In February it was announced that the IMF – alongside the World Bank and G20-lead India – would be launching the Global Sovereign Debt Roundtable (GSDR), the third meeting of which took place on the sidelines of the Spring IMF/World Bank Meetings in Washington on April 12.
There have been a number of debt roundtables in the past, but they have been dominated by creditor-centric discussions and groups – like the Paris Club, or even the G20 Common Framework discussions launched in November 2020. What is most noteworthy about this roundtable is that borrower countries are being included in a break from the creditor-core norm. Six borrowing countries are participating – from Latin America this includes Ecuador and Suriname and from Africa, there is Ethiopia, Zambia, and Ghana with Sri Lanka the only Asian borrower at the roundtable.
As we’ve argued elsewhere, this is progress but not enough. Borrowers themselves need to get together exclusively to coordinate on positions around debt restructuring as well as exchange lessons and ideas for securing new finance to meet these challenges head-on.
Given that all three of these African countries are in discussion with or are considering the IMF loan route, it is essential they come together to discuss various terms and offers from the IMF, US, China and others, and work out what are the best terms they can propose. Creditor coordination has been the norm for far too long – it is this kind of borrower coordination that can and should become standard practice.
Four suggestions for borrowers
However, there may still be a useful role for this roundtable, especially if the borrowers in the room have some fairly clear and similar views. But what could those views be on? We have four suggestions.
First, borrowers could express views on the challenges of the existing, creditor-centric architecture.
As we saw with Sri Lanka’s bilateral creditor assurances in February 2023 roundtable discussions, Ghana, Ethiopia and Zambia will look to seek to secure similar creditor buy-in this April. However, a glaring concern going into the next sovereign debt meetings is how long restructuring discussions have taken. A negative precedent is being set for future roundtable participants, where debt service default is likely to occur before borrower-lender agreements are in place, tarnishing borrower perceptions before debt negotiations even kick-off.
As an example, Ghana’s financial authorities suspended debt services in 2022 and have effectively defaulted on sovereign debt. But even though Ghana reached a staff-level agreement with the IMF in December 2022, the $3bn IMF financial package remains on hold pending creditor committee formation and creditor assurances.
Common Framework talks and creditor committee formulation for Chad and Zambia have dragged on for one to two years. The sooner such debt restructuring impediments are overcome, the more efficient future debt restructuring work will be – both for African and other countries in need of multilateral and bilateral debt relief and access to much-needed development financing.
Second, borrowers could express views on which creditors should be involved in debt restructuring and how.
For instance, do they agree with our colleagues that every creditor should be involved? For instance, the IMF and World Bank account for a significant proportion of debt servicing for many countries. Take Zambia where multilateral development banks (MDBs) account for 23% of external debt. Debt relief from the MDBs could be based on the Multilateral Debt Relief Initiative (MDRI) or draw on capital that is so far unused, as highlighted in the Capital Adequacy Framework report.
Beyond this, they could also raise the need for Europe, the UK and the US to help legislate for private sector participation in debt restructuring. For China, bilateral debt relief could be negotiated on a one-by-one basis or in groups of loan categories to speed up the process.
Third, borrowers could make it clear that for them, this is not a one-off issue, because fundamentally, low- and middle-income countries have too little debt.
Often, African governments secure loans from creditors to invest into much-needed infrastructure creating debt. However, this debt can be asset-producing and has a myriad of positive externalities – such as job creation, productivity increases and trade linkages.
Our recent forecasting analysis at Development Reimagined on infrastructure financing gaps illuminates this. To reach the SDGs, Ethiopia would have to have an average annual spend ranging between 17-25% of its GDP ($23.6- $34.8bn)! For Zambia and Ghana, this stands at 26-38% ($7.4-$10.8 billion) and 9.7-12.6% ($7-$9.1bn), respectively!
Now let’s take debt servicing for these countries into account. Ethiopia’s debt service in 2020 amounted to just under $2bn, whilst Zambia’s and Ghana’s stood at $1.9bn and $2.7bn, respectively. Compared to total debt forgiven or reduced between 2000-2020, debt serviced in 2020 alone represented 29% of debt forgiven in Ethiopia. The figures are more alarming in Zambia and Ghana, at 31% and 43% respectively.
Using Ethiopia, Zambia and Ghana as regional examples, these comparisons highlight the importance of urgent debt restructuring for fiscally constrained countries, balancing domestic growth and enabling investments with unnecessarily burdensome liabilities abroad. A clear lesson learned from the pandemic era is that a crippled recovery of one economy compromises the robustness, speed and sustainability of growth in the rest of the world.
Fourth and finally, the borrowers in the room could comment on the current conditionality of the G20 Common Framework and the specific reforms extracted in return for debt relief.
For instance, all three African countries which have applied to the Common Framework are having to agree to IMF programmes that are focused on austerity measures and cutting spending, which in turn, may dampen growth, demand and revenues. Countries need more flexibility to determine their own growth paths.
Overall, whilst the debt roundtable is not enough, those at the table can utilise it strategically to support borrowers aims and elevate borrowers’ voices and agency in the creditor-centric international financial system.
GSDR meets in Washington
The Global Sovereign Debt Roundtable (GSDR) met in Washington on 12 April 2023 and discussed debt sustainability and debt restructuring challenges and ways to address them. The discussion focused on the actions that can be taken now to accelerate debt restructuring processes and make them more efficient, including under the G20 Common Framework.
The meeting agreed on the importance to urgently improve information-sharing including on macroeconomic projections and debt sustainability assessments at an early stage of the process. The IMF and World Bank undertook to rapidly issue staff guidance on information sharing at each stage of the restructuring process.
The meeting discussed the role of MDBs in these processes through the provision of net positive flows of concessional finance.
It was announced that a workshop on how to assess and enforce comparability of treatment will be held in the near future and further work will be undertaken on principles regarding cut-off dates, formal debt service suspension at the beginning of the process, treatment of arrears, and perimeter of debt to be restructured, including with regards to domestic debt. It was hoped that this work will also help in clarifying potential timetables to accelerate debt restructurings.
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