EXTERNAL DEBT: IMF WARNS ECONOMIES FACE COLLAPSE
With the G20 Debt Service Suspension Initiative (DSSI) nearing its terminal date in about four weeks, the International Monetary Fund (IMF) has warned that the economies of some of the 60 per cent low-income countries could collapse as from the end of this month. The initiative is due to terminate at the end of this month.
The organisation said, yesterday, “For many of these countries, the challenges are mounting. New variants are causing further disruptions to economic activity. COVID-related initiatives such as the G20 Debt Service Suspension Initiative (DSSI) are ending. Many countries face arrears or a reduction in priority expenditures.
“We may see economic collapse in some countries unless G20 creditors agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated. It is also critical that private sector creditors implement debt relief on comparable terms.
“No doubt 2022 will be much more challenging with the tightening of international financial conditions on the horizon. The DSSI will expire at the end of this year forcing participating countries to resume debt service payments. Countries will need to transition to strong programs, and for low-income countries that need comprehensive debt treatment, the Common Framework will be critical to unlock IMF financing.”
The Fund said that recent experiences of Chad, Ethiopia, and Zambia showed that the Common Framework for debt treatments beyond the DSSI must be improved with quick action to build confidence in the framework and provide a road map for helping other countries facing increasing debt vulnerabilities. Since the start of the pandemic, low-income countries have benefited from some attenuating measures. Domestic policies, together with low interest rates in advanced economies mitigated the financial impact of the crisis on their economies.
The G20 put in place the DSSI to temporarily pause official debt payments to the poorest countries, followed by the Common Framework to help these countries restructure their debt and deal with insolvency and protracted liquidity problems.
The IMF explained, “The Common Framework is intended to deal with insolvency and protracted liquidity problems, along with the implementation of an IMF-supported reform program.” According to the world body, so far, only three countries—Chad, Ethiopia, and Zambia—have made requests for debt relief under the Common Framework and that each case has experienced significant delays.
It said, “In part, these delays reflect the problems that motivated the creation of the Common Framework in the first place. These include coordinating Paris Club and other creditors, as well as multiple government institutions and agencies within creditor countries, which can slow down decisions. The Common Framework aims to mitigate these problems but does not eliminate them. New creditors, including relevant domestic institutions, need to gain comfort with restructuring processes that would allow all creditors to work together in providing relief and enable the IMF to lend to countries facing debt difficulties. This takes time.
No time to waste
The Fund said that with policy space tightening for highly indebted countries, the framework can and must deliver more quickly. It asked greater clarity on the different steps and timelines in the Common Framework process, as well as, earlier engagement of official creditors with the debtor and with private creditors, which would help accelerate decision making.