Low-income countries face fewer debt problems today than 25 years ago, thanks in part to the Heavily Indebted Poor Countries Initiative, which has reduced the unmanageable debt burden in sub-Saharan Africa and other regions. But good debt ratios are lower that in the mid-1990s, debt has increased over the past decade and the changing composition of creditors will make restructurings more complex.
Improvements to the Group of Twenty Common Framework for Debt Treatment, including the 73 countries eligible for the G20 Debt Service Suspension Initiative (DSSI) in 2020-2021 can now benefit from it – could pave the way for this growing creditor complexity.
So far, only a handful of countries have applied to use the common framework, which was launched in November 2020, highlighting the need for change to build trust and encourage participation at a pivotal time for low-income countries. highly indebted income.
Growing risks of over-indebtedness
Stimulated by low interest rates, high investment needs, limited progress in raising additional domestic revenue, and strained public financial management systems, DSSI countries’ debt ratios have increased, partly reversing a decline observed in the early 2000s.
Today, the economic shocks of COVID-19 and the war in Ukraine add to the debt problems facing low-income countries, even as central banks begin to raise interest rates.
About 60% of DSSI countries are at high risk of debt distress or are already in debt distress—when a country has started or is about to start debt restructuring, or when a country is accumulating arrears .
Among the 41 DSSI countries at high risk or in debt distress, Chad, Ethiopia, Somalia (under the HIPC initiative) and Zambia have already requested debt treatment. Another 20 show significant breaches of the applicable high risk thresholds, half of which also have low reserves, rising gross funding needs or a combination of both in 2022.
Domestically, difficult trade-offs will exist between the need to restructure sovereign debt owed to domestic banks, in some cases, and the impact of such restructurings on financial sector stability and the ability of domestic banks to finance growth.
The local currency debt of the median DSSI country has doubled from 7% of gross domestic product in 2010 to 15% in 2021.
For DSSI countries with market access, the share has more than tripled from 8% to 28% in 2021. Many of these DSSI countries have also seen tighter sovereign-bank ties, with larger holdings of debt national sovereign in national banks.
Externally, the increased diversity of creditors poses significant coordination problems.
Over the past few decades, DSSI countries have borrowed primarily Official Paris Club creditor nations and private banks, alongside multilateral institutions. Today, China and private bondholders are playing a much larger lending role.
The share of DSSI countries’ external debt owed to Paris Club creditors fell from 28% in 2006 to 11% in 2020. Over the same period, the share owed to China rose from 2% to 18% and the share of Eurobonds sold to private investors. creditors went from 3% to 11%.
However, the situation differs considerably from country to country. The averages mask a diversity of debt composition, from the shares of bilateral, multilateral and private creditors to the composition of the official bilateral creditors themselves.
China is now the largest official bilateral creditor in more than half of DSSI countries, including counting the 22 Paris Club creditors as one pool. China would therefore play a key role in the debt restructurings of most DSSI countries that would involve official bilateral creditors.
While the diversity of creditor compositions calls for greater attention to national specificities, appropriate coordination mechanisms will be essential in all cases.
The establishment of mechanisms ensuring coordination and trust between creditors and debtors has become urgent. Improvements to the G20 Common Framework could play an important role in ensuring broad creditor participation with more equitable burden sharing.
Experience so far shows that greater clarity on the stages of restructuring, earlier engagement of public creditors with the debtor and with private creditors, a halt in debt service payments during negotiations and the precision of the mechanisms of comparability of the treatment are always necessary.
Strengthening debt management and transparency should also be a priority. This would help countries manage debt risks, reduce the need for debt restructuring, and facilitate more effective and sustainable resolution if debt becomes unsustainable.
“It is in the interest of debtor countries as well as their creditors that debt restructurings, where necessary, are carried out quickly, smoothly and efficiently. It would also promote global stability and prosperity.
This article, which builds on a recent series of questions and answers by the authors, reflects the research contributions of Prateek Samal and Dilek Sevinc.
*About the authors:
- Guillaume Chabertborn in 1970, graduated from the Ecole Centrale de Paris, the Institut d’Etudes Politiques de Paris and the Ecole Supérieure de la Function Publique (ENA).
- Martin Cerisola is Deputy Director and Head of the Debt Policy Division in the Strategy and Policy Review Department. In this capacity, he leads the work of designing and implementing IMF policies related to debt sustainability, debt conditionality, and sovereign debt restructuring.
- Dalia Hakura is Deputy Division Chief in the IMF’s Strategy, Policy, and Review Department. She is currently working on issues relating to debt analysis and policy.
Source: This article was published by IMF Blog