Questions and Answers

Loading component...

The IMF’s Policies on Sovereign Arrears

Last Updated: May 18, 2022

When members running sovereign arrears seek IMF financing, the sovereign arrears policies govern the conditions under which the IMF can lend. These policies strike a balance between urging members to stay current on their debt payments — to the extent possible — and allowing the Fund to support members running arrears that are taking appropriate steps to resolve them. To better serve our members, these policies need to be periodically reviewed.
The IMF has now completed the modernization of its legal and policy framework for sovereign debt restructurings in the context of IMF-supported programs.
Members are contending with the new realities of a more complex creditor landscape and the need to increase debt transparency. The amendments to the IMF’s sovereign arrears policies are intended to help members address both concerns.

Loading component...

What are the IMF’s sovereign arrears policies?

The IMF assists countries in solving their balance of payments problems by providing them with financing as they implement policies to restore medium term external viability.

At times, countries hit by crises cannot pay their debts to external creditors on time and in full, leading to the accumulation of sovereign arrears. Such arrears complicate the resolution of the debtor country’s balance of payments problems by disrupting relations with external creditors and limiting access to financing.

The IMF’s sovereign arrears policies govern the conditions under which the IMF can lend to countries running sovereign external arrears. These policies reflect a trade-off. On the one hand, the IMF urges its members to stay current on their payments to the extent possible and foster a good relationship with creditors. On the other, the IMF tries to find ways to help members in economic and financial crisis. The arrears policies try to strike this balance in a way that is consistent with the IMF’s mandate to help resolve balance of payments problems and restore medium-term debt sustainability.

The conditions under which the IMF lends into arrears depend on the type of creditor whose claims are in arrears:

The Non-Toleration Policy (NTP) applies to certain claims of International Financial Institutions (IFIs) and official bilateral creditors that are outside the scope of a debt restructuring.
The Lending Into Official Arrears (LIOA) policy applies to claims of official bilateral creditors and IFIs that are within the scope of a debt restructuring.
The Lending Into Arrears policy applies to claims of external private creditors on sovereigns.

The IMF’s arrears policies interact with its other policies, such as those on financing assurances, debt sustainability, and market access.

Loading component...

How are the IMF’s sovereign arrears policies applied to official bilateral creditors and International Financial Institutions?

With respect to lending into arrears to official bilateral creditors and IFIs, defined as financial institutions with at least two sovereign members and no non-sovereign member, the IMF applies two policies: the Non-Toleration Policy and the Lending Into Official Arrears policy:

The Non-Toleration Policy prevents the IMF from lending in the presence of arrears to official (bilateral or IFI) creditors with two exceptions:
- With respect to official bilateral creditors, the IMF can lend if the creditors do not object despite the arrears.
- With respect to IFIs, the IMF can lend if the member requesting financial support from the IMF has a credible plan to resolve the arrears during the program period.
The Lending Into Official Arrears policy allows the IMF to provide financing despite sovereign arrears to official bilateral creditors and some IFIs (namely, when these fall outside the scope of the NTP, see below), provided that certain conditions under the LIOA are met.

Crucial to the application of both of these policies is the distinction between cases where official sector involvement in the debt restructuring is needed to restore debt sustainability and where official sector involvement is not needed.

In cases where official sector involvement is not needed, the Non-Toleration Policy applies to both official bilateral creditors and IFIs.

In cases where official sector involvement is needed and the arrears are to official bilateral creditors, the Lending Into Official Arrears policy applies. Where official sector involvement is needed and the arrears are to an IFI, the Non-Toleration Policy applies when the IFI meets certain conditions—otherwise the Lending Into Official Arrears policy continues applies.

Lending Into Official Arrears when applied to official bilateral creditors. When a member is in arrears to an official bilateral creditor and official sector involvement is needed, the IMF can provide financing under the following conditions:

When there is a representative Paris Club agreement in place. To be representative, the agreement must provide a majority of the total financing contributions required from official bilateral creditors over the program period. When such financing assurances are received from the Paris Club, the country is no longer considered to be in arrears to either participating or non-participating creditors for purposes of the policy.
In the absence of a representative Paris Club agreement, the IMF may provide financing if the creditor consents.
In the absence of either a representative Paris Club agreement or creditor consent, the IMF may provide financing if the following criteria are met:

prompt financial support from the IMF is deemed essential for economic stability and growth, and the member is pursuing appropriate policies;
the debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the parameters of the IMF-supported program, even if the creditor is unwilling to reach such an agreement; and
the decision to provide financing despite the arrears would not have an undue negative effect on the IMF’s ability to mobilize official financing packages in future cases.

The IMF Executive Board has provided further specific guidance on how to apply the second and third criteria.

Lending Into Official Arrears when applied to IFIs. When the Non-Toleration Policy does not apply to an IFI, the Lending Into Official Arrears policy is applied. This means that in the case of arrears to that IFI, the IMF may provide financing if:
- the institution has provided consent to Fund lending despite the arrears, or
- when all of the three criteria listed in point 3 above are met.
Non-Toleration Policy in cases requiring official sector involvement, when applied to selected IFIs. In cases where official sector involvement is needed, the decision to apply the NTP to an IFI is a judgment call of the IMF’s Executive Board, informed by the following characteristics of the IFI:

Mandate. Specifically, if the IFI’s mandate is aligned with the IMF’s mandate to solve balance of payments problems, as would be the case if the IFI is a Regional Financing Arrangement;
Membership. If the IFI has global rather than regional membership;
Participation in the Highly Indebted Poor Countries (HIPC) Initiative;
Exclusion from past Paris Club restructurings; and
Exclusion from a debt treatment by a creditor committee based on a “representative standing forum” recognized under the LIOA policy in the case at hand. At present, the only recognized representative standing forum is the Paris Club.

Loading component...

How are the IMF’s sovereign arrears policies applied to private creditors?

The Lending Into Arrears policy for private creditors means that the IMF may provide financing despite sovereign arrears to external private creditors on a case-by-case basis and only where:

prompt financial support from the IMF is considered essential for the successful implementation of the member’s IMF-supported program; and

the member is pursuing appropriate policies and making a “good faith” effort to reach a collaborative agreement with its private creditors.

In turn, the assessment of “good faith” effort is guided by the following principles:

engagement in an early dialogue with creditors, which should continue until the restructuring is complete;
sharing of relevant information with all creditors on a timely basis; and
providing creditors with an early opportunity to give input on the design of restructuring strategies and the design of individual instruments.

Loading component...

Why were the IMF’s sovereign arrears policies updated?

The IMF periodically reviews its sovereign arrears policies, like all of the IMF’s policies, to ensure that they are up to date. In particular, the policies need to reflect the current creditor landscape, while definitions and practices for categorizing claims need to be periodically updated. Changes in the creditor landscape since the previous review include the emergence of new official bilateral and IFI creditors and instruments, whose treatment was difficult to determine under the existing policies.

This review is the last step in a multi-year modernization of the IMF’s legal and policy framework regarding sovereign debt restructurings.

Loading component...

How was the Lending Into Official Arrears policy modified?

The Lending Into Official Arrears policy as applied to official bilateral creditors was not modified. This was found to be working well and hence no changes were proposed.

However, the policy was extended to some IFIs. Specifically, it now also applies to IFIs in official restructuring cases when the IMF Executive Board indicates that the Non-Toleration of Arrears policy should not be applied.

How was the Non-Toleration Policy modified and what are the changes applying to International Financial Institutions?

There were two main changes.

First, the distinction between cases which require a restructuring of official claims in order to restore debt sustainability and those that do not, which previously applied only to bilateral creditors in the context of the Lending Into Official Arrears policy, was extended to IFIs. The Non-Toleration Policy (NTP) continues to apply to all IFIs when a restructuring of official claims is not required.

Second, the factors informing IMF Executive Board judgment about whether the NTP should be applied (even when restructuring of official claims is required) were extended. Previously, this judgment was based only on membership (global rather than regional), treatment in Paris Club restructurings (whether the Paris Club had considered the IFI to be a preferred creditor), and participation in the HIPC Initiative. These factors are unhelpful in classifying new regional IFIs that have no track record in Paris Club restructurings and did not exist at the time of the HIPC Initiative.

The new NTP addresses this by adding two new factors that will inform the IMF Executive Board’s judgment. These are based on the IFI’s mandate and role in the global financial safety net (in particular, whether the IFI is a regional financing arrangement), and on the IFI’s treatment by a creditor committee (based on a representative standing forum recognized under the LIOA policy – currently the Paris Club) in the case at hand. The latter implies that an IFI that is not treated as a preferred creditor by such a committee will not benefit from the policy, unless one or several of the other factors (for example, global rather than regional membership) suggests the opposite.

Loading component...

How was the Lending Into Arrears policy modified?

This review recognizes the changes in the debt-creditor engagement over the last 20 years with respect to private-sector creditors and includes the following amendments:

revised guiding principles on “good faith” efforts by the debtor under the policy, including to simplify requirements for engagement with creditor committees; and
the addition that any debt restructuring offer by the debtor should restore debt sustainability consistent with the program parameters, as is already required under the IMF’s Lending Into Official Arrears policy.

The amended policy also provides additional guidance on the sharing of relevant information with creditors, with a particular focus on debt transparency.

Loading component...

Can the IMF lend to countries that have unsustainable debts held by private sector creditors but are not (yet) in arrears to their private creditors?

When the IMF considers a country’s debt to be unsustainable and the country is not (yet) in arrears to its private sector creditors, then the IMF can only lend if a “credible process” to restore sustainability is underway. The recent review recalls elements to determine whether this is the case, and codifies the existing practice. This includes practical steps, such as hiring legal and financial advisors; the sharing of “relevant information” with private creditors and the design of the debt restructuring strategy.

Loading component...

Do these policies impact the IMF’s Debt Sustainability Analysis?

No. However, the IMF’s debt sustainability analysis (DSA) informs the decision to provide IMF financing. When a member country requests financing from the IMF, the Fund assesses whether the country's policies are going to restore debt sustainability. This assessment is based on a DSA that determines whether the government is able to meet all its current and future payment obligations. The DSA is forward looking and considers steps being taken by the member to restore sustainability over the medium term. In cases where a country's debt is assessed as unsustainable, the IMF is precluded from providing financing, unless the member takes steps to restore debt sustainability, including by seeking a debt restructuring form its creditors.

IMF’s Work

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

Loading component...

Questions and Answers

Loading component...

The IMF’s Policies on Sovereign Arrears

Loading component...

What are the IMF’s sovereign arrears policies?

Loading component...

How are the IMF’s sovereign arrears policies applied to official bilateral creditors and International Financial Institutions?

Loading component...

How are the IMF’s sovereign arrears policies applied to private creditors?

Loading component...

Why were the IMF’s sovereign arrears policies updated?

Loading component...

How was the Lending Into Official Arrears policy modified?

How was the Non-Toleration Policy modified and what are the changes applying to International Financial Institutions?

Loading component...

How was the Lending Into Arrears policy modified?

Loading component...

Can the IMF lend to countries that have unsustainable debts held by private sector creditors but are not (yet) in arrears to their private creditors?

Loading component...

Do these policies impact the IMF’s Debt Sustainability Analysis?

Loading component...

IMF’s Work

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

Policy Paper

Related Links

The IMF and COVID-19

Publications