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IMF: Debt Restructurings are Improving but Need to Be Faster

IMF: Debt Restructurings are Improving but Need to Be Faster

The International Monetary Fund (IMF) said yesterday, 30 June, that public debt restructuring processes in countries in difficulty have been faster, but pointed out that aid mechanisms need to be accelerated.

“When countries fall into financial default, restructuring is critical to contain the damage, restructuring should be as fast as possible, because delays deepen the problems, making adjustment more difficult and increasing costs for both creditors and debtors,” reads an IMF blog on the process of restructuring public debt in the most indebted countries.

“Although some sovereign debt restructuring processes have faced significant delays, we are working with our partners to accelerate the process, and the progress we have made so far shows that the world can work together to reduce risks,” adds the article, signed by the director of the Strategy, Policy and Review department, Ceyla Pazarbasioglu.

The global economy, said the economist, “avoided what could have been a systemic debt crisis during the turmoil of recent years, but vulnerabilities remain significant in a context of high debt servicing costs,” particularly among developing countries, 15 per cent of which have interest rates considered unsustainable, and among low-income countries, which will need to refinance around 60 billion dollars, around 56 billion euros, over the next two years, equivalent to three times the needs over the past decade.

“Around 15 per cent of low-income countries are in debt distress and another 40 per cent are at high risk of being in debt distress,” writes Ceyla Pazarbasioglu.
In the article, the director of the department that liaises between the IMF and various international institutions, such as the G20, says that despite the difficulties, the debt restructuring processes, the most recent model of which is the Common Framework and the Debt Roundtable, are improving the situation.

“Results are appearing, reducing the time between a technical agreement with the IMF, which is a critical step for an IMF programme, and the delivery of financial guarantees by the official creditors, necessary for the Fund’s approval of the programme,” which means that “it is possible to speed up the delivery of much-needed financial assistance to the country.”

As an example, Pazarbasioglu points to Ghana, whose agreement this year took five months, more or less half of what it took Chad in 2021 and Zambia in 2022, “and the talks with Ethiopia should be quicker, around two or three months”.

The improvements are the result of non-traditional creditors such as China, India or Saudi Arabia coming on board, because “familiarising themselves with the process helped the parties know what to expect, built trust, and allowed creditors to resolve what were previously considered insurmountable obstacles.”

In April, the IMF announced that it had streamlined the approval process for financial programmes to allow for faster disbursement and intervention in cases where there are coordination problems between creditors, as well as a new procedure that dispenses with official letters and only assesses the existence of a “credible official process with creditors”, she pointed out.

Later this year, the Fund plans to present more proposals to clarify the process, including revising the parameters for analysing debt sustainability for low-income countries, which is done jointly with the World Bank and determines whether or not countries can receive funding, she concluded.

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