Urgent reforms are needed to prevent a debt crisis among emerging markets and low-income countries as the Covid-19 pandemic exacerbates international debt levels to record highs, the International Monetary Fund (IMF) said.
Average debt ratios in 2021 are projected to rise by 20 per cent of gross domestic product in advanced economies, 10 per cent in emerging market economies, and about 7 per cent in low-income-countries compared to the end of 2019, Kristalina Georgieva, the IMF's managing director said in a blog post on Thursday co-authored with IMF officials. The fund's director of strategy, policy and review department Ceyla Pazarbasioglu and its legal department director Rhoda Weeks-Brown contributed to the blog.
Emerging markets and low-income countries face "much tighter limits" on carrying additional debt, with half of them already already in or at high risk of a debt crisis, making the further rise in debt "alarming", the authors said.
Many of these countries could suffer a second wave of economic distress, triggered by defaults, capital flight and fiscal austerity just as they start to recover from the pandemic, the IMF officials said.
"Preventing such a crisis can make the difference between a lost decade and a rapid recovery that puts countries on a sustainable growth trajectory," the co-authors said.
Current policy actions by central banks, bilateral lenders and international financial institutions implemented during the early days of the pandemic have prevented a debt crisis so far but are quickly becoming insufficient. That is because initiatives such as the G20's debt relief programme, are temporary and the measures have so far focused on providing liquidity.
"As the crisis continues, solvency problems— the inability to repay debts—increasingly come to the forefront," the authors said. "Preventing a developing country debt crisis requires urgent additional steps."
The IMF called for an extension the G20 Debt Service Suspension Initiative (DSSI) into 2021, warning that its current beneficiaries will be forced to adopt austerity measures to resume debt repayments, which could compound the suffering caused to their populations during the pandemic. The programme, which helps poorer nations cope with the economic fallout from Covid-19, expires at the end of this year.
"The extension of the initiative should provide incentives to tackle unsustainable debt problems early," Ms Georgieva and the IMF officials said. "The length of the extension could be linked to IMF and World Bank programmes designed to reduce debt vulnerabilities."
The Washington-based lender also called on debt-laden countries to urgently tackle their debt through a combination of debt management and measures to stimulate growth.
"Where debt is unsustainable, it should be restructured, the sooner the better," the authors said, adding that private sector claims should be included. "Ignoring solvency problems only makes them worse."
In a 52-page report released on Thursday, the fund also emphasised the need to reform international debt "architecture", which includes sovereign debt contracts, frameworks that support debt restructurings and institutions such as the IMF and the Paris Club – a group that represents private sector creditors of debtor nations.
The report says although more than a dozen sovereign debt restructurings since 2014 "have generally proceeded smoothly", others have been protracted, incomplete and non-transparent. Total sovereign debt has increased as a share of GDP, debt instruments have become more diverse and the creditor base has become more fragmented, which has caused challenges in some recent restructurings.
It suggests that contractual provisions between debtors and creditors should be strengthened to minimise economic disruptions when debtors run into trouble and that provisions are made to allow for an orderly restructuring of non-bonded debt, with clauses that lower debt payments or automatically suspend debt service in the event of natural catastrophes and other large economic shocks.
The IMF report also called for increased debt transparency so creditors can make more informed lending or restructuring decisions.
Official bilateral creditors should agree on a common approach to restructure bilateral debt, the IMF said. That can include a common term sheet that requires debtors to transparently lay out their debts and seek restructuring agreements from all creditors on comparable terms.
"The world is at a critical juncture and should not sit idle waiting for a crisis. It needs to review its arsenal of weapons," the IMF officials said. "It also needs to do the utmost to prevent, and if necessary, pre-empt, another sovereign debt quagmire."
The alternative, they warned, could be large-scale defaults that would severely damage economies and set back their recoveries for years.
"Low-income countries are especially at risk, and their people are likely to suffer most if a debt crisis occurs," they said.