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Debt Dynamics

Government support measures have provided an important lifeline, but the resulting rise in public debt must be carefully managed, especially in countries with limited access to low-cost financing.

The pandemic has pushed public debt levels to new heights, with the total approaching 100 percent of GDP globally in 2020. But the ability to carry debt varies widely among countries. Many emerging market and developing economies face tighter financing constraints and rising debt vulnerabilities. Although interest rates are currently low, a sudden rise could lead to a sharp tightening of financial conditions and significant capital flow reversals.

Since 2018, the IMF and the World Bank have been implementing a multipronged approach to address rising debt vulnerabilities in low-income countries and emerging market and developing economies. Taking into account the COVID-19 pandemic and countries’ capacity constraints, new initiatives were launched during the year under the multipronged-approach umbrella. These initiatives focused on enhancing debt transparency, including by improving data dissemination and analytical guidance for both borrowers and creditors, scaling up CD in crisis prevention areas, and improving debt analysis tools.

Substantial progress has also been made on updating IMF policies. A new sovereign risk and Debt Sustainability Framework for Market Access Countries was released in February 2021. Reforms to the IMF’s debt limits policy have also been introduced to provide low-income countries with more flexibility in managing their debt, along with safeguards to preserve or restore debt sustainability.

The IMF has also been following the uptake of enhanced collective action clauses in international sovereign bonds and recently completed a policy paper for the G20 on gaps in the architecture for the resolution of sovereign debt involving private sector creditors.

Jointly with the World Bank, the IMF is also supporting implementation of the G20 Common Framework for Debt Treatments beyond the DSSI: an initiative designed to facilitate timely and orderly debt treatment for DSSI-eligible countries, with broad creditor participation, including by the private sector. This is an important step on the road to improving the international debt architecture. Not only can effective operationalization of the common framework provide important relief to the poorest debt-stricken countries, but it can also set the stage for a more universal and possibly permanent framework for efficient sovereign debt resolution.