Since the Monterrey Consensus, Member States of the United Nations have welcomed initiatives to reduce the debt overhang in countries that are under debt distress. Considerable progress was made with respect to LICs, whose main creditors were in the public sector. Private creditors also contributed to the debt wrote-down for LICs, even though litigation strategies were pursued in some cases by hold-out creditors. The Addis Agenda recognizes the need to assist developing countries in attaining long-term debt sustainability and commits to a range of actions.
The HIPC Initiative and MDRI are nearly complete. Debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing $76 billion in debt-service relief over time (see here). Three countries—Eritrea, Somalia, and Sudan—have yet to start the process of qualifying for debt relief under the Initiative.
The devastating impact of the 2017 Atlantic hurricane season put the spotlight on the vulnerability of developing countries to natural disasters and their wide-ranging consequences. Hurricane Irma destroyed infrastructure and homes across Barbuda. Reconstruction costs estimated by the World Bank and Caribbean Development Bank estimated would equal 15 per cent of Antigua and Barbuda’s annual GDP. Hurricane Maria swept over Dominica, causing loss of life and unprecedented destruction estimated at 226 per cent of GDP. As climate change is expected to make such events more frequent and more intense, there is need for the international community to address these risks, and for official sector creditors, in collaboration with countries at risk, to work on pre-emptive and reactive policies to provide appropriate support in times of crisis.
The IMF’s Exceptional Access Lending framework was revamped in January, 2016. The reforms allow IMF lending decisions to be better calibrated to members’ debt vulnerabilities, while avoiding unnecessary costs for the member, its creditors, and the overall system. It has two key elements: (i) allowing for appropriate flexibility, including the use of a “debt re-profiling” option, in situations when debt is assessed as sustainable but not with high probability; and (ii) the elimination of the systemic exemption, introduced in 2010, which has proven ineffective in addressing debt problems and preventing contagion.
In December 2015, the IMF revised its policy on arrears to official bilateral creditors to strengthen incentives for collective action among official bilateral creditors and promote more efficient resolution of sovereign debt crises. The revised arrears policy encourages official bilateral creditors to reach agreement through the Paris Club, consistent with the parameters of the IMF-supported program. If a representative agreement cannot be reached within the Paris Club, and creditor consent is not received, the IMF can still consider lending into arrears owed to official bilateral creditors under carefully circumscribed circumstances ( there is need for prompt support and the member is pursuing appropriate policies; the debtor is making good faith efforts to reach an agreement consistent with program parameters; and the decision to lend into arrears will not have an undue effect on the IMF’s ability to mobilize official financing packages in the future).
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The implementation of the revised policy has started, and experience so far suggests the policy is promoting dialogue between member countries and their official bilateral creditors. The recent IMF program review[s] for Ukraine—completed in a context where there were outstanding arrears to an official bilateral creditor, no representative Paris Club agreement, and no creditor consent—was [were] the first (and so far only) case where an assessment of the criteria was provided to the IMF Board in order to allow completion of the review.
A more fragmented official creditor base could pose coordination challenges in future debt restructurings. Effective official creditor coordination will remain essential, given what are referred to as first-mover (the first creditor to restructure, who in turn gets the most favourable deal), and free-rider (a less cooperative creditor who benefits from concessions given by other creditors) problems. The Paris Club has extensive experience in negotiating debt relief on behalf of a large group of official creditors in ways that overcome these problems. Further expansion of the Club would provide one way to address this challenge in the new environment and thereby strengthen the international financial system.
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Alternatively, official creditors would need to develop other coordination mechanisms. International practice has been not to restructure debts owed to the multilateral institutions and to the IMF, except in exceptional circumstances, such as those addressed by the Multilateral Debt Relief Initiative of 2005. However, there is thus far no experience in restructuring debts owed to new development finance institutions, and it is unclear whether these creditors will demand senior treatment on par with established multilateral creditors (such as the World Bank) that other official bilateral creditors may not accept. A further complication is the case of public sector entities that have purchased and hold the sovereign bonds of other countries. In these circumstances, there could be a lack of clarity about whether the bondholder is a private or an official creditor. Even where this distinction is clear, the existence of official and private creditors in the same voting pool (e.g., in a bond with collective action clauses) could complicate restructurings.
Against the backdrop of a more challenging official sector landscape, it would be helpful to look back at prior experiences of official sector actions to identify workable approaches for the future. In this context, and as part of its commitment to assemble a comprehensive database on debt restructurings, the IMF is examining ways to present comparable information on both private and official sector involvements (building, for the latter, on the database of Paris Club debt treatments). The effort is expected to be completed by end-2018.
In July 2016, at the occasion of its 60th anniversary, the Paris Club organized an international conference in Paris to take stock of and to discuss current and forward-looking challenges to achieving orderly sovereign debt restructuring and providing sustainable financing, as well as the international official financing architecture more generally. At this event, the Club also welcomed Korea as the Club’s 21st member. In November 2016, Brazil became the Club’s 22nd member. Outreach to other non-Paris Club official creditors is continuing with a view to further expanding the Club’s membership.
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The annual Paris Forum, organized by the Paris Club together with the Group of 20 countries, aims to foster frank and open discussions between debtor and creditor countries. At the latest forum in November 2016, representatives of more than 40 sovereign creditor and debtor countries and international financial institutions and organisations discussed guidelines for sustainable financing, building on the agreement in the Addis Ababa Action Agenda to “working towards a global consensus on guidelines for debtor and creditor responsibilities in borrowing by and lending to sovereigns”. Such guidelines could focus on transparency, coordination, resilience and consistency with the IMF and the World Bank’s debt frameworks. This work has been taken up and is continuing in the G-20 International Financial Architecture Working Group.
In between the regular annual meetings, the forum also gathered in a workshop in April 2016 focusing on new policies and tools to address debt sustainability in developing countries. The Paris Club also fosters dialogue with private creditors, particularly through annual meetings organized jointly with the Institute of International Finance, gathering official (Paris Club and non-Paris Club) and private creditors.
The changing creditor landscape has also resulted in the increasing prominence of non-Paris Club (NPC) bilateral and plurilateral creditors. Between 2015 and 2016, South-South Cooperation drove a more than twofold increase in new bilateral loan commitments to low- and middle-income countries, reaching $84 billion (see International Debt Statistics). In many cases, lending by NPC bilateral and plurilateral creditors has caused their share in total external debt to exceed the share of traditional Paris Club and multilateral creditors. This has implied a welcome unlocking of new financing, but often on less concessional terms. As these creditors are not integrated into existing mechanisms for creditor coordination (e.g., the Paris Club, which has long-standing principles to govern official sector involvement in debt restructurings), any restructuring that may be necessary could be more complicated.