IMF, World Bank debt revamp process needs a relook

The recent Global Sovereign Debt Roundtable (GSDR) meeting held on the sidelines of the IMF and World Bank Spring Meetings on April 17 offered a ray of hope for low- and middle-income countries (LMICs) burdened by mounting debt. The IMF and World Bank acknowledged significant progress in tackling global debt vulnerabilities.

However, a key challenge remains: expediting debt restructuring processes and ensuring fair treatment across creditors. The world faces a daunting challenge: global debt reached a staggering $235 trillion in 2022, with low-income developing countries particularly vulnerable.

Record debt levels

According to Unctad’s Least Developed Countries Report 2023, the total external debt of Least Developed Countries hit a record $570 billion in 2022 — more than four times higher than in 2006. As a result of this growing debt burden, they are spending five times more on debt servicing than a decade ago.

In the past three years alone, the number of sovereign debt defaults in these countries has surged to 18, outstripping the total of the previous two decades. The situation is particularly dire for Low-Income Countries, with over 60 per cent currently in debt distress or having defaulted on their obligations.

This unsustainable debt situation creates a vicious cycle. LMICs often rely on borrowing to finance crucial infrastructure projects and social programmes. However, excessive debt can become a major drag on economic growth. High debt servicing costs divert resources away from productive investments, hindering long-term development prospects.

The IMF and World Bank through tools like Debt Sustainability Frameworks (DSFs), assess a country’s ability to repay its loans. They also offer financial assistance and policy advice to help countries implement reforms that promote economic stability and growth.

The timeframe

One of the key issues addressed at the GSDR was the lengthy timeframe associated with debt restructuring processes. Delayed resolutions not only create uncertainty for debtor countries but also exacerbate economic hardship.

The delay in finalising IMF programme and debt restructuring package for Ethiopia under the G20 Common Framework for debt treatments has caused particular concern. Stakeholders have specifically sought clarification over the efficacy of the IMF’s Ethiopia package and the reasons for its delay.

Such transparency would not only benefit Ethiopia but also strengthen confidence in the IMF’s role as a facilitator of debt resolution.

The GSDR discussions proposed a potential solution: setting a target of programme approval within 2-3 months for future debt restructuring cases, including under the G20 Common Framework for debt treatments. This would require streamlining communication and information sharing between debtor countries, official bilateral creditors (government-to-government loans), and private creditors. Another critical aspect of debt restructuring is ensuring comparability of treatment (CoT) between different creditor groups. This principle dictates that all creditors holding similar claims should receive comparable treatment in terms of debt relief. Inconsistent CoT can create an uneven playing field, potentially undermining the overall debt restructuring effort.

The GSDR discussions emphasised the need for enhanced information exchange and coordination between official bilateral creditors and private creditors. This would allow debtor countries to negotiate with full knowledge of how CoT will be assessed, facilitating a more efficient and equitable resolution. While the GSDR meeting represents a step forward, significant challenges remain. The IMF and World Bank must continue to play a proactive role in facilitating communication, promoting transparency, and advocating for faster and fairer debt restructuring processes.

Neeraj Kumar is an IES officer, currently serving as Joint Director (Bilateral Cooperation) at the Ministry of Finance.

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