• Sri Lanka is in the final stages of negotiations with the International Monetary Fund (IMF) on the much-awaited $2.9 billion bailout package that could help the debt-trapped island nation recover from the unprecedented economic crisis.

• Its completion hinges on assurances on debt restructuring from creditors that include China, India and the Paris Club, a grouping of major creditor nations.

• The Paris Club has given financing assurances to support the IMF’s approval of an extended fund facility for Sri Lanka.

• Sri Lanka was hit by an unprecedented financial crisis in 2022, the worst since its independence from Britain in 1948, due to a severe paucity of foreign exchange reserves. 

What is the Paris Club?

• 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.

• It undertakes multilateral reschedulings and in some cases reductions of debt service payments and arrears of developing countries owed to creditor governments.

• The origin of the Paris Club is traced back to the meetings that were held in the French capital in May 1956 to reschedule Argentina’s debt obligations with the export credit agencies of various OECD countries.

• At that time, the Club had no formal rules or procedures and was only intended to provide pragmatic responses to specific problems. 

• Since then, it has provided substantive debt relief and restructuring to many countries on a case-by-case basis.

• The Chair and the General Secretariat of the Paris Club are run by senior officials from the French Treasury.

How it works?

• As debtor countries undertake reforms to stabilise and restore their macroeconomic and financial situation, Paris Club creditors provide an appropriate debt treatment. 

• It provides debt restructuring only to debtor countries that need debt relief and that have implemented and are committed to implementing the reforms necessary to restore their economic and financial situation. Paris Club debt relief is usually contingent on a country having an economic reform programme with the IMF and World Bank.

• Paris Club creditors provide debt treatments to debtor countries in the form of rescheduling, which is debt relief by postponement or, in the case of concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment).

• Since its inception, the Paris Club has reached 478 agreements with 102 different debtor countries amounting to $614 billion.

Members of the Paris Club:

There are 22 permanent members of the Paris Club, and other official bilateral creditors may participate. 

Paris Club permanent members are: 

Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, South Korea, Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, United Kingdom and USA.

Functioning principles of Paris Club

It has a set of principles to be implemented when working out agreements on debt restructuring.

i) Solidarity: All members of the Paris Club agree to act as a group in their dealings with a given debtor country and be sensitive to the effect that the management of their particular claims may have on the claims of other members.

ii) Consensus: Paris Club decisions cannot be taken without a consensus among the participating creditor countries.

iii) Information sharing: The Paris Club is a unique information-sharing forum. The members regularly share views and information with each other on the situation of debtor countries, benefit from participation by the IMF and World Bank, and share data on their claims on a reciprocal basis. In order for discussions to remain productive, deliberations are kept confidential.

iv) Case by case: The Paris Club makes decisions on a case-by-case basis in order to tailor its action to each debtor country’s individual situation. This principle was consolidated by the Evian Approach.

v) Conditionality: Negotiations take place only when debt relief is required, a country is implementing reforms, and has a demonstrated track record

vi) Comparability of treatment: A debtor country that signs an agreement with its Paris Club creditors should not accept from its non-Paris Club commercial and bilateral creditors terms of treatment of its debt less favorable to the debtor than those agreed with the Paris Club.

UPSC Civil Services Examination, Previous Year Question (PYQ) 2022

With reference to the “G20 Common Framework”, consider the following statements: 

1) It is an initiative endorsed by the G20 together with the Paris Club. 

2) It is an initiative to support Low Income Countries with unsustainable debt. 

Which of the statements given above is/are correct ? 

(a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

Answer: c.

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