Slow progress on a plan by the biggest economies to help debt-ridden developing nations restructure what they owe is spurring concern from the International Monetary Fund and World Bank about vulnerabilities as a $35 billion bill comes due and US interest-rate increases loom.

More than a year since the G20 set up the so-called Common Framework to reorganise the debt of countries in danger of default, a lack of co-ordination and transparency has hampered the process. Chad, Zambia and Ethiopia – the only nations among about 70 eligible ones that have applied – remain mired in talks. And Ethiopia had its credit rating cut just for applying, prompting nations like Mauritania to avoid the process.

“The framework has yet to deliver on something that may act as a catalyst for others,” World Bank chief economist Carmen Reinhart said. Creditors have been too slow to accept that they’re going to earn less from their investments, she said.

The World Bank estimates that the world’s poorest countries, which comprised most of the nations eligible for the debt-service suspension, owe $35bn in payments in 2022.

A meeting of G20 finance chiefs in Indonesia this month presents an opportunity to make it more effective, said Susan Lund, the chief economist of the International Finance Corp, the World Bank’s private-sector lender. Too many creditors are holding out and waiting for others to accept losses, she said.

“It’s a classic free-rider problem,” Ms Lund said. Creditors “need to step up to take a haircut. You don’t want this to worsen even more”.

Meanwhile, the list of nations in trouble grows. About 60 per cent of low-income countries are at high risk or already in debt distress, double 2015 levels, the IMF says. Eight developing economies have dollar-denominated government bonds that pay at least 1,000 basis points more than US Treasuries, which is above the threshold for debt to be considered distressed, according to data compiled by Bloomberg.

Framework timelines need to be improved, and the formation of creditor committees and early engagement with the debtor country should go more quickly, said Guillaume Chabert, deputy director at the IMF’s strategy, policy and review department.

Private creditors are not having their perspective sufficiently taken into account in the IMF’s analysis of needed debt reductions, said Kevin Daly, investment director at Aberdeen Standard Investments, which holds Zambian bonds. That creates the risk of “a big gulf between what the IMF requires and what these creditors feel is necessary”, he said.

The IMF engages regularly with private creditors, including through the Institute of International Finance, which represents global financial companies, the IMF’s Mr Chabert said. Debt-restructuring negotiations are done directly between the debtor nation and its creditors, he said.

The Zambian finance ministry said that the nation is committed to transparency and treating creditors comparably.

Ethiopia’s State Minister for Finance Eyob Tekalign said the nation has been co-operative with the process and is disappointed that it has not been completed, calling on all parties to intensify efforts.

Source: Bloomberg

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