Key to Resolving Covid’s Global Debt Crunch: Transparency

IMF Blog, March 5, 2021

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Op-ed first published on Bloomberg Opinion by Ceyla Pazarbasioglu and Carmen M. Reinhart.
Publication date: March 5, 2021.
Central thesis: Greater debt transparency is critical to mitigating the severity of debt boom‑and‑bust cycles exacerbated by the Covid‑19 pandemic and to enabling effective debt treatments.

The Covid‑19 pandemic and lockdowns have deepened inequality within and across countries and caused severe economic contractions in many low‑income countries, creating urgent financing needs and exacerbating debt‑sustainability concerns.
Since the founding of the League of Nations in 1920, the international community has sought to address recurrent international debt cycles through institutional and contractual reforms.
The World Bank estimates that the global poverty rate increased in 2020 for the first time since 1998.

Today, more than half of low‑income countries eligible for relief under the Group of 20’s Debt Service Suspension Initiative (DSSI) are either in debt distress or at high risk, doubling in the last decade.
During the high commodity price period that lasted until around 2014, many low‑income countries accumulated significant debts to a number of creditors from outside the Paris Club, including China.
A substantial share of these debts went unrecorded in major databases and was not on the radar screen of credit‑rating firms.
External borrowing by state‑owned (or guaranteed) enterprises escalated; these entities have very uneven reporting standards.
Public domestic debt is much larger now than during the 1980s debt crisis in developing countries, and data availability for public domestic debt lags that for external debt (particularly on ownership).
As some low‑income countries, such as Zambia, issued Eurobonds, investors underpriced risk in nations with opaque debt structures, contributing to the unsustainable buildup of debt.

The IMF and the World Bank have taken steps to disclose more data on the creditor composition of each country in connection with the DSSI.
The Institute for International Finance agreed on voluntary principles for debt transparency; effective implementation by private creditors remains to be seen.
Global leaders and G‑7 and G‑20 communiques stress transparency as a priority.
The DSSI has freed up resources from debt service to give governments fiscal capacity to cope with the pandemic; by design it is a temporary measure.
The Common Framework for Debt Treatments, endorsed by the G‑20 late last year, seeks comparable treatment from all official bilateral creditors (both Paris Club and non‑Paris Club) and private creditors.

Three major challenges for the Common Framework:
- Creditor reluctance: Creditors — governments, commercial banks and bondholders alike — have often been reluctant to offer significant debt relief quickly, contributing to protracted restructurings (debt‑restructuring cases stretched out over a decade during the 1980s and also during the 1930s).
- Debtor commitment uncertainty: Resolution has often been delayed by uncertainty about the willingness or ability of debtor governments to commit to a credible multiyear action plan.
- Complex creditor mix: Many developing countries face a more complex and varied group of creditors than in past crises, complicating coordinated responses.
Three countries have applied for debt relief under the Common Framework: Chad, Ethiopia and Zambia. The resolution of these test cases will probably shape future restructurings.

Transparency alone will not stop boom‑bust cycles, but it can mitigate their severity and help avoid setbacks in poverty reduction and other development objectives.
Early detection of problems is essential for pre‑emptive policy action; inadequate debt disclosure undermines debt‑sustainability analyses and macroeconomic surveillance.
Transparency increases trust among creditor groups and can speed negotiations under the Common Framework by providing accurate and shared information.
Disclosure must come from all creditors and debtors; multilaterals are expanding coverage of data gaps in existing databases, building more encompassing ones, and revising lending policies to enhance disclosure requirements.

Enhance debt transparency as a global public good through coordinated international effort.
Expand and improve disclosure of creditor composition and debt statistics for both external and public domestic debt (including ownership data).
Encourage effective implementation of voluntary debt‑transparency principles by private creditors.
Use the Common Framework to both seek comparable treatment across creditor types and to drive greater disclosure from creditors and debtors.
IMF and World Bank to continue supporting the transparency agenda through surveillance functions and policies to support debtors and creditors.

IMF Blog — "Key to Resolving Covid’s Global Debt Crunch: Transparency", March 5, 2021.