Questions and Answers on Debt Restructuring in Low Income Countries

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Publication: Questions and Answers on Debt Restructuring in Low Income Countries, IMF Strategy, Policy and Review Department.
Date: April 6, 2022.
Core message: Some low-income countries will likely have to restructure their debt; restructurings are becoming more complex and require timely, efficient, and orderly mechanisms.

The IMF notes that debt challenges in low-income countries have risen over the last decade, exacerbated by COVID-19 and the fallout of the war in Ukraine.
The 73 low-income countries that were eligible for the G20 Debt Service Suspension Initiative (DSSI) in 2020–21 and are now eligible for the G20 Common Framework:
- About 60 percent are now at high risk or already in debt distress, compared to less than 30 percent in 2015.
- Among the 41 DSSI countries at high risk or in debt distress: 4 have already undertaken a debt treatment and around 20 exhibit significant breaches of applicable high-risk threshold, half of which also have low levels of reserves and rising gross financing needs in 2022.
Historical context: Debt levels and accumulation of arrears in low-income countries are far from the situation in the 1990s before the Heavily Indebted Poor Countries (HIPC) initiative, but have been on the rise in the last decade.

Local currency debt for the median DSSI country:
- Rose from 7 percent of GDP in 2010 to 15 percent of GDP in 2021.
For DSSI countries with market access:
- Local currency debt increased from 8 percent of GDP in 2010 to 28 percent of GDP in 2021.
Sovereign-bank links have deepened, with larger holdings of domestic sovereign debt at domestic banks.
Key trade-off: Restructuring sovereign debt owed to domestic banks may be necessary but can affect financial stability and domestic banks’ ability to finance growth.

Creditor composition has diversified, complicating coordination for restructurings:
- In 2006, 28 percent of DSSI countries’ external debt was owed to Paris Club creditors; by 2020 this share had fallen to 11 percent.
- Over the same period, the share owed to China rose from 2 to 18 percent.
- Eurobonds’ share rose from 3 to 11 percent.
Distribution and concentration:
- Among 68 DSSI countries with available data:
- 22 countries have debt to private creditors that exceeds 15 percent of their total external debt; these 22 countries represent 83 percent of the total exposure of private creditors.
- Only 26 countries report bonded debt; 18 do not report any private debt.
- 22 countries have a debt to China that exceeds 20 percent of their total external debt; these 22 countries represent 76 percent of China’s total exposure to DSSI countries.
- Six countries (Angola, Ethiopia, Kenya, Lao PDR, Pakistan, and Zambia) together account for about half of China’s total exposure to DSSI countries.
- China is the biggest official bilateral creditor in more than half of the DSSI countries (counting all 22 Paris Club creditors as a single pool), with a median share of China in the total debt owed to official bilateral creditors reaching 43 percent.
Implication: China would play a key role in most DSSI countries’ debt restructurings involving official bilateral creditors.

The increased frequency and complexity of restructurings in DSSI countries implies an urgent need for mechanisms that ensure:
- Coordination among diverse creditor types (official bilateral creditors, China, private bondholders, multilateral institutions).
- Confidence among stakeholders to enable timely, orderly, and efficient restructurings.
Potential role for the G20 Common Framework:
- Improvements in the G20 Common Framework could play an important role in enhancing coordination and timely resolution of debt problems.
Rationale: Timely, orderly, and efficient debt restructurings serve the interests of debtor countries, their creditors, and broader global stability and prosperity.

The Common Framework: Utilizing its Flexibility to Support Developing Countries’ Recovery
- The Common Framework: Utilizing its Flexibility to Support Developing Countries’ Recovery (Markdown version)
- The Common Framework: Utilizing its Flexibility to Support Developing Countries’ Recovery (PDF)