Questions and Answers on Sovereign Debt Issues

Last Updated: February 24, 2021

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Recent debt developments

How big is the current debt problem and how is the COVID-19 pandemic affecting countries’ debt burdens?

  • Debt levels were elevated before the crisis. For example, before the onset of the COVID-19 crisis, an IMF paper published in February 2020 found that half of low-income countries (LICs) (36 of 70 countries) were at high risk of debt distress or already in debt distress. Many emerging market economies were also at significant risk of debt distress. Since the onset of the pandemic, a number of countries have announced their intention to seek debt restructurings. Some countries have already concluded debt restructurings, for example, Argentina and Ecuador, while others’ debt restructurings remain a work in progress, such as for Lebanon and Zambia. 
  • The COVID-19 pandemic is pushing debt levels to new heights. The pandemic is adding to spending needs as countries seek to mitigate the health and economic effects of the crisis, while revenues are falling due to lower growth and trade, together raising debt burdens. Some vulnerable countries are also facing higher financing costs or have very limited access to external financing. As a result, the pandemic has adversely affected both solvency and liquidity indicators of most if not all emerging market- and developing economies.
  • The ultimate extent of debt distress will depend on how deep and prolonged the impact of the pandemic will be, which will vary from country to country depending on access to medical interventions as well as the importance of commodity and oil exports, tourism, and remittances. Countries with higher debt burdens will face an even more difficult trade-off between scaling up much-needed health- and social safety net spending and public investment to meet ambitious development objectives on the one hand, and containing debt vulnerabilities on the other.
  • The extent of debt distress will also depend on the extent of international support to countries through debt service relief, concessional financing, and, when needed, support for debt restructuring.

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The G20 Debt Service Suspension Initiative (DSSI)

What does the Debt Service Suspension Initiative (DSSI) mean? 
How much debt service relief will be provided? 
How long will this debt service suspension last? Is this long enough? 
Will all official bilateral creditors comply, or just the G20? 
What progress has been made on getting the private sectors to contribute on equal terms as the official creditors under the DSSI? 
Do countries need to qualify for IMF financing in order to have access to the G20 debt service suspension initiative (DSSI)? 
What is the IMF’s role in supporting the implementation of the G20 DSSI? 
The poorest countries are offered temporary debt service relief, but many of them are already in debt distress or at high risk of debt distress. Wouldn’t it be better to restructure their debt? 
This initiative provides relief to the poorest countries. What about the middle-income countries that also need debt relief? 
Debt service due to the multilateral official creditors (the IMF and the World Bank) is about the same size as to bilateral official creditors. Why not suspend debt service payments to the IMF?
 
What does the Debt Service Suspension Initiative (DSSI) mean?
  • The Debt Service Suspension Initiative (DSSI) means that bilateral official creditors will, during a limited period, suspend debt service payments from the poorest countries (73 low- and lower middle-income countries) that request the suspension. It is a way to temporarily ease the financing constraints for these countries and free up scarce money that they can instead use to mitigate the human and economic impact of the COVID-19 crisis.
  • The DSSI helps address immediate liquidity needs but does not mean that existing debt sustainability problems in some of these countries will be resolved. Before the onset of the COVID-19 crisis, debt vulnerabilities had become elevated in many IDA countries, with more than 50 percent being classified as either in or at high risk of debt distress. But DSSI does help by providing more time to properly assess and address debt sustainability on a country-by-country basis.
How much debt service relief will be provided?
  • The overall amount of relief depends on how many countries request to benefit from the DSSI. As of mid-February, 2021, more than 60 percent of the eligible countries have made requests for the debt service suspension. More than 50 percent of eligible countries have so far requested the extension of the debt suspension through June 2021. The DSSI requests received amounted to about US$5 billion in debt service suspended in 2020.
How long will this debt service suspension last? Is this long enough?
  • For now, G20 bilateral official creditors have agreed to extend the initial debt service suspension by six months until end of June 2021. The G20 have agreed to examine the need for a further extension by the time of the IMF-World Bank Spring Meetings in April 2021.  
What progress has been made on getting the private sectors to contribute on equal terms as the official creditors under the DSSI?
  • The recommendation by the International Institute of Finance , the IIF, that private creditors voluntarily grant debt payment forbearance in a similar way, is welcome. On May 28, 2020, the IIF released Terms of Reference (ToR) to facilitate voluntary private sector involvement in the DSSI after extensive discussions and collaboration with private sector creditors. The IIF’s ToR provide a flexible framework to allow sustained progress in the conversations between sovereign borrowers and creditors. However, private sector participation has been limited so far.
  • The IMF, as the G20, would like to see private creditors participating in the debt service suspension on equal terms when requested by eligible countries. By supporting low income countries at this time, private creditors can facilitate their efforts to cope with and recover from the pandemic, which is also in the long-term commercial interest of private creditors. 
Do countries need to qualify for IMF financing in order to have access to the G20 debt service suspension initiative (DSSI)?
  • In order to apply for the DSSI, a country either needs to be in an IMF financing arrangement, or it needs to have requested financing (including emergency financing) from the IMF. However, a request is enough. This means that even countries that could not have access to IMF financing because their debts are not sustainable can still benefit from the DSSI. A country that is already participating in the DSSI and would like an extension into 2021 could continue to participate. There is no need for the country to make another request for IMF financing.
What is the IMF’s role in supporting the implementation of the G20 DSSI?
  • The IMF and the World Bank staffs are providing technical support to the Debt Service Suspension Initiative (DSSI), with our country teams working to inform countries about the initiative and also by supporting the provision of information requested by the G20 such as monitoring the use of the resources released by the DSSI to address the pandemic shock. 
The poorest countries are offered temporary debt service relief, but many of them are already in debt distress or at high risk of debt distress. Wouldn’t it be better to restructure their debt?

When debt is unsustainable, restructuring is urgently needed. The IMF takes a case-by-case approach in assessing whether a country needs a debt restructuring, taking into account debt sustainability analysis and the continued availability of the financing that countries need for their long term growth and development. For those countries that have unsustainable debts, the IMF is precluded from lending unless the member takes steps to restore debt sustainability (including a debt restructuring). Already, the IMF is working with a number of countries to conduct the debt sustainability analysis (DSA) to determine the financing envelope necessary to restore debt sustainability and underpin member’s efforts to gain the debt relief needed to enable a lasting economic recovery.

  • But assessing debt sustainability takes times, especially in the current situation of immense uncertainty about the economic impact of the pandemic. Countries need immediate relief. The DSSI helps to temporarily ease the financing constraints for the poorest countries by freeing up scarce money that they can use to mitigate the human and economic impact of the COVID-19 crisis.
  • In anticipation of the need for deeper debt relief in some cases, the G20 agreed on a Common Framework for Debt Treatments beyond the DSSI, which should help facilitate debt restructuring on a case-by-case basis and burden sharing across creditors. Depending on the economic and debt situation of each country, this relief could be a deferral of a portion of debt service payments for a number of years (a reprofiling or rescheduling), or, where the situation is more difficult, a reduction in debt service payments in present value terms may be required (for more information on the G20 Common Framework see the next section).  

The DSSI provides relief to the poorest countries. What about the middle-income countries that also need debt relief?

The initiative focuses on IDA countries, because they are the poorest countries and are in urgent need of relief in order to increase health spending and address other needs related to the COVID-19 pandemic.

  • But it is true that some middle-income countries that do not qualify for the G20 official bilateral debt service suspension are also facing severe falls in growth and large impacts on their fiscal and debt positions. The IMF has been providing rapid support through its emergency financing facilities and is ready to continue to provide further support, including to middle-income countries, if needed.
Debt service due to the multilateral official creditors (the IMF and the World Bank) is about the same size as to bilateral official creditors. Why not suspend debt service payments to the IMF?

In supplying new financing to member countries, the IMF, like many other IFIs, provides these member countries with much needed resources to deal with emergency situations like this. While most official bilateral creditors have agreed to at least maintain their overall outstanding lending to the DSSI beneficiary countries, the IMF and the World Bank are substantially increasing their overall outstanding lending, and this lending is on favorable terms compared to the market.

  • The provision of this additional financing is already well under way. As of mid-February, 2021, the IMF Executive Board has approved emergency financing to 51 LICs, totaling over $11bn, and support for more is proposed to be approved. More financing is made available to countries who request additional financing through the Fund’s regular concessional financing facilities.
  • In addition, the IMF has been providing debt service relief through the Catastrophe Containment and Relief Trust (CCRT) to 29 of its poorest and most vulnerable member countries, covering these countries' eligible debt falling due to the IMF for the period between April 2020 and April 2021. We are working with donors to increase funds for further debt relief through this trust, so that we can extend the duration of grant-based debt relief to our most vulnerable members to up to a two year period, ending April 2022.

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The G20 Common Framework for Debt Treatments beyond the DSSI

What is the G20 Common Framework for Debt Treatments beyond the DSSI?
What is the IMF’s role in the G20 Common Framework?
What are the IMF’s views on the recent country requests for debt restructuring under the G20 common framework and how does this affect their debt sustainability analyses?
For countries with sustainable debt but large financing needs, in what circumstances could they request debt relief under the Common Framework?
Does the IMF require countries to seek external debt treatments under the Common Framework to access IMF program financing?
 
What is the G20 Common Framework for Debt Treatments beyond the DSSI?

The Common Framework for Debt Treatments beyond the DSSI is an agreement of the G20 and Paris Club countries to coordinate and cooperate on debt treatments for up to 73 low income countries that are eligible for the Debt Service Suspension Initiative (DSSI).

Debt treatments under the Common Framework are initiated at the request of a debtor country on a case-by-case basis. The framework is designed to ensure broad participation of creditors with fair burden sharing. Importantly, it includes not only members of the Paris Club but also G20 official bilateral creditors such as China, India, Turkey or Saudi Arabia that are not members of the Paris Club.

The Common Framework can be used to address a wide range of sovereign debt challenges of DSSI‑eligible countries:

  • For countries where public debt is not sustainable, it can provide a deep debt restructuring, with a reduction in the net present value of debt sufficient to restore sustainability.
  • For countries with sustainable debt but liquidity issues, it can provide a deferral of a portion of debt service payments for a number of years that can ease financing pressures. This type of treatment is often referred to as a rescheduling or reprofiling. Such a debt treatment can also benefit countries where high debt service payments are a source of debt vulnerability.
What is the IMF’s role in the G20 Common Framework?

To benefit from a debt treatment under the Common Framework a country must have an IMF‑supported program, such as an Extended Credit Facility, to support the implementation of suitable economic policies and structural reforms. In practice, this means that if a country does not currently already have a Fund-supported program, it will need to request one in conjunction with making a request for a debt treatment under the Common Framework. The IMF has a key role in working with the country authorities toward the development of a policy framework that will assist the country to regain external viability including by restoring sustained inclusive growth.

The second key role for the IMF is to define the financing envelope (or debt relief envelope) consistent with the parameters of the IMF-supported program, which informs creditor and debtor discussions on the necessary debt treatment. This financing envelope is based on the program macroeconomic framework and the accompanying debt sustainability analysis (DSA).

What are the IMF’s views on the recent country requests for debt restructuring under the G20 common framework and how does this affect their debt sustainability analyses?

The recent requests from Chad, Ethiopia, and Zambia for a debt treatment under the Common Framework are welcome. The debt challenges that these countries face are quite different, but the Common Framework can provide a treatment that is tailored to their specific needs.

In some cases, where debt is sustainable, the debt treatment will help reduce debt vulnerabilities, such as the risk of debt distress. In other countries where debt is unsustainable, a debt treatment under the Common Framework could help the country meet the debt sustainability requirements necessary to enable to Fund to lend.

For countries with sustainable debt but large financing needs, in what circumstances could they request debt relief under the Common Framework?

An IMF-supported program must be fully financed. In some cases, the Fund supported program serves to mobilize sufficient financing to meet a country’s needs, e.g., from multilateral development banks and other sources. In cases where these efforts do not generate sufficient financing to fill the program’s financing gaps, countries may need to seek a debt treatment under the Common Framework to ensure the program is fully financed, such as a rescheduling of debt service payments.

Does the IMF require countries to seek external debt treatments under the Common Framework to access IMF program financing?

Any decision to seek debt treatments must be made by the country authorities. If there are debt vulnerabilities and/or financing issues that prevent the Fund from providing financial support to a country, the Fund would advise the country authorities accordingly. The country would then decide whether to seek a suitable debt treatment.

If the G20 Common Framework can also be used as a tool to mitigate liquidity pressures through a rescheduling of debt service over time, what is the difference from the earlier Debt Service Suspension Initiative?

Given countries’ urgent financing needs and the highly uncertain environment, the DSSI provided temporary liquidity relief with the same debt treatment provided to all requesting countries. The debt service that was suspended in May to December 2020 is due for repayment after a one-year grace period with payments spread over the following three years. For the debt service suspended in the first six months of 2021, the grace period remains the same, but the repayments are spread over five years to avoid overlaps and bunching of debt service payments.

In contrast, when the Common Framework is used to provide liquidity relief, the rescheduling of debt service is tailored to the country’s specific needs, with the potential to cover debt service payments due over a number of years and to cover all or part of those payments. The terms of repayments, including the grace period, are to be adjusted to meet the duration and depth of the liquidity pressures facing the county.

A further important difference is that the DSSI encouraged, but did not require, comparable debt relief from private creditors and any other creditors that were not directly participating in the DSSI. By contrast, the Common Framework requires the debtor to seek from other creditors, including private creditors, a treatment at least as favorable as the one agreed under the Common Framework. How comparability of treatment will be implemented in relation to the private sector will depend on the circumstances as evaluated by the official bilateral creditors signing the agreement with the debtor country, who, in practice, apply comparability of treatment at the level of private creditors as a whole, rather than to each private creditor.

The voluntary private sector participation in the Debt Service Suspension Initiative to date has been limited, partly reflecting debtor countries’ concerns about their standing with private creditors including their credit rating. How likely is it that pre-emptive relief requests under the Common Framework will face similar concerns?

The DSSI lacked private sector participation in part because comparable treatment of private creditors was encouraged but not required. This reflected the priority at the outset of the crisis to provide immediate support to as many countries as possible.

In contrast, under the G20/Paris Club agreement on the Common Framework, the debtor country is required to seek a treatment from private creditors that is not less favorable than the treatment from official bilateral creditors. How the comparability of treatment will be implemented in relation to the private sector will depend on the circumstances as evaluated by the official creditors signing the agreement with the debtor country, who, in practice, apply comparability of treatment at the level of private creditors as a whole, rather than to each private creditor.

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Debt relief by the IMF

Why does the IMF not utilize its gold holdings, which have recently increased in value, to finance debt relief for low income- as well as middle income countries? 
Why can’t the IMF provide more debt forgiveness beyond the Catastrophe Containment Relief Trust? The IMF and WB have forgiven debt before—with the Heavily Indebted Poor Countries Initiative—and the crisis now is much greater than then, so why not? 
How do the IMF’s current debt forgiveness efforts compare to previous ones undertaken by the institution? 


Why does the IMF not utilize its gold holdings, which have recently increased in value, to finance debt relief for low income- as well as middle income countries?

Gold provides fundamental strength to the Fund’s balance sheet, benefiting both creditors and debtors alike and enabling the Fund to play its effective role as a crisis lender.

  • This role is particularly important at present when the Fund is undertaking exceptionally large support for its membership in the wake of the COVID-19 pandemic so the Fund has no plans to sell gold at this time.
  • The Fund is focused on what can be done quickly to help the Fund’s poorest members. It is therefore raising additional resources from donor countries to support its capacity to expand concessional lending.
  • Reaching an agreement on gold sales requires a very broad consensus—approval by an 85 percent majority of the total voting power—and this is not a realistic option to help the Fund’s poorest members at this time.

Why can’t the IMF provide more debt forgiveness beyond the Catastrophe Containment Relief Trust? The IMF and WB have forgiven debt before—with the Heavily Indebted Poor Countries Initiative—and the crisis now is much greater than then, so why not?
  • The IMF under its charter is not permitted to simply cancel claims or write off debt. Instead, the IMF’s ability to provide debt service relief on its loans to members is based on the availability of grants for the repayment of those loans. The IMF can mobilize these grants from donors, and the IMF does this through trust funds such as the Catastrophe Containment and Relief Trust (CCRT).
  • The CCRT allows the IMF to provide debt relief for the poorest and most vulnerable countries hit by catastrophic natural or public health disasters. In April, 2020, the IMF expanded its provision of debt service relief under the CCRT to cover exceptional balance of payments needs arising from the COVID-19 pandemic, by freeing up financial resources of the Low Income Countries (LICs) to respond to the pandemic.
  • The CCRT is providing grant-based debt service relief to the 29 poorest LICs with outstanding credit to the IMF, until April 2021. Efforts are underway, through a fundraising campaign, to request grants from a broad range of donors and to extend the duration of grant-based debt relief to these members for another year until April 2022.
  • The IMF has also temporarily increased access limits under its concessional emergency lending facility, the Rapid Credit Facility (RCF) under the PRGT, to respond more effectively to LICs’ urgent needs. The IMF is currently seeking additional donor support to expand its PRGT concessional lending for low-income countries.
How do the IMF’s current debt forgiveness efforts compare to previous ones undertaken by the institution?
  • The Catastrophe Containment and Relief Trust (CCRT) allows the IMF to provide debt service relief for the poorest and most vulnerable countries hit by catastrophic natural disasters or public health disasters. Financed by resources that include donor contributions, it provides grants to pay for debt service to the IMF for a limited time. A new feature in the current CCRT debt relief initiative is to provide grant-based debt relief in tranches so that debt relief can be immediately available to all eligible countries hit by the COVID-19 pandemic without having to wait until the CCRT receives sufficient resources. Up-front grants for two tranches, together covering eligible debt falling due to the IMF within a period of one year ending April 2021, have been disbursed. Additional tranches to extend the debt service relief to cover another year ending in April 2022 would be provided, subject to further donor contributions to the CCRT.  
  • In April 2020, the IMF expanded its provision of debt service relief under the CCRT to cover exceptional balance of payment needs arising from COVID-19, to help low-income countries create space for urgent spending needs to address the pandemic. Debt service relief in response to the COVID-19 pandemic was mobilized faster than under previous debt relief initiatives, and efforts are currently underway to expand CCRT resources for longer periods of up to two years.
  • Debt relief was previously also provided under the Multilateral Debt Relief Initiative (MDRI), which complemented the Heavily Indebted Poor Countries Initiative (HIPC) by providing additional resources to help eligible countries achieve the United Nations Millennium Development Goals.
  • The IMF Executive Board adopted the MDRI in November 2005, and it became effective on January 5, 2006. The IMF delivered MDRI debt relief of SDR 2.3 billion to 30 qualifying countries. In contrast to the CCRT, which provides grants to pay for debt service for a limited time, the HIPC Initiative and the MDRI provided grants to cancel the debt (as specified in the respective initiatives). However, it also took much longer to put them in place, both in mobilizing the needed resources and in implementation. There is no longer any outstanding IMF debt eligible for MDRI debt relief, and the MDRI trust accounts have been unwound.

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Sovereign Debt Restructuring

Do you foresee a wave of countries having to restructure their debt in the wake of the crisis?
Does debt reduction need to be extended to all LICs?
For the large share of LICs that are in debt distress or at high risk of debt distress, will IMF financial support require debt restructurings?
Does debt restructuring need to extend beyond LICs?
Shouldn’t the IMF ask a country’s external creditors to forgive their loans? Can’t the IMF force creditors to do this?
Is it time to rethink the Sovereign Debt Restructuring Mechanism?
Do you foresee a wave of countries having to restructure their debt in the wake of the crisis?
  • As a result of the COVID-19 crisis, we have seen a significant increase in the debt vulnerabilities of many countries. In some cases, countries have taken steps to restore debt sustainability, such as fiscal consolidation in the years after the pandemic. However, there are other cases where a deeper debt restructuring will be needed to enable the country to recover from this crisis and restore debt sustainability, and their number may rise if the global slump is deeper and more prolonged. Currently, our main goal is to support the international community in working together to avoid such a scenario.
Does debt reduction need to be extended to all LICs?
  • When debt is unsustainable, restructuring is urgently needed. However, while many LICs are at risk of debt distress or in debt distress and may need restructuring, there are many others where debt vulnerabilities remain manageable. The nature of debt restructuring needed can also differ across countries; even countries with sustainable debt can, in difficult times, benefit from debt rescheduling or reprofiling to ease financing needs and enable them to address fiscal priorities. The IMF takes a case-by-case approach in assessing whether a country needs debt restructuring, taking into account debt sustainability analysis and the continued availability of the financing that countries need for their long term growth and development. Debt reduction must be targeted to those LICs that really need this treatment to enable them to return to sustainable growth.
For the large share of LICs that are in debt distress or at high risk of debt distress, will IMF financial support require debt restructurings?
  • IMF financial support can only be provided for countries with sustainable debt. In some cases, debt sustainability can be restored through sufficient access to concessional financing, while in others, a restructuring of the debt is needed to reduce debt or extend debt service over a longer period.
  • For countries with unsustainable debt, IMF financing may proceed before a debt restructuring is completed if: (i) official bilateral creditors provide the IMF with adequate assurances that they will take steps to help restore debt sustainability; and (ii), in cases where a restructuring of debt to private creditors is needed, if the member has taken credible steps towards completing the debt restructuring process in a way that will achieve debt sustainability.
Does debt restructuring need to extend beyond LICs?
  • Yes. Many emerging market economies are also at significant risk of debt distress and since the onset of the pandemic a few have announced their intention to seek debt restructurings. Argentina and Ecuador, for example, have already concluded debt restructurings, while for others debt restructurings remain a work in progress, such as for Lebanon. More countries may end up in a similar situation. The Fund stands ready to support these countries by providing financing and supporting their efforts for debt restructuring when this is needed.
Shouldn’t the IMF ask a country’s external creditors to forgive their loans? Can’t the IMF force creditors to do this?
  • The IMF cannot interfere in debt contracts between countries and their creditors. These are contracts to which the IMF is not a party.
  • It is always the member country’s decision whether to restructure its debt or not, and the IMF advises members to stay current on their obligations to the extent possible. The IMF cannot lend if a country’s debt is unsustainable unless the country is taking steps to restore debt sustainability.
  • The debt restructuring negotiations, and the specific terms of the debt restructuring, as well as the decision on what debt to include in the restructuring, are left to the authorities in consultation with their legal and financial advisors.
  • In the context of a sovereign debt restructuring, based on a realistic debt sustainability analysis (DSA), the IMF’s role is to determine the financing envelope that needs to be filled with financing/debt relief. The IMF’s objectives are that the debt restructuring achieves high creditor participation and restores debt sustainability consistent with the DSA. The IMF does not manage the debt restructuring process. 
Is it time to rethink the Sovereign Debt Restructuring Mechanism?

The IMF has endorsed key features of enhanced collective action clauses and encouraged their inclusion in international bond contracts to facilitate orderly debt restructurings, and this existing contractual framework has been largely effective. Nonetheless, the resolution of sovereign debt distress can still be challenging given the diversity of creditors and debt instruments and there is a need to strengthen the international debt “architecture”. The goal is to provide speedy and sufficiently deep debt relief to countries that need it, benefitting not only these countries but the system as a whole. The IMF has substantial expertise in this area, and IMF staff recently published a new staff note taking stock of the current international architecture for restructuring privately held debt and noting possible options for improvements.

  • The G20’s Common Framework for Debt Treatments beyond the DSSI which should help facilitate timely debt resolution when needed and ensure burden sharing amongst all creditors — is an important step forward, and the IMF will work closely with the G20 and debtor countries on its implementation.
  • The Fund supports a contractual approach to sovereign debt restructuring. The Sovereign Debt Restructuring Mechanism did not command the requisite majority support in the IMF membership in the early 2000s.