Sovereign Debt Restructuring Process Is Improving Amid Cooperation and Reform

IMF Blog, June 26, 2024

Source details

Canonical URL: Sovereign Debt Restructuring Process Is Improving Amid Cooperation and Reform

Author: Ceyla Pazarbasioglu; Date: June 26, 2024.
The global economy avoided a systemic debt crisis in recent years, but vulnerabilities persist because of high debt servicing costs that pose important challenges for low and middle-income countries.
When sovereigns falter, faster restructurings reduce human and economic costs; delays worsen poverty and creditor losses.

Common Framework outcomes:
- Reduces time from IMF staff level agreement to financing assurances from official creditors required for program approval.
- Example timings: Ghana’s agreement this year took five months to cover those steps, roughly half the time it took for Chad in 2021 and Zambia in 2022.
- Ethiopia’s talks are likely to be faster, closer to the customary two or three months.
- Improvements reflect increased experience and engagement with non-traditional official creditors such as China, India, and Saudi Arabia.
Emerging market restructurings outside the Common Framework:
- Sri Lanka’s case was faster than the Suriname process in 2021, reflecting better creditor coordination and understanding of safeguards and assurances.
Global Sovereign Debt Roundtable (GSDR):
- Introduced by the IMF, World Bank and the G20 Presidency early last year.
- Helped address technical disagreements on comparability of treatment, debt coverage, information sharing, and processes and timelines.
- Progress summarized in a recent report has accelerated ongoing cases and built foundations for future restructurings.

Executive Board reforms (adopted in April) provide tools to generally allow IMF program approval within two or three months of a staff-level agreement, including through safeguards to proceed amid creditor coordination problems.
Approval in principle for programs:
- Enables disbursement as soon as financing assurances materialize.
- Increases transparency and helps complicated cases move on a faster schedule.
New procedure for establishing financing assurances:
- IMF would assess that a “credible official creditor process” is underway based on creditor actions and track record.
- Intended to be considerably faster than waiting for formal letters over time.
Reforms will:
- Facilitate faster engagement with debtor countries.
- Provide more information to creditors (economic projections, policy commitments, debt sustainability analysis).
- Complement Fund efforts to improve transparency and timely information sharing with stakeholders.

Sovereign defaults and requests for comprehensive debt relief have tapered off since 2021 and 2022; the last notable request was Ghana’s more than a year ago.
Market indicators:
- Markets reopened earlier this year for low-income countries; Benin, Cote d’Ivoire, Kenya, and Senegal raised money from foreign investors.
- Emerging market bond spreads are back to pre-pandemic levels.
- Spreads for about 15 percent of emerging markets are at distressed levels.
Low-income country financing needs and risks:
- Low-income countries still need to refinance about $60 billion of external debt each year over the next two years—about triple the average in the decade through 2020.
- Around 15 percent of low-income countries are in debt distress and another 40 percent are at high risk of distress.

GSDR will continue to address outstanding restructuring challenges, including:
- How official and private creditor processes can move in parallel.
- Ways to address liquidity challenges.
- Potential menu of options: use of the Common Framework for coordinated liquidity relief; liquidity management operations such as debt swaps or buy backs; ways to support new inflows including through risk-sharing instruments.
IMF actions:
- Publish a sovereign debt handbook later this year to distill policies and underpin more efficient processes.
- Review the debt sustainability framework for low-income countries jointly with the World Bank to ensure fitness for purpose.
Broader policy priorities:
- Borrowers must foster economic growth and boost government revenues to create fiscal space for development and climate-related spending while keeping debt sustainable.
- Official creditors should consider mobilizing more funding at reduced cost, particularly grants, given the time needed for borrower policy reforms to deliver results.
- The Fund will continue to support efforts and provide adequate financing, including through review of concessional facilities.
A forthcoming blog will elaborate on international cooperation to ease borrowing burdens and alleviate the liquidity squeeze facing many emerging and low-income countries.

Source: IMF blog post “Sovereign Debt Restructuring Process Is Improving Amid Cooperation and Reform” (June 26, 2024).

Global Sovereign Debt Roundtable — Compendium of GSDR Common Understanding on Technical Issues
- Global Sovereign Debt Roundtable — Compendium of GSDR Common Understanding on Technical Issues (Markdown version)
- Global Sovereign Debt Roundtable — Compendium of GSDR Common Understanding on Technical Issues (PDF)