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Debt crisis resolution: Actions by official creditors

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. 

Heavily Indebted Poor Countries (HIPC) Initiative

The HIPC Initiative and MDRI are nearly complete, with 36 countries having already reached the completion point under the HIPC Initiative (Table 1). Three countries—Eritrea, Somalia, and Sudan—have yet to start the process of qualifying for debt relief under the Initiative. 

 

Table 1. HIPC Eligible Countries (as of end-October 2016)1/

 36 Post-Completion-Point HIPCs 2/

Afghanistan

Congo, Dem. Rep. of   the

Haiti

Niger

Benin

Congo, Rep. of

Honduras

Rwanda

Bolivia

Côte d’Ivoire

Liberia

São Tomé and Príncipe

Burkina Faso

Ethiopia

Madagascar

Senegal

Burundi

Gambia, The

Malawi

Sierra Leone

Cameroon

Ghana

Mali

Tanzania

Central African Republic

Guinea

Mauritania

Togo

Chad

Guinea-Bissau

Mozambique

Uganda

Comoros

Guyana

Nicaragua

Zambia

3 Pre-Decision-Point HIPCs 3/

Eritrea

Somalia

Sudan

 

1/ Of the 39 HIPC eligible countries, 31 are LDCs. 17 LDCs were not eligible for HIPC
2/ Countries that have qualified for irrevocable debt relief under the HIPC initiative.
3/ Countries that are eligible or potentially eligible and may wish to avail themselves of the HIPC Initiative and MDRI. 
Sources:  IMF Factsheet: HIPC Initiative (https://www.imf.org/external/np/exr/facts/hipc.htm)
International Monetary Fund – The World Bank (2016), “Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Statistical Update” (March).
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The debt stock in LICs that received HIPC/MDRI debt relief and/or are at high risk of external debt distress remains low on average. HIPC/MDRI debt reliefs have lowered the level of external debt in recipient countries considerably. While non-concessional debt, as defined by the Development Assistance Committee of the OECD, has risen modestly in recent years, the overall level of external debt stock remains low. The averages do conceal risks in individual countries however. As of March 2017, 9 post-completion point HIPCs are considered at high risk of debt distress by the IMF.

 

Support measures to assist vulnerable countries in handling unexpected emergencies, such as natural disasters

The IMF has continued to implement new facilities to help countries cope with natural disasters and other shocks. IMF’s Catastrophe Containment and Relief Trust (CCR) was established in 2015 to expand the scope of qualifying events for debt relief under its predecessor Post-Catastrophe Debt Relief Trust from catastrophic natural disasters to public health disasters. Liberia, Sierra Leone, and Guinea tapped the CCR in 2015 to cope with the fallout from the Ebola outbreak. The IMF also increased access limits to its emergency lending windows by 50 percent in 2015 through the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI). The RCF provides rapid and concessional financial assistance to LICs facing an urgent balance of payments need, without the need for program-based conditionality, while the RFI provides rapid financial assistance to all member countries facing an urgent balance of payments need, without the need to have a full-fledged program in place. The interest paid on RCF loans was also set permanently at zero percent. Since 2015, Ecuador, Iraq and Vanuatu received financial assistance via RFI, while Central African Republic, Dominica, the Gambia, Haiti, Liberia, Madagascar, Nepal, and Vanuatu received financial assistance via RCF.

IMF reform of exceptional access lending framework

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.

IMF reform of policy on arrears

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.

Debtor creditor engagement

The IMF staff is continuing to work on the Fund’s final work stream on sovereign debt restructurings. The objective is to address further issues relating to private sector involvement in debt restructurings, including in the context of the Fund’s lending-into-arrears policy. This work stream will also address a broader set of issues related to the form and nature of debtor-creditor engagement. IMF staff’s recommendations will be based on experience with debtor-creditor engagement in the context of both pre- and post-default cases since 2002, and will also draw on consultations with stakeholders, including official issuers and official and private creditors.

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The Financing for Development Office carried out three study group meetings on creditor debtor engagement, with participation of international organisations, policy thinks tanks, legal affairs, representatives of private sector organisations and selected debtor and creditor governments. The group considered issues pertaining to the platform and process that is most appropriate for creditor-debtor engagement. The main conclusion drawn from these meeting is that engagement in the form of a creditor committee need not be part of a contractual clause as proposed by the International Capital Market Association (ICMA). While such contractual clauses may promote engagement and possibly help to preserve a bond contract, they do not necessarily overcome creditor coordination problems (given wide creditor diversity), and may also present several disadvantages for issuers, including constraining the timing of engagement and shifting the balance of power in negotiations. An issuer can act prudently when the time comes, and benefit from informal soundings with different creditors, including engaging with any creditor committee that is formed.

Paris Club, Paris Forum and non-Paris Club lenders

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 most recent meeting took place in June 2016.