The report titled ‘Restructuring Debt of
Poorer Nations Requires More Efficient Coordination’ was published on Thursday.
“Low-income countries face fewer debt
challenges today than they did 25 years ago, thanks in particular to the
Heavily Indebted Poor Countries initiative, which slashed unmanageable debt
burdens across sub-Saharan Africa and other regions,” said the global financial
institution.
“Although debt ratios are lower than in the
mid-1990s, debt has been creeping up for the past decade and the changing
composition of creditors will make restructurings more complex.
“Improvements to the Group of Twenty Common
Framework for Debt Treatments—from which the 73 countries that were eligible
for the G20 Debt Service Suspension Initiative (DSSI) in 2020-21 can now
benefit—could clear a path through this increasing creditor complexity.
“So far, only a handful of countries have
requested to use the common framework, which was launched in November 2020,
underscoring the need for change to build confidence and encourage
participation at a pivotal moment for heavily indebted low-income countries.”
IMF stated that the debt ratios of DSSI
countries have increased, partly reversing a decline seen in the early 2000s.
it added that this was spurred by low-interest rates, high investment needs,
limited progress in raising additional domestic revenue, and stretched systems
for managing public finances.
It said the economic shocks from the
COVID-19 pandemic and the war in Ukraine were adding to the debt challenges
faced by low-income countries, even as central banks begin to raise interest
rates.
“About 60 per cent of DSSI countries are at
high risk of debt distress or already in debt distress—when a country has
started or is about to start a debt restructuring, or when a country is
accumulating arrears,” the report added.
“Among the 41 DSSI countries at high risk
of or in debt distress, Chad, Ethiopia, Somalia (under the HIPC framework), and
Zambia have already requested a debt treatment. Around 20 others exhibit
significant breaches of applicable high-risk thresholds, half of which also
have low reserves, rising gross financing needs, or a combination of the two in
2022.
“On the domestic side, 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 capacity of domestic banks to finance growth.”
According to the financial institution,
local currency debt for the median DSSI country doubled from seven per cent of
Gross Domestic Product (GDP) in 2010 to 15 per cent in 2021.
It stated that for those DSSI countries
with market access, the share more than tripled from eight percent to 28 per
cent in 2021.
“Many of these DSSI countries have also
experienced a tightening of sovereign-bank links, with larger holdings of
domestic sovereign debt at domestic banks.”
On the way forward, IMF recommended putting
in place mechanisms that ensure coordination and confidence among creditors and
debtors.
It added that improvements to the G20
Common Framework could play an important role by ensuring broad participation
of creditors with fairer burden-sharing.
“Experience so far shows that greater
clarity on restructuring steps, earlier engagement of official creditors with
the debtor and with private creditors, a standstill in debt service payments
during negotiations, and specifying the mechanics of comparability of
treatment, is still needed.
“Strengthening debt management and debt
transparency should also be priorities. This would help countries manage debt
risks, reduce the need for debt restructurings, and facilitate a more efficient
and durable resolution if debt becomes unsustainable.
“It is in the interest of debtor countries
as well as their creditors that debt restructurings, where necessary, are
accomplished speedily, smoothly, and efficiently. This would support global
stability and prosperity, too,” the financial institution proposed.
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