Will rising international concern over a new debt crisis be matched by action?

Added 26 Mar 2018

Number of poor countries facing major debt crises doubles since 2013, says IMF, but are remedies robust enough?

Last week, the IMF has turned up the volume on warnings of a new debt crisis in the Global South. In a report looking at macroeconomic developments in 59 of the world’s poorest countries (low-income developing countries or LIDCs), the IMF paints a bleak picture of rising debt risks and what this means for development spending.

Forty per cent of LIDCs are now deemed to be at high risk of or in debt distress, with the most dramatic increases in debt vulnerabilities since 2013 generally being seen in Sub-Saharan Africa. Meanwhile, only one in five are considered to be at low risk: the lowest proportion since 2007.


What’s driving the downward debt trend?

Eurodad and other civil society organisations have for several years been highlighting issues that are driving this deterioration in debt indicators, and the IMF’s new report echoes many of these concerns. These include falls in commodity prices hitting LIDCs reliant on commodity export earnings; a changed, and increasingly fragmented creditor landscape, with more commercial lending meaning many impoverished countries are more exposed to market risks; the lack of transparency surrounding lending to LIDCs; and the potential risks to public finances posed by public-private partnerships (PPPs) and other, often hidden, state contingent liabilities. (Concerns over PPPs are so great amongst CSOs that more than 150 organisations have launched a manifesto and campaign calling for an end to the promotion of PPP contracts.) The report also acknowledges that reducing volumes of aid flows in the form of grant assistance to LIDCs have put added pressures on national budgets.


The rise in debt stocks in LIDCs, along with the growing dependence on commercially-priced debt, means the absolute and relative costs of servicing debts are growing. The more money a government has to divert to its creditors, the less it has to spend on development, and the IMF’s report points to this: public investment fell in about 50 per cent of the countries with large fiscal deficits, suggesting debt servicing is absorbing a greater share of public funds. Indeed, Eurodad member Jubilee Debt Campaign this week released figures showing developing country debt payments increased by 60 per cent between 2014 and 2017, reaching their highest level since 2004. Meeting the SDGs under such circumstances is, as the IMF itself recognises, a serious challenge for these countries.


Policy incoherence still a major concern

Despite the urgency of its warnings, the shadow of IMF policy incoherence still looms large over the report. 

The IMF projects that debt levels in LIDCs will fall over the coming years, basing this assumption on debtor governments implementing ‘significant fiscal consolidation’ – i.e. austerity measures. In fairness, the report acknowledges that in reality this optimistic outlook is unlikely. Moreover, it states that without any debt relief or restructuring, significant reductions in debt stocks are rare. IMF data identifies only seven such cases since 2000, and in only one of these – Nepal – did fiscal consolation apparently play an ‘important contribution to debt reduction’. 

In light of this, one would imagine that the Fund has concluded that it should adopt a new approach in its policy advice on debt management. Sadly, however, fiscal consolidation appears to remain a key tenet of its proposed solutions to current LIDC debt vulnerabilities. In view of the findings it describes, and coupled with the ever-expanding body of evidence of the negative impact that austerity is having on human rights, why does the IMF resort to prescribing more of the same? It seems neither the economic argument, nor the legal argument in defence of austerity, are particularly strong.

This incoherence extends to the report’s consideration of PPPs. The fiscal risks and paucity of data associated with these sorts of investments are starkly laid out: the volume of PPPs in LIDCs has increased rapidly in recent years, and they are seldom well captured or considered in debt sustainability assessments. The report goes on to note that ‘for a handful of countries with relatively large PPP capital stocks, the estimated fiscal impact of [projects falling into trouble] would exceed 10 percent of GDP’.

Yet despite all of this, the IMF seems still to proselytize for infrastructure investment through PPPs, albeit with the caveat that only projects with ‘credibly high economic rates of return’ should be financed. The proposed buffer to the negative fiscal impact from PPPs is ‘skilled negotiation and rigorous risk assessment’. The impression remains that the priorities of investors are being placed above the development effectiveness of such investments, and that insufficient consideration is being given to safeguarding effectively the burden of fiscal risk that LIDCs may be taking on via PPPs. Thorough cost-benefits analyses and fiscal risks assessments before every project is approved are now more needed than ever.


Time for a rethink on solutions

Beyond the mixed signals, there are some signs that the Fund is beginning to look seriously at systemic, multilateral steps to prevent and resolve debt crises. Motivated by the changing nature of the creditor landscape, and the diminishing importance of traditional lenders such as Paris Club nations (22 rich countries that have for decades been the largest bilateral sovereign creditors) the Fund is calling for across-the-board efforts towards more responsible sovereign financing, including through steps to increase the availability of information on the terms, amounts, and conditions of debt. Here, the IMF points to better due diligence by lenders and encourages endorsement of the G20 Operational Guidelines on Sustainable Financing. While the general thrust of the IMF’s appeals is welcome, the report fails to acknowledge work done within the UN system to push this agenda forward, including the UNCTAD principles on responsible sovereign lending and borrowing, which take other dimensions into account, such as giving more attention to development concerns than the G20 guidelines.

Significantly, however, the report also underlines the increasing challenge that this landscape poses to the timely, orderly and fair resolution of debt crises, and urges lenders to develop modalities for debt restructuring operations – calling for ‘prior agreement among official creditors on the general “rules of the game”’. The Executive Board assessment of the report goes further than the staff authors and explicitly calls for ‘concerted efforts from the multilateral community’…expressing support for an ‘improved framework for debt restructuring in cases where debt burdens have become unsustainable’. A few Executive Directors also flag the possibility of a new wave of multilateral debt relief. While again, existing UN work on the framework for such a multilateral debt restructuring mechanism is not overtly referenced, the Executive Board assessment does send a positive political signal. So-called ‘rules of the game’ have to be developed, and importantly, this has to be done via a genuinely multilateral exercise, to ensure the interests of debtor nations are adequately defended.


Carpe diem

As Einstein famously didn’t say, ‘insanity is doing the same thing over and over again, and expecting different results.’ The IMF’s diagnosis of the current health of LIDCs’ debt is timely and unambiguous. What it must now do is heed its own warnings, and secure multilateral solutions rather than continue to prescribe ineffective medicine in the form of austerity and risky PPP investments. This report contains welcome calls to address once and for all the absence of a comprehensive and fair regime for handling sovereign debt restructuring. Governments must now act, and follow this up by restarting international discussions on a debt workout mechanism.