IMF To Push G-20 For Plan To Lower Debt Costs For Poor Countries And Dodge Defaults
The International Monetary Fund is seeking to rally Group of 20 nations around a new effort to help poor countries reduce debt burdens, avoid defaults and stabilize their economies.
While the plan is at an early stage, it could encompass re-profiling of existing loans, debt swaps, and credit guarantees that would help lower costs, Ceyla Pazarbasioglu — head of the fund’s powerful Strategy, Policy and Review Department — told reporters at a briefing in Washington on Wednesday.
The broad idea is to provide countries “a menu of options and we can decide jointly with them what suits them,” she said. “One size doesn’t fit all.”
The IMF push comes as several emerging and developing countries, particularly in Africa and South Asia, continue to struggle with debt piles built up before the pandemic and exacerbated in the last couple of years by steeper borrowing costs.
The existing G-20 mechanism known as the Common Framework aims to deal with the aftermath of defaults, rather than ward them off. It’s been hobbled by disagreements among creditors including China — a major lender to emerging-market economies in the pre-pandemic years — as well as private bondholders.
Debt held by 30 emerging economies tracked by the International Institute of Finance totaled $28.4 trillion in the first quarter of this year, up from about $11 trillion in the same period of 2014. Some estimates put the annual service costs for poor countries at more than $400 billion.
That debt burden is siphoning off much-needed funds from investment and public services, according to the IMF and its sister institution, the World Bank.
Beyond countries that have already defaulted in recent years, such as Zambia, Ghana or Sri Lanka, there are others struggling with high debt-servicing costs and sluggish growth, partly due to Covid-related economic scarring.
“This is the key problem right now,” Pazarbasioglu said. The issue “is going to be discussed a lot” when G-20 finance ministers and central bank governors gather next week in Brazil, where the host country has put a strong focus on inequality.
Getting the G-20 on board would mean achieving a rare agreement between the US and China, the most important players in global debt talks but rivals when it comes to security and trade. The two countries have already discussed the new ideas with the goal of getting a proposal ready for G-20 leaders to approve when they meet in November.
The new initiative would be a “third pillar” to help countries get on track, Pazarbasioglu said, alongside raising domestic revenues and increased support from multilateral lenders such as the World Bank and African Development Bank. She added this “holistic” approach would work for countries such as Kenya, which has been rattled by deadly protests against tax increases.
A key outcome of the new effort would be to help countries avoid defaults that can lead to lengthy and complicated restructurings — one reason why the Common Framework has been criticized. Pazarbasioglu ackowledged the problem, but defended the program.
“The Common Framework has been slow, but it’s progressing,” she said.
