Action Needed on Debt Crisis

At the World Bank Group-IMF Spring Meetings this week, I will be advocating strongly for sound development solutions for the mounting challenges facing developing countries. Resolving the impasse in debt restructurings, especially for the world’s poorest countries, is going to be at the center of discussions. 

On Wednesday, I will co-chair, with IMF Managing Director Kristalina Georgieva and India’s Finance Minister Nirmala Sitharaman, an in-person meeting of the Global Sovereign Debt Roundtable. Ahead of the Roundtable, I will moderate a discussion on debt and growth with four deeply engaged speakers: Ethiopia’s Minister of Finance Ahmed Shide, Jamaica’s Minister of Finance and Public Service Nigel Clarke, former Governor of the Reserve Bank of India Professor Raghuram Rajan, and asset manager GMO’s head of emerging country debt Tina Vandersteel. At these events—and at my fireside chat with Bill Rhodes at the Bretton Woods Committee's Annual Meeting—I’m looking forward to discussions of the debt crisis itself and approaches to achieving debt transparency and sustainability. 

"I would like to see serious consideration of a debt “standstill” meaning formal debt service suspension at the request of the debtor country at the beginning of debt restructuring process"

As we bring together the Global Sovereign Debt Roundtable, I see two fundamental challenges: the debt restructuring process is not moving much, and there hasn’t been enough discussion yet on ways to take action toward debt sustainability.  Creditors are spending vital months discussing issues that should be agreed on beforehand –the steps in the restructuring process, the process and timeline to reconcile debts, and how to handle cut-off dates. The most important topic – how to measure and apply comparability of debt treatment (fair burden sharing among creditors during a debt restructuring) – is still up in the air. All these points are part of every restructuring and need to be discussed and agreed. This Roundtable meeting could at least start the discussion. There needs to be consensus on these to get to the next step that really matters for countries with unsustainable debt – how to restructure the debt in a way that achieves sustainability. 

It is urgent that we make progress: countries need to achieve transparent, sustainable debt burdens in order to restart investment, which has slowed to a standstill.  The World Bank has expanded financial support to countries at high risk and in debt distress while many other creditors have stopped providing critically needed financing. IDA is maintaining very large positive transfers, provides implicit debt relief through its concessional terms, and is further increasing the concessionality, including by the provision of 100 percent grants.

Ahead of the Roundtable, the staff of the World Bank and the IMF have developed concrete proposals to address some of these roadblocks that the members of the Roundtable can discuss and agree on. The joint World Bank-IMF debt sustainability analysis should be shared with all creditors involved in the restructuring discussions at the same time. Transparency and information sharing here will help in calculations of how much debt relief is needed. Similarly, the restructuring process can be accelerated and made more dependable by setting clear timelines for milestones, including for the formation of the Creditor Committee, the provision of financing assurances, and importantly the signing of the debt restructuring agreement itself.

To make the process faster and address concerns of unequal treatment among creditors, we urgently need agreement on how to assess and implement burden sharing. Also, I would like to see serious consideration of a debt “standstill” meaning formal debt service suspension at the request of the debtor country at the beginning of debt restructuring process and the treatment of arrears accumulated during the standstill. These measures would provide incentives for reaching a restructuring, help provide predictability to the process, and avoid eroding debtors’ repayment capacity.

The Spring Meetings will provide an opportunity to achieve progress on individual country cases. On Zambia, I am encouraged to see that IMF staff reached an Agreement on the First Review of the Program, and I am looking for a good outcome of next week’s Official Creditor Committee meeting. If we could get an agreement on Zambia’s restructuring in line with the joint World Bank-IMF Debt Sustainability Analysis next week, this would provide great relief and growth impetus for the people of Zambia and would give a clear signal of progress on the G20 Common Framework.

For Ghana, I am encouraged that the technical meetings are taking place. As we all wait for the Official Creditor Committee to be established, it’s good to see the technical work advancing. And for Ethiopia, it is important to make faster progress on debt restructuring, which is needed as the authorities tackle deep structural problems including the unification of the exchange rate.

With the debt crisis growing larger, we must approach the meetings in the week ahead with resolve and urgency – now is the time for all parties to turn words into action.