 73 developing countries are eligible to request a debt treatment under the CF, comprising all International Development Association-eligible countries and UN Least Developed Countries current on their debt service to the IMF and World Bank.  
- Three countries have made requests for CF debt treatments to date: Chad, Ethiopia, and Zambia. Chad’s request has received support from its Creditor Committee, thereby providing official financing assurances to the IMF.  
- The CF can strengthen the architecture for sovereign debt resolution beyond the pandemic and has flexibility to provide case-by-case debt treatments.  
- Periodic reporting to the G20 on CF implementation is envisaged, with potential refinements as experience is gained.

### II. Origins of the Common Framework and Its Key Features
- The CF builds on the G20 and Paris Club’s Debt Service Suspension Initiative (DSSI).  
- DSSI, starting from May 2020, provided liquidity relief to more than 40 of the 73 eligible countries, mostly low-income countries (LICs).  
- DSSI coordinated a suspension of debt service payments to official creditors with:
  - a one-year grace period, and
  - repayments over three years for the debt service falling due in May–December 2020,
  - later extended to five years for the debt service due in 2021.  
- DSSI was a rapid emergency response and temporary. Lack of private participation in DSSI put the full burden on official creditors.  
- The CF, established in November 2020, enables official bilateral creditors to provide tailored debt treatments for the same DSSI-eligible countries, including:
  - a comparability of treatment requirement to ensure participation by other bilateral creditors and by private creditors, and
  - a G20 requirement that countries requesting CF debt treatment must also have or be seeking an IMF-supported program.

### III. Diverse Needs Require Tailored Debt Treatments
- Share of LICs either in debt distress or at high risk of debt distress nearly doubled since 2015, reaching 56 percent of LICs by end-April 2021.  
- Note: 66 out of 73 DSSI-eligible countries apply the LIC DSA.  
- Debt relief needs vary by country depending on pre-crisis vulnerabilities and COVID-19 impacts (commodity exports, tourism, remittances).  
- Categories of debt treatments under the CF:
  - Liquidity relief:
    - For countries with sustainable debt but financing needs exceed mobilizable financing.
    - Treatment reduces debt service payments during IMF-supported program years and spreads repayments over a longer period without necessarily reducing debt in present value terms.
  - Restoring debt sustainability (solvency relief):
    - For countries whose debts are unsustainable despite sound policies.
    - May require reductions in debt in present value terms as part of a broader package.
    - The amount of debt reduction varies widely; options include repaying original principal over a longer period or an upfront “haircut” or principal reduction.

### IV. Collaborative Process and Key Steps Toward Debt Treatments
- Key parties: debtor and creditors, supported by IMF and World Bank. Steps include:
  - Country requests CF debt treatment from each official bilateral creditor and requests (or has) an IMF-supported program.
  - Development of IMF-supported program: country and IMF set policies to restore medium-term external viability and assess financing needs.
  - Assessment of debt sustainability and distress risks via LIC DSF (joint IMF-World Bank for LICs).
  - Formation of a Creditor Committee by G20 and Paris Club official bilateral creditors to discuss the debt treatment once IMF staff reaches staff-level agreement on an IMF-supported program (or a review under an existing program).
  - IMF provides official and private creditors with an aggregate “envelope” for debt service and debt consistent with closing program financing gaps, reducing debt risks, and, if needed, restoring debt sustainability.
  - Official bilateral creditors provide assurances supporting a debt treatment consistent with that envelope.
  - Finalizing and implementing the debt treatment:
    - IMF assesses whether the debtor has a credible process for private debt resolution and safeguards in place for IMF Executive Board approval.
    - After IMF program approval, official bilateral creditors and the debtor agree an MOU detailing:
      - reduction in debt service during the determined period;
      - extension of duration of payments; and, where needed,
      - reduction in the present value of payments.
    - These parameters guide implementation of relief by other official bilateral creditors and private creditors via bilateral agreements with the debtor.
  - Program monitoring:
    - IMF Executive Board monitors program implementation, including implementation of the debt treatment by participating G20 and Paris Club creditors, other official creditors, and private creditors subject to the comparability clause.

### V. Comparable Treatment of Private Creditors
- Comparability of treatment by private creditors is a critical CF element and is closely monitored by official bilateral creditors, who may withdraw their treatment if comparability is not met.  
- Countries must seek a treatment from private creditors at least as favorable as that in the MOU with official creditors.  
- Practical expectations:
  - If official creditors provide reprofiling of debt service within a period, private creditors are generally expected to provide a comparable reduction in nominal debt service during that period and an extension in duration of payments.
  - If the MOU specifies a cut in present value of debt, private creditors are generally expected to provide at least that reduction.
  - Comparability is assessed at the level of private creditors as a whole, not on a creditor-by-creditor basis, per Paris Club practice.
- Debtor countries generally hire financial and legal advisors to engage with private creditors; support may be available from the World Bank’s Debt Reduction Facility (subject to DRF guidelines) and the African Legal Support Facility for some countries.  
- Historical experience indicates private creditors will generally agree to comparable treatment recognizing the debtor cannot offer a better treatment and that IMF lending to a country in arrears to private creditors is not precluded when certain conditions are met.

### VI. Using the Common Framework to Support Recovery
- The CF can replace DSSI in providing liquidity relief and can operate over a longer horizon suited to countries recovering from the COVID crisis.  
- A key concern: some countries with unsustainable debt or very large financing needs may not utilize or may delay utilizing the CF, potentially undermining recovery prospects.

### (1) Unsustainable debts must be resolved in a timely and durable manner
- When a country is facing an unsustainable debt burden, its creditors have often already reassessed credit risks, limiting the countries’ access to financing and reducing its capacity to address the crisis.
- Knock-on effects often include pressures on monetary and financial stability and lower investment.
- It is important to approach the IMF for a package of support that also restores debt sustainability, as only by tackling the debt problem forcefully can the country return to a path of sustained growth.
- For LICs facing unsustainable debt:
  - Consider utilizing the CF, as it will coordinate relief from the most important official bilateral creditors.
  - By comparability of treatment, the CF will also bring in other creditors including the private sector.
  - A broad-based treatment helps address creditor concerns about fair burden sharing, which could otherwise result in delays.
- Timely treatments are needed but they should also be durable, and this is a key goal of the Common Framework.

### (2) Debt reprofiling would support fiscal space for recovery in other cases
- Even countries with sustainable debts often face difficult trade-offs during recovery from the current crisis.
- Domestic financing may be unduly costly, curtailing future growth by crowding out lending to the private sector and leading to a buildup of financial stability risks, including through an intensification of the sovereign-bank nexus.
- Meeting the health and other costs of the crisis may require cutbacks elsewhere, such as investment, with the potential to undermine recovery and future growth.
- An IMF-supported program is a traditional financing tool for countries in these circumstances.
- In the current deep crisis, financing provided by the IMF and other donors may not always be sufficient.
- By reducing debt service during the program period, a reprofiling of debt service from the CF would:
  - Enhance fiscal space.
  - Smooth fiscal adjustment over time.
  - Help the country recover while protecting its long-term growth prospects.
- Concerns about credit standing and access to financing may deter some countries from IMF-supported programs coupled with CF reprofiling:
  - This is less of a concern for most DSSI eligible countries which have not issued international sovereign bonds or do not have imminent plans to do so.
  - Where such bonds are outstanding, official bilateral creditors and the country have a mutual interest to utilize debt reprofiling modalities that limit creditworthiness impacts as these may undermine the repayment capacity of a country.

### Conclusion — Policy implications and priorities
- Building confidence in the CF among the full range of countries that require debt treatments should be a priority to promote debtor country participation and maximize its contribution to recovery in eligible countries.
- The CF provides an important new opportunity to take a coordinated approach aimed at delivering more comprehensive, timely, fairer, and more durable debt restructurings.
- Successful conclusion of a case with a deep debt treatment will be important for eligible countries facing severe debt challenges by giving confidence that creditor coordination under the CF, together with an IMF-supported program, can enable them to return to sustained growth.
- The international community should consider supporting reprofiling of debt using the CF for those countries with sustainable debt but insufficient financing to maintain high-priority social and investment spending.
- Failing to deliver debt treatments via the CF risks impeding countries’ recovery or requiring reliance on costly and unstable sources of financing, which may ultimately require more debt relief.

*Special Series on COVID-19 note by Craig Beaumont and Dalia Hakura, IMF, June 24, 2021.*

### Section 1

### The Common Framework: Utilizing its Flexibility to Support Developing Countries’ Recovery

### I. Background
- Publication date: June 24, 2021.  
- Authors: Craig Beaumont and Dalia Hakura.  
- The COVID-19 pandemic has exacerbated debt vulnerabilities in many developing countries.  
- The G20 and Paris Club have endorsed a Common Framework (CF) for coordinating official creditors to provide debt treatments for countries eligible for the Debt Service Suspension Initiative (DSSI).  
- A total of 73 developing countries are eligible to request a debt treatment under the CF, comprising all International Development Association-eligible countries and UN Least Developed Countries current on their debt service to the IMF and World Bank.  
- Three countries have made requests for CF debt treatments to date: Chad, Ethiopia, and Zambia. Chad’s request has received support from its Creditor Committee, thereby providing official financing assurances to the IMF.  
- The CF can strengthen the architecture for sovereign debt resolution beyond the pandemic and has flexibility to provide case-by-case debt treatments.  
- Periodic reporting to the G20 on CF implementation is envisaged, with potential refinements as experience is gained.

### II. Origins of the Common Framework and Its Key Features
- The CF builds on the G20 and Paris Club’s Debt Service Suspension Initiative (DSSI).  
- DSSI, starting from May 2020, provided liquidity relief to more than 40 of the 73 eligible countries, mostly low-income countries (LICs).  
- DSSI coordinated a suspension of debt service payments to official creditors with:
  - a one-year grace period, and
  - repayments over three years for the debt service falling due in May–December 2020,
  - later extended to five years for the debt service due in 2021.  
- DSSI was a rapid emergency response and temporary. Lack of private participation in DSSI put the full burden on official creditors.  
- The CF, established in November 2020, enables official bilateral creditors to provide tailored debt treatments for the same DSSI-eligible countries, including:
  - a comparability of treatment requirement to ensure participation by other bilateral creditors and by private creditors, and
  - a G20 requirement that countries requesting CF debt treatment must also have or be seeking an IMF-supported program.

### III. Diverse Needs Require Tailored Debt Treatments
- Share of LICs either in debt distress or at high risk of debt distress nearly doubled since 2015, reaching 56 percent of LICs by end-April 2021.  
- Note: 66 out of 73 DSSI-eligible countries apply the LIC DSA.  
- Debt relief needs vary by country depending on pre-crisis vulnerabilities and COVID-19 impacts (commodity exports, tourism, remittances).  
- Categories of debt treatments under the CF:
  - Liquidity relief:
    - For countries with sustainable debt but financing needs exceed mobilizable financing.
    - Treatment reduces debt service payments during IMF-supported program years and spreads repayments over a longer period without necessarily reducing debt in present value terms.
  - Restoring debt sustainability (solvency relief):
    - For countries whose debts are unsustainable despite sound policies.
    - May require reductions in debt in present value terms as part of a broader package.
    - The amount of debt reduction varies widely; options include repaying original principal over a longer period or an upfront “haircut” or principal reduction.

### Box: Debt Sustainability Definition and Concepts in the LIC DSF (summarized)
- Debt is sustainable when there is a high likelihood a country can meet current and future financial obligations while pursuing feasible fiscal adjustment consistent with growth and development goals.  
- A debt treatment becomes necessary if feasible fiscal adjustment is not sufficient to restore debt sustainability.  
- The need for and design of a debt treatment are assessed during discussions on an IMF-supported program, which triggers:
  - an analysis of financing needs and sources, and
  - a joint IMF-World Bank Debt Sustainability Analysis (DSA) using the LIC DSF.  
- Outcomes from the DSA guide treatment type:
  - No debt treatment needed: DSA finds debt sustainable and financing sufficient.
  - Liquidity relief: DSA finds debt sustainable but financing insufficient; the financing gap defines the “envelope” for reductions in debt service payments.
  - Solvency relief: DSA finds debt unsustainable; deeper treatment needed to place countries at least into moderate risk of debt distress over the medium term (or by end of IMF program in exceptional access cases).

### IV. Collaborative Process and Key Steps Toward Debt Treatments
- Key parties: debtor and creditors, supported by IMF and World Bank. Steps include:
  - Country requests CF debt treatment from each official bilateral creditor and requests (or has) an IMF-supported program.
  - Development of IMF-supported program: country and IMF set policies to restore medium-term external viability and assess financing needs.
  - Assessment of debt sustainability and distress risks via LIC DSF (joint IMF-World Bank for LICs).
  - Formation of a Creditor Committee by G20 and Paris Club official bilateral creditors to discuss the debt treatment once IMF staff reaches staff-level agreement on an IMF-supported program (or a review under an existing program).
  - IMF provides official and private creditors with an aggregate “envelope” for debt service and debt consistent with closing program financing gaps, reducing debt risks, and, if needed, restoring debt sustainability.
  - Official bilateral creditors provide assurances supporting a debt treatment consistent with that envelope.
  - Finalizing and implementing the debt treatment:
    - IMF assesses whether the debtor has a credible process for private debt resolution and safeguards in place for IMF Executive Board approval.
    - After IMF program approval, official bilateral creditors and the debtor agree an MOU detailing:
      - reduction in debt service during the determined period;
      - extension of duration of payments; and, where needed,
      - reduction in the present value of payments.
    - These parameters guide implementation of relief by other official bilateral creditors and private creditors via bilateral agreements with the debtor.
  - Program monitoring:
    - IMF Executive Board monitors program implementation, including implementation of the debt treatment by participating G20 and Paris Club creditors, other official creditors, and private creditors subject to the comparability clause.

### V. Comparable Treatment of Private Creditors
- Comparability of treatment by private creditors is a critical CF element and is closely monitored by official bilateral creditors, who may withdraw their treatment if comparability is not met.  
- Countries must seek a treatment from private creditors at least as favorable as that in the MOU with official creditors.  
- Practical expectations:
  - If official creditors provide reprofiling of debt service within a period, private creditors are generally expected to provide a comparable reduction in nominal debt service during that period and an extension in duration of payments.
  - If the MOU specifies a cut in present value of debt, private creditors are generally expected to provide at least that reduction.
  - Comparability is assessed at the level of private creditors as a whole, not on a creditor-by-creditor basis, per Paris Club practice.
- Debtor countries generally hire financial and legal advisors to engage with private creditors; support may be available from the World Bank’s Debt Reduction Facility (subject to DRF guidelines) and the African Legal Support Facility for some countries.  
- Historical experience indicates private creditors will generally agree to comparable treatment recognizing the debtor cannot offer a better treatment and that IMF lending to a country in arrears to private creditors is not precluded when certain conditions are met.

### VI. Using the Common Framework to Support Recovery
- The CF can replace DSSI in providing liquidity relief and can operate over a longer horizon suited to countries recovering from the COVID crisis.  
- A key concern: some countries with unsustainable debt or very large financing needs may not utilize or may delay utilizing the CF, potentially undermining recovery prospects.

*Special Series on COVID-19 note by Craig Beaumont and Dalia Hakura, IMF, June 24, 2021.*

### Section 2

### enspecial-series-on-covid19-the-common-framework-utilizing-its-flexibility-to-support-developing-cou - Section 2

### (1) Unsustainable debts must be resolved in a timely and durable manner
- When a country is facing an unsustainable debt burden, its creditors have often already reassessed credit risks, limiting the countries’ access to financing and reducing its capacity to address the crisis.
- Knock-on effects often include pressures on monetary and financial stability and lower investment.
- It is important to approach the IMF for a package of support that also restores debt sustainability, as only by tackling the debt problem forcefully can the country return to a path of sustained growth.
- For LICs facing unsustainable debt:
  - Consider utilizing the CF, as it will coordinate relief from the most important official bilateral creditors.
  - By comparability of treatment, the CF will also bring in other creditors including the private sector.
  - A broad-based treatment helps address creditor concerns about fair burden sharing, which could otherwise result in delays.
- Timely treatments are needed but they should also be durable, and this is a key goal of the Common Framework.

### (2) Debt reprofiling would support fiscal space for recovery in other cases
- Even countries with sustainable debts often face difficult trade-offs during recovery from the current crisis.
- Domestic financing may be unduly costly, curtailing future growth by crowding out lending to the private sector and leading to a buildup of financial stability risks, including through an intensification of the sovereign-bank nexus.
- Meeting the health and other costs of the crisis may require cutbacks elsewhere, such as investment, with the potential to undermine recovery and future growth.
- An IMF-supported program is a traditional financing tool for countries in these circumstances.
- In the current deep crisis, financing provided by the IMF and other donors may not always be sufficient.
- By reducing debt service during the program period, a reprofiling of debt service from the CF would:
  - Enhance fiscal space.
  - Smooth fiscal adjustment over time.
  - Help the country recover while protecting its long-term growth prospects.
- Concerns about credit standing and access to financing may deter some countries from IMF-supported programs coupled with CF reprofiling:
  - This is less of a concern for most DSSI eligible countries which have not issued international sovereign bonds or do not have imminent plans to do so.
  - Where such bonds are outstanding, official bilateral creditors and the country have a mutual interest to utilize debt reprofiling modalities that limit creditworthiness impacts as these may undermine the repayment capacity of a country.

### Conclusion — Policy implications and priorities
- Building confidence in the CF among the full range of countries that require debt treatments should be a priority to promote debtor country participation and maximize its contribution to recovery in eligible countries.
- The CF provides an important new opportunity to take a coordinated approach aimed at delivering more comprehensive, timely, fairer, and more durable debt restructurings.
- Successful conclusion of a case with a deep debt treatment will be important for eligible countries facing severe debt challenges by giving confidence that creditor coordination under the CF, together with an IMF-supported program, can enable them to return to sustained growth.
- The international community should consider supporting reprofiling of debt using the CF for those countries with sustainable debt but insufficient financing to maintain high-priority social and investment spending.
- Failing to deliver debt treatments via the CF risks impeding countries’ recovery or requiring reliance on costly and unstable sources of financing, which may ultimately require more debt relief.

---


_Source: https://www.imf.org/-/media/files/publications/covid19-special-notes/enspecial-series-on-covid19-the-common-framework-utilizing-its-flexibility-to-support-developing-cou.pdf_