Weekly Brief: On Debt Restructuring Framework

Countries in debt distress

An estimate of 60% of low-income countries are at high risk or are already in debt distress, which doubles the share in 2015.

Afghanistan and Ethiopia are among the 30 countries at high risk of a debt crisis, while Grenada, Mozambique, the Republic of the Congo, Sao Tome and Principe and Somalia are already experiencing it. Regardless of how COVID-19 has brought relief measures, it is causing a recession that could push over 100 million people into extreme poverty in low-income countries.

The World Bank says the following nations are at high risk of overall debt distress:

Africa:

• Cameroon, Cape Verde, Central African Republic, Chad, Djibouti, Ethiopia, Gambia, Ghana, Guinea-Bissau, Kenya, Liberia, Malawi, Mauritania, Sierra Leone, South Sudan, Togo, Zambia

Asia:

• Afghanistan, Laos, Tajikistan

Island nations:

• Haiti, Kiribati, Maldives, Marshall Islands, Micronesia, Papua New Guinea, Samoa, St. Vincent and the Grenadines, Tonga, Tuvalu

Debt Treatments

Since the pandemic, the World Bank and the International Monetary Fund recommended G20 countries establish the Debt Service Suspension Initiative (DSSI). The G20 did launch DSSI to temporarily pause official debt payments to the low-income countries, subsequently expecting the Common Framework which intends to help these countries restructure their debt and deal with insolvency and protracted liquidity problems. International communities scaled up their financial support. For instance, the IMF emergency lending and a $650 billion allocation of special drawing rights (SDRs).

The Common Framework: Yet to Deliver

Chad, Ethiopia, and Zambia have made requests for debt relief under the Common Framework however, experiencing significant delays. The delays are caused by core problems from the Common Framework. For example, decisions slowed down due to the coordination between Paris Club and other creditors, as well as multiple government institutions and agencies within creditor countries. There are also other domestic challenges in the countries that complicate the decision-making process.

The debt outlook in 2022

With the continuation of COVID-19, tightening of international financial conditions, and notable deceleration in economies, 2022 will be much more challenging. The DSSI expired through the December of 2021, which forces the participating countries to resume debt service payments.

IMF Proposals

It is necessary for the Common Framework to be delivered more quickly and strengthened. The following four points regarding actions that should be made for the Common Framework are proposed from the IMFBlog.

1. Clarifying timelines and steps in the Common Framework will accelerate the decision-making process.

2. Comprehensive and sustained debt service payment standstill during the negotiation period provides an incentive to relieve debtors in times of stress and to take faster procedures towards actual debt structuring

3. Clarify how the comparability of treatment is effectively implemented through IMF arrears policies to provide greater comfort to creditors and debtors.

4. Extension to other highly-indebted countries that may benefit from creditor coordination.

Adopting these provisions would better equip the IMF, World Bank, and other institutions to handle what may be increased demand for debt restructurings, particularly this year.

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References

Georgieva, K., & Pazarbasioglu, C. (2021, December 2). The G20 Common Framework for Debt Treatments Must Be Stepped Up. IMF Blog. Retrieved February 14, 2022, from https://blogs.imf.org/2021/12/02/the-g20-common-framework-for-debt-treatments-must-be-stepped-up/

Reuters. (2022, February 10). IMF says wants G20 support to strengthen debt restructuring framework. Retrieved February 14, 2022, from https://www.reuters.com/world/asia-pacific/imf-says-sri-lanka-has-not-sought-its-financial-assistance-2022-02-10/

World Bank Group. (2022, February 1). COVID 19: Debt Service Suspension Initiative. World Bank. Retrieved February 14, 2022, from https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative