Debt Cancellation and Debt Rescheduling: Options for Sovereign Debtors in the light of Covid-19 pandemic

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For sovereign debtors, the onset of Covid-19 pandemic has resulted in the need to re-align national budgets to fight the pandemic, aside from the need for additional resources to stimulate the economies to survive the negative economic effects of the Covid-19 pandemic. The direct consequence of budget re-alignments and additional budgetary support towards the Covid-19 related matters is the likelihood of debt stress as the meagre resources can hardly sustain both debt service and Covid-19 pandemic matters. In the light of these challenges, it becomes necessary for sovereign debtors, especially technocrats in their debt management offices to consider all options to deal with the challenge. Debt cancellation and debt parameters, being accountable in the use of resources channeled towards the Covid -19 pandemic as lenders will surely seek a demonstration that their cancelled debt contributed to a the fight of the pandemic. Finally, fiscal discipline and a demonstration that the sovereign debtor was on course to meet its debt obligations, but for the pandemic, should be useful in persuading lenders to seriously consider debt cancellation.

Debt Rescheduling

The Cambridge Dictionary defines debt rescheduling as the situation when a debt is paid back over a longer period of time than was originally agreed. The debt restructuring process can be carried out by reducing the interest rates on loans or by extending the dates when the debt is due. Countries facing debt stress on account of Covid-19 can opt to restructure their debt with bondholders.  From a contract law perspective, debt rescheduling must be pursued by a renegotiation of the original terms of the loan agreement. It is also not uncommon for parties to provide some parameters for subsequent variation, alteration, amendment, revision or supplementing of the original loan agreement, in writing, which are the typical clauses to invoke in pursuing a debt rescheduling. rescheduling become unavoidable topics. So what is debt cancellation and debt rescheduling?

Debt Cancellation

Debt cancellation simply means a situation when a lender tells a borrower that he or she no longer must repay a loan. While under strict contract law debt cancellation entails the creditor forgiving a debt without any consideration in return from the borrower, in international development assistance, debt cancellation is a type of aid scheme applied to recipient countries with excessive burden of external debt but the recipient countries are expected to provide some form of consideration by committing to certain reform measures as an exchange to the debt treatment.

Debt cancellation is therefore not a right and sovereign debtors cannot invoke specific provisions of loan agreements to persuade the creditors to consider debt cancellation, notwithstanding that the reasons for seeking it are as noble as fighting the Covid-19 pandemic.

Notwithstanding that it is not a contractual right, the pursuit of debt cancellation can be enhanced by appreciating the debt cancellation policy of the lender thereby ensuring that the pursuit of debt cancellation is anchored within the policy factors that should aid sovereign debtors in pursuing debt rescheduling in light of the Covid-19 pandemic are similar to those for pursuing a debt cancellation. Lenders are more likely to agree to a debt rescheduling if it is within their policy framework, the sovereign debtor is accountable in demonstrating the prudent use of resources channeled to Covid-19 pandemic and where there is a demonstration of fiscal discipline and meeting the ‘but for the pandemic test’.

In a nutshell, debt cancellation and debt rescheduling remain viable options for sovereign debtors in the light of unexpected expenditures on account of Covid-19. Effective pursuit of either option depends on similar factors

Client Legal Alert – Equitas Legal Practitioners@2020

*This scholarly article is a general guide and does not contain definitive legal advice. Readers considering taking action on any of the issues discussed should speak to their legal advisors before taking any such action. Equitas disclaims any liability whatsoever arising from acting on this article.

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