The IMF said on April 11 that it aims to stave off defaults using better mechanisms for dealing with sovereign debt stress. The decision came as a necessity since poor countries are hurting from sharply higher global energy and food prices as a result of the war in Ukraine.
In an official statement, Ceyla Pazarbasioglu, the IMF’s strategy chief, and Vitor Gaspar, director of the International Monetary Fund’s fiscal affairs department said:
“The war in Ukraine is adding risks to unprecedented levels of public borrowing while the pandemic is still straining many government budgets.”
“With sovereign debt risks elevated and financial constraints back at the center of policy concerns, a global cooperative approach is necessary to reach an orderly resolution of debt problems and prevent unnecessary defaults.”
Most low-income countries may need more grants and highly concessional financing as spikes in energy and food prices were hitting them particularly hard. Countries should strengthen debt management policies to reduce risks and undertake reforms to improve debt transparency.
The authors said that about 60% of low-income countries were already in, or at risk of, debt distress. Widening spreads for countries with weaker fundamentals could be triggered by rising interest rates in major economies, making it more costly for them to borrow.
They said that the decline in overseas lending from China — which is grappling with problems with existing loans to developing countries, solvency concerns in the real-estate sector, and COVID-19 lockdowns — exacerbated the credit crunch.
Noting that a freeze in official bilateral debt payments adopted at the start of the pandemic had ended, they said that actions taken by major economies were insufficient, and the Group of 20 industrialized nations had not agreed on any restructurings under a defined framework.
A broader range of countries, now not yet eligible for debt relief, needed options. They concluded:
“Muddling through will amplify costs and risks to debtors, creditors and, more broadly, global stability and prosperity. In the end, the impact will be most sharply felt by those households that can least afford it.”