SPECIAL FEATURE
Limited hopes for global debt resolution prospects
to long delays in the provision of IMF financing. And the Common Framework took around two years to provide a structure for starting to negotiate financial terms in one of the most important test cases – Zambia. The main source of difficulty is that some official creditors act like commercial creditors. This was dramatically demonstrated in late November 2023 when Zambia was forced to suspend a deal of almost US$4 billion in dollar bonds, derailing its attempts to move on from its years- long default. Most other official bilateral creditors, together with the IMF and the World Bank, have accepted that claims on LICs should carry concessional rates. China maintains that the World Bank and other multilateral development banks (MDBs) should “take a haircut” alongside bilateral and commercial creditors. However, the World Bank is highly unlikely to agree to this, given its preferred creditor status. Revoking this status would lead to large losses, jeopardizing its financial stability and its AAA rating, which enables the bank to issue bonds to commercial investors at extremely low rates. The other obstacle is posed by the change in the source of financial flows to LICs and how these should be better coordinated in the future in a post- debt resolution environment. The debt burden faced by LICs in particular is framed by an increase in bilateral lending from new creditors (mostly China) together with commercial borrowing from China and the bond market. MDB lending after the Heavily Indebted Poor Countries debt reduction initiative in the early- to mid-2000s has been undertaken in a financially responsible manner, highlighting the role of China and new commercial lenders and the increase in borrowing
demand from LICs supported by ultra- low interest rates following the global financial crisis. Resolving debt vulnerabilities remains work in progress Securing a return to debt sustainability for many LICs that are in default or in debt distress requires finding the basis for an agreement with China's policy banks, its state commercial banks and commercial bond holders that provides a clear path back to resumption of payments and leaves a country with a sustainable debt structure. In addition, a more coordinated and accountable system of lending to LICs at concessional rates is needed to ensure debt vulnerabilities once treated do not rise again. The World Bank’s “playbook” for development that was launched at its annual meeting in October 2023 focuses on ending poverty on a livable planet through more concessional resources provided by a boost to its capital adequacy is part of this solution. So too is the hope that a less confrontational geopolitical environment, highlighted by the competition and rivalry between the US and China, can be achieved. Given the trials and tribulations of the Common Framework to date, the new debt restructuring architecture that is likely to materialize will probably emerge out of case law precedents and actual practice rather than from more abstract discussions. With an uncertain geopolitical environment it has to be feared that sub-Saharan Africa’s debt problems could worsen before they start to improve.
To prevent the significant problems faced by several LICs (notably in sub- Saharan Africa) from spreading across to many others, the leading policy advice is to take urgent action in order to help reduce debt vulnerabilities and reverse the growth in debt. But what does this actually mean in practice? For governments seeking to strengthen management of their public debt the overarching goal should be to introduce and implement stronger public financial management (PFM). Weaknesses over many years in PFM have generally led to the multitude of problems that some of the OPEC
Fund’s partner countries face. The first step in this direction
revolves around building a credible fiscal framework to help balance spending needs with revenue streams so as to achieve debt sustainability. For many OPEC Fund partner countries improving the capacity to collect additional tax revenues is a crucial step in achieving this necessary sustainability. Meanwhile, for governments with unsustainable debt a comprehensive approach is needed which encompasses fiscal discipline as well as debt restructuring under the G20 Common Framework – the multilateral mechanism for forgiving and restructuring sovereign debt (see box).
Is the Common Framework fit for purpose?
The hopes and aspirations of what the Common Framework could help provide have been elusive for a number of reasons, raising questions about its effectiveness in resolving LIC debt problems. One of the main obstacles is the need for financing assurances from China for the IMF to lend, which has led
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