As the World Bank and the International Monetary Fund (IMF) gear up for this year’s round of Spring Meetings from April 10 to 16 in Washington DC, the need to resolve the massive debt issues of developing nations will be one of the main points of discussion.
Both institutions are set to present viable proposals meant to deal with large-scale debt restructuring issues.
Two Key Points
In a blog post made on Sunday, April 9th, World Bank president David Malpass said that there are two particular areas that will be discussed during this week’s Global Sovereign Debt Roundtable.
The suspension of debt-service payments at the beginning of the debt restructuring process is the first. Such a suspension will open up incentives for reaching deals and protect the debt repayment ability of individual nations.
The second calls for a more frequent invocation of the IMF’s policy of lending into arrears. While rarely used, this policy enables the Fund to lend into arrears immediately whenever necessary. However, borrowing nations need to show the Fund that they are pursuing the relevant policies and make a sincere effort to reach agreements with their creditors so that they cannot block funding from the IMF.
Debt overhang – a state wherein organizations or governments have such a substantial amount of debt that they can no longer borrow additional funds even if these are construed as a prudent investment that will more than pay for themselves in the long run – is another issue affecting numerous developing nations that Malpass hopes to address with these two points.
A Severe Hindrance to Economic Growth
Malpass pointed out that debt overhang is severely affecting the economic growth of numerous countries. Over half of the world’s lower-income nations are either at high risk of debt distress, already in the thick of it, or have already defaulted on their debts.
While the largest G20 economies agreed to a Common Framework to streamline the process of restructuring loans that governments are unable to repay back in 2020, it has yet to bring relief to any affected nation. Malpass noted that China, the largest sovereign creditor to developing nations, has slowed the process by questioning the institutions’ joint assumptions.
Other Ideas from the Floor
Among the proposals which will be discussed at the Spring Meetings is how the joint World Bank – IMF debt sustainability analysis for individual nations ought to be shared with all its creditors, along with any information necessary to help calculate the size of debt relief requirements.
Likewise, debt restructuring could be strengthened, even accelerated, with the establishment of succinct timelines for key steps in the process, specifically the formation of creditor committees, provision of financing assurances, and the signing of the final restructuring agreements.