Current Sovereign Debt Challenges and Priorities in the Period Ahead
IMF Blog, November 16, 2020
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- Authors: countries with sound economic policies, fresh financing.
- Published: November 16, 2020
Debt situation in low-income countries (LICs)
- Debt levels were already at record high levels before the crisis and the COVID-19 crisis is pushing them to new heights.
- The pandemic is adding to spending needs while revenues are falling due to lower growth and trade, increasing LICs’ debt burdens.
- Over 50 percent of LICs are now assessed to be at high risk of or in debt distress according to the joint IMF-World Bank Debt Sustainability Framework.
- Some countries with high pre-crisis debt vulnerabilities may face unsustainable burdens and need to pre-emptively restructure before default.
- Some LICs have already announced their intention to restructure their debt.
- Priority: address problematic debt situations sooner rather than later.
What the IMF is doing on debt
- Country-specific, careful, and deliberate approach to help member countries address debt challenges.
- Support provided through:
- Policy advice, financing, and capacity development to ensure debt sustainability and avoid disorderly restructurings.
- Debt sustainability analysis and policy advice to identify and overcome debt risks.
- Lending to LICs at below market rates to catalyze donor support and prevent liquidity shortfalls.
- Technical assistance on debt management and fostering debt transparency.
- IMF-supported programs that complement necessary debt restructuring with sound policies and fresh financing when debt is unsustainable.
- Catastrophe Containment and Relief Trust (CCRT) relief:
- Debt relief through grants to the 29 poorest countries under the CCRT.
- CCRT relief approved to cover debt service to the IMF falling due between April 2020 and April 2021.
- Total debt relief for these first two tranches amounts to almost US$500 million.
- Calls for urgent reforms of the International Debt Architecture, including:
- Further strengthening contractual provisions in debt contracts.
- Enhancing debt transparency.
- Coordinating restructuring of official bilateral debts with official and private creditors participating on comparable terms.
- Support for the Common Framework for Debt Treatments beyond the DSSI and work with G20 and debtor countries on implementation.
- Examination of the potential role of State-Contingent Debt Instruments in reducing costliness and risk of restructurings.
- Strengthening IMF debt policies:
- Reform of the Policy on Debt Limits in IMF-supported programs to provide more flexibility while preserving or restoring debt sustainability; includes enhanced data disclosure requirements to the IMF.
- Forthcoming Review of the Debt Sustainability Framework for Market-Access Countries to improve prediction of debt distress at short, medium- and long-term horizons.
- Forthcoming Review of the IMF’s Lending Into Arrears Policies to review the perimeter of official and private claims and maximize incentives for constructive creditor-debtor engagement pre-default and enhance IMF’s role in post-default cases.
Debt transparency
- Debt transparency is critical to prevent build-up of debt vulnerabilities; without full picture of outstanding debt and contingent liabilities, informed decisions and accountability are weakened.
- Transparency depends on factors including institutional capacity, legal frameworks, governance, and civil service organization.
- IMF and World Bank efforts include:
- Scaling up capacity development to enhance public debt reporting in borrowing countries.
- Setting standards for debt statistics and disseminating public debt reported by borrowers through databases.
- Setting higher requirements on debt reporting for surveillance activities and debt sustainability analysis.
- Recent reform of the Policy on Debt Limits in IMF-supported Programs aims to further raise the bar on debt disclosure to the IMF.
Status of the G20’s Debt Service Suspension Initiative (DSSI)
- During 2020, 44 eligible countries who requested debt service suspension are expected to benefit from an estimated US$5 billion of debt service being deferred.
- G20 bilateral official creditors agreed to extend the initial debt service suspension by six months through end-June of 2021.
- The G20 agreed to examine the need for a further extension by the time of the IMF-World Bank Spring Meetings in April 2021.
The Common Framework for Debt Treatments beyond the DSSI
- The Common Framework aims to address sovereign debt challenges and ensure broad creditor participation with fair burden sharing; it brings in official creditors previously not part of the Paris Club process.
- Framework facilitates coordination of debt treatments tailored to debtor situations and requires participating debtor countries to seek treatment on comparable or better terms from other creditors, including the private sector.
- IMF role:
- Support implementation, especially through Debt Sustainability Analysis jointly with the World Bank to inform debt treatment needed to restore debt sustainability within the context of an upper credit tranche (UCT) IMF-supported program.
- IMF-supported programs will promote sound economic policies, provide fresh financing, and ensure countries can service restructured debts post-restructuring.
- The Common Framework can provide relief to poorest debt-stricken countries and can set the stage for a more universal and possibly permanent framework for sovereign debt resolution.
Scope: Which countries need restructuring
- Debt restructuring is urgently needed when debt is unsustainable.
- The IMF takes a case-by-case approach based on debt sustainability analysis and availability of financing for long-term growth and development.
- Many LICs may need restructuring, but others have manageable vulnerabilities and do not need restructuring.
- Extending debt reduction to countries that can continue to service debts could be counterproductive and undermine access to new financing.
- Debt reduction must be targeted to LICs that need it to return to sustainable growth.
- Restructuring also needed beyond LICs:
- Emerging market economies are at significant risk; some have announced restructurings.
- Examples in the period include Argentina and Ecuador (concluded restructurings) and Lebanon (work in progress).
- IMF stands ready to support emerging markets with financing and restructuring support when needed.
Role of private sector creditors
- As LICs develop, private sector financing becomes more important for critical investments.
- Private sector creditors should participate in debt restructurings, provide new financing, and contribute to improved debt transparency.
- Private sector involvement ensures fairer burden sharing and is essential to unlock deeper debt relief by bilateral official creditors.
- Lack of private sector participation in the DSSI was disappointing; the Common Framework expects private sector participation.
- Private sector provides critical new financing; withholding access through defaults would impede countries’ recovery.
- For countries assessed as not sustainable, programs incorporate debt restructuring and IMF policies allow for lending into arrears.
- For countries where debt is sustainable, defaulting on private creditors would prevent access to external funding and forestall recovery.
Options if a systemic debt crisis occurs
- A large number of parallel sovereign restructurings could lead creditors facing large aggregate losses, reduce cooperation, and make restructurings protracted and difficult.
- It is too early to tell if a systemic crisis will occur, but IMF is working on options to manage widespread sovereign debt crises.
- Possible “carrots”:
- IFI financing of cash or credit enhancements in difficult restructurings where required debt relief is very deep to make deals more feasible.
- Limitation: IFIs have limited financial resources and competing demands; such enhancements cannot be used on a very large scale.
- Possible “sticks”:
- Targeted domestic and international law statutory tools that limit or delay, in a time-bound manner, creditor recovery/enforcement actions or timing of lawsuits to reduce holdout incentives and their disruptive capacity.
- These statutory options carry potential legal and policy drawbacks and should be used only as a last resort and on a time-bound basis, if needed to address unique challenges of a systemic crisis.
- Reference to recent IMF paper on The International Architecture for Resolving Sovereign Debt Involving Private Creditors outlining these measures.
Source: Current Sovereign Debt Challenges and Priorities in the Period Ahead — Ceyla Pazarbasioglu, Director of the IMF’s Strategy, Policy and Review Department, November 16, 2020.
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