The recent G20 finance ministers’ meeting has reminded us of the powerful role the G20 plays in financial multilateralism. Will the objectives be met in practice?

G20, financial multilateralism, Common Framework for Debt Treatments, DSSI, global tax framework, Special Drawing Rights, Resilience and Sustainability Trust, vaccines, SDR, Rapid Credit Facility, Rapid Financing Instrument, global economy, global governance

The recent G20 finance ministers’ meeting has reminded us of the powerful role the G20 plays in financial multilateralism. In the last year alone, the G20 has secured a global deal on international taxation, championed the issuance of US $650 billion worth of Special Drawing Rights, and launched a debt-relief programme for low-income nations suffering from COVID. It is a work plan reminiscent of G20’s role during the trans-Atlantic financial crisis a decade ago.

The question that arises then is: Will the objectives be met in practice?

A new global tax framework in motion

Efforts to develop consensus on a global tax framework began in 2013 when the G20 first endorsed the OECD (Organisation for Economic Cooperation and Development) framework on tax regulations — Base Erosion and Profit Shifting (BEPS) — comprising 15 principles and tasked OECD with the responsibility of building a consensus (‘Inclusive Framework’) with nations beyond its own members. Today, 139 nations are part of the initiative.

The approval of emerging markets like China, India, Brazil, Turkey, Indonesia, and Mexico is a powerful reminder of what can be achieved in global governance.

One of the principles was to address tax challenges arising due to digitalisation of the economy. On 2 July 2021, the OECD proudly announced that 132 of the 139 nations had signed onto the global deal. The framework includes two components: Pillar one that defines how profits from multinationals can be taxed when the revenue is being generated across nations. And Pillar two, that defines a global minimum corporate tax rate of 15 percent to restrict multinationals from seeking low tax jurisdictions to register their businesses.

Obviously, offshore financial centres and low-tax jurisdictions were the hardest to convince. For instance, Ireland, which is known to attract corporates with their low tax benefits, is yet come to on board. Yet, the approval of emerging markets like China, India, Brazil, Turkey, Indonesia, and Mexico is a powerful reminder of what can be achieved in global governance. Together, the 132 nations account for 90 percent of global GDP — that is a significant segment.

India has been fighting to get its fair share of taxes from multinationals that have often used tax havens and ‘treaty shopping’ to escape tax responsibilities. The government welcomed the framework because it forces multinationals to pay tax where the revenue is generated. How much additional tax revenue India will gain will depend on the formulae that underlie the agreement. For instance, India may have to withdraw the 2 percent levy it currently imposes on digital multinationals on e-commerce transactions as the new global framework comes into effect. This may cause India to have a net loss in tax revenue.

India has been fighting to get its fair share of taxes from multinationals that have often used tax havens and ‘treaty shopping’ to escape tax responsibilities.

The threshold of 15 percent has been challenged by many developing nations for being too low when the existing rates are closer to 20-25 percent. Also, only those multinationals that have annual revenue greater than 20 billion euros and profits greater than 10 percent of the turnover will qualify for 20 percent profit sharing. This may result in a very narrow set of digital firms the Indian government can tax. The G24, an inter-governmental group that represents the voice of developing countries on monetary and development issues at the International Monetary Fund and World Bank, has requested a lower threshold and a higher tax margin of 30 percent to 50 percent on the profits.

A similar threshold, but to address climate change, was introduced by the IMF in June 2020 for the International Carbon Price Floor. The proposal recommends a carbon price floor of US $25 for India, US $50 for China, and US $75 for the European Union, United States, Canada, and the UK. The Indian government has asked for all such proposals to be discussed within the framework of the Paris Agreement, reflecting agreed principles of common but differentiated responsibility, respective capability, voluntary commitments, and technology transfer. But if the proposal picks up steam, as the global deal on taxation did, India will have to makes its voice louder to ensure that its interests are secure.

Debt Service Suspension Initiative

For pandemic-induced debt relief, the G20’s awkwardly titled, Debt Service Suspension Initiative (DSSI), managed by the IMF and World Bank, has garnered similar global consensus. The significance of the initiative is that it combines Paris Club (mainly the rich Western nations) to work with non-Paris Club members such as China, India, Saudi Arabia, and Turkey to provide temporary relief on debt payments. The World Bank International Debt Statistics 2021 estimates that the total external debt stock of low-income countries eligible for DSSI was US $744 billion in 2019. Launched on 1 May 2020, the programme was open to 73 eligible developing nations that needed relief from paying their debt obligations to bilateral creditors. G20 nations accounted for over 90 percent of the loans. China alone accounts for over 60 percent of outstanding debt of the DSSI eligible nations. David Mihalyi and Scott Morris estimate debt repayments to China in 2019 have overtaken the debt disbursements. This means that China’s participation is going to be crucial for DSSI.

If DSSI fails, it will stymie efforts to develop the more ambitious ‘G20 Common Framework for Debt Treatments’ framework being currently designed for permanent restructuring of debt — a task that lands on India’s desk as chair of the G20 in 2023.

While the interest in DSSI was high, its uptake has been slow. By March 2021, the initiative had approved US $5 billion in relief to 40 eligible countries — a fraction of the US $12 trillion of cumulative loss to the global economy that the IMF had projected for 2020 and 2021. Bery, Garcia-Herrero and Weil of Bruegel, a Brussels-based think tank, illustrate how developing nations are hesitant to apply for the programme for fear of being downgraded by rating agencies when vulnerabilities of their public finances are exposed. They also explained that the reluctance of the IMF and private creditors to restructure debt discouraged nations like China to take a more active role in DSSI. Plus, there are private creditors whose loans have increased nearly five times in the last decade to a total of US $102 billion on which there continues to be no formal global consensus.

India has been a keen supporter of DSSI and the Common Framework. As the Co-Chair of the G20 Framework Working Group, the group responsible for global macroeconomic issues, India’s voice is recognised in programme design and implementation. If DSSI fails, it will stymie efforts to develop the more ambitious ‘G20 Common Framework for Debt Treatments’ framework being currently designed for permanent restructuring of debt — a task that lands on India’s desk as chair of the G20 in 2023.

Special Drawing Rights to revive global economy

Beyond tax and debt relief, the G20 seems particularly pleased with IMF’s leadership on securing the approval of its members for the issuance of new Special Drawing Rights (SDR)of US $65o billion — the largest in history. The announcement was made by the IMF Managing Director, Kristina Georgieva, on 10 July 2021 at the culmination of the G20 finance and central bank governors meeting.

Beyond tax and debt relief, the G20 seems particularly pleased with IMF’s leadership on securing the approval of its members for the issuance of new Special Drawing Rights (SDR) of US $65o billion — the largest in history.

SDR is an international reserve asset managed by the IMF. For practical purposes, the issuance of SDRs can be best understood as printing of new money by the world’s central bank — the IMF — to infuse liquidity in the global economy and replenish depleting reserves for nations. Each member nation of the IMF will get the SDRs allocated based on its quota at the institution.

What irks some developing countries is that the richest nations (which have the largest share of quota at the IMF) naturally get the largest share of SDRs. For instance, the United States will receive US $133 billion of SDRs of US $650 billion issued. A report by the European Network on Debt and Development estimates that the low-income nations will get less than one percent of the total issuance, a puny US $7 billion, whereas the requirement is closer to US $3 trillion. The report makes the stark comparison with US $2.7 trillion infusion by the US Federal Reserve and US $2.1 trillion infusion by the European Central Bank for their respective economies. Still, the United States and the IMF consider it a big win. The decision overturns the block imposed by the Trump administration. An amount higher than US $650 billion would have to go to the US Congress for approval, which the Biden administration has avoided.

The low-income nations may exchange their allocated SDRs for, say, US dollars in a deal with the US Treasury (there are 32 nations that provide this offer of voluntary exchange of SDRs for dollars, euros or yen). Some rich nations have recycled the SDRs to capitalise IMF’s existing funds for concessional loans, such as the Poverty Reduction and Growth Trust. Nearly 60 percent of the Trust’s financing has come via this route since the start of the pandemic.

What irks some developing countries is that the richest nations (which have the largest share of quota at the IMF) naturally get the largest share of SDRs.

The irony is obvious: IMF’s SDR allocations are actually perpetuating the role of rich nations as creditors. India was apparently resistant to the idea of additional SDR allocation. There was no official explanation, but the reasons given above and India’s continuing fight for reform of the IMF quotas to reflect its share of the global economy would justify the position.

But experts such as Kevin Gallagher and Jose Antonio Ocampo are more sanguine about the new issuance. They suggest that the unused SDRs be used for IMF’s Rapid Credit Facility and the Rapid Financing Instrument, programmes through which loans can be fast tracked without conditionality. IMF itself has suggested that the unused SDRs could be used to capitalise a new fund for climate change (Resilience and Sustainability Trust) which can be used for affordable, long-term finance of green projects. There are other concepts being discussed such as the creation of a World Recovery Fund or a Countercyclical Sovereign Financial Mechanism, from the T20[1] (official sub-forum of the G20 for think tanks).

The IMF itself has good alternate suggestions. A staff note has proposed that steps be taken to vaccinate 60 percent of the population in all nations by the first half of 2022. This will require an expense of a mere US $50 billion but expected benefit of US $9 trillion as the global economy gets moving again.

South Asia is estimated to house nearly 60 percent of this ‘New Poor,’ a significant portion of whom would be in India.

Meanwhile, a new long-term concern is the grim implications and collateral damage of the pandemic on the world’s poorest. The rich have easier access to vaccines, 0nline education, technology jobs and economic recovery stimulus whereas the poor still seek access to basic necessities such as food and healthcare. The World Bank estimates that nearly, 124 million people are likely to get pushed into abject poverty. South Asia is estimated to house nearly 60 percent of this ‘New Poor,’ a significant portion of whom would be in India. The IMF, on the other hand, has raised concerns about economic stability and social unrest, caused by an emerging “Great Divergence” in global growth with 50 percent of the developing world falling further behind on their development curve.

The promise of G20’s financial multilateralism can only be fulfilled if the benefits accrue to those nations and communities that are most vulnerable. Else, the anxiety of uneven, unfair benefits may eventually derail the ‘world’s economic steering committee’.


[1] Author is Co-Chair of the T20 International Finance Taskforce under Italy’s G20 presidency of 2021.

The views expressed above belong to the author(s).

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REQUEST_URI: https://www.orfonline.org/expert-speak/promise-anxiety-g20-financial-multilateralism/
Title: The promise and anxiety of G20’s financial multilateralism
ID: 89885
date publish: 2021-07-23 17:36:13
image: https://www.orfonline.org/wp-content/uploads/2021/07/G20.jpg
authors: NULL
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