[Last] week, delegates and policymakers from different parts of the world gathered for the International Monetary Fund (IMF) spring meetings in Washington to discuss the state of the global economy and lay out plans to strengthen it.
During her curtain-raiser speech, the IMF director Kristalina Georgieva told the audience to “fasten your seatbelts.” The reference suggested that the soft landing might not be so soft in certain parts of the world. Georgieva’s advice is especially relevant for nations sitting on a large pile of debt.
Debt sustainability and the Fund’s capacity/ability to support countries under strain were a topic of conversation this week. Developing economies, in particular, are suffocating under high interest rates which are hindering their economic recoveries. According to the IMF, nine countries are already in debt distress with another 25 nations at a high risk of joining them.
Some low-income economies are spending as much as 13% of their gross domestic product (GDP) on servicing debt, four times the fraction that interest contributes to U.S. government outlays. Low-income economies are expected to pay over $185 billion in interest on combined external and domestic debt in 2024. Defaults have been avoided at the cost of development goals: the United Nations estimates that over 3 billion people live in nations where administrations spend more on interest payments than on education or health. The imbalance explains why progress in reducing poverty has not merely stalled in some places, but started to reverse. Persistent economic underperformance can give rise to political instability, which makes it difficult for a country to attract capital of any kind.
DEBT DISTRESS IS RISING FAST, BUT RESTRUCTURING IS BECOMING MORE COMPLEX, LEADING TO DELAYS.
In addition to the burden of interest rates, countries under distress are also forced to comply with fiscal austerity, an important condition that the IMF attaches to most of its financial assistance. With western economies and multilateral agencies failing to provide swift and coordinated relief, poorer nations have been increasingly looking for bailouts from private creditors.
According to research by economists Lawrence Summers and N.K. Singh, the private sector reaped $68 billion more in interest and principal repayments than it loaned to developing economies in 2023. Instead of providing comprehensive debt relief to struggling economies, the lenders of last resort collected $40 billion in repayments of non-concessional loans from these nations.
The sovereign debt restructuring process has become much more difficult, owing to the wide variety of creditors and much larger debt involved. The Sri Lankan government is struggling to reach an agreement with its bondholders for the restructuring of around $12 billion of debt. It took Zambia three years after its default to agree to a debt restructuring with private bondholders. The true extent of liabilities is often not wholly known to creditors or international institutions.
The issue of emerging market debt distress has garnered attention for a long time, but solutions have proven elusive. New rules announced by the IMF this week aim to speed debt restructuring by easing the requirement that nations reach a debt agreement with one or more of its bilateral creditors.
The size, scope and nature of 21st century fiscal problems have grown, but the resources of multilateral bodies like the IMF have not progressed at the same rate. The Biden administration is proposing to inject $21 billion to shore up the Fund’s ability to deliver financial aid. Considering the debt and case load, other members will have to chip in. More and more governments are living on borrowed time.
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