Handling the sovereign debt issue

‘Since 2014, total sovereign debt has increased as a share of GDP, and the range of debt instruments has proliferated. Coupled with a continued diversification of the creditor base, these development.’ – ‘The international architecture for resolving sovereign debt involving private-sector creditors’, International Monetary Fund (IMF; September, 2020)

The same report highlights that ‘Total external government debt of emerging market and developing economies (EMDE) has increased from 14 to 24 percent of GDP between 2008 and 2018, driven by increased debt owed to the private sector.’ Moreover, to make things more complicated in terms of debt repayment, given the underlying lot less chances of debt moratorium/relief from private creditors, with whom the debt increased from $186 billion to $535 billion during the same ten years.

This is indeed a big jump in just ten years, and a significant amount was amassed, for instance by African countries by floating bonds to tap-in on substantial injections into advanced countries as monetary easing after the Global Financial Crisis of 2007/08. The extent of this rather risky borrowing, given the big size of it, could be understood from the fact that during 1990 to 2008, sovereign debt of low - and middle-income countries increased by 30 per cent, while during the next ten years after 2008 saw a significant increase from $600 billion to $1.3 trillion.

Having said that, the heavy Covid-related spending by governments has added appreciably more to this already high debt burden, especially of developing countries. Given the upcoming spending needs for delivering vaccines, will further add to this burden.

In this regard, the announcement by G20 countries under its Debt Service Suspension Initiative (DSSI) is to allow poor developing countries to resume their bilateral debt repayments next year, as highlighted by Paola Subacchi in a recent article ‘A good buy in complete start to debt relief’ as ‘DSSI took the first step by suspending principal and interest payments on debt falling due between May 1, 2020, and June 30, 2021 (having been extended from December 31, 2020), thereby expanding the safety net for at least 77 developing countries.’ While this is welcome, the depth of debt burden requires a number of other initiatives; some of which may include the following.

Firstly, the enormity of the task at hand of avoiding a sovereign debt crisis requires creation of a dedicated organization at the international level. Paola in the same article articulates this as ‘We need a multilateral agency specifically tasked with coordinating creditors, sharing information, and reducing the scope for information arbitrage. We need a multilateral agency specifically tasked with coordinating creditors, sharing information, and reducing the scope for information arbitrage.’

Moreover, given the phenomenon of ‘long Covid’, and the extensive rollout time involved for purchasing and administering vaccines, along with the associated need to raise more debt for meeting these concerns, it is therefore important that a multilateral agency provides continuous assistance for debt restructuring to debtor countries through all stages of dealing with the pandemic in an effective and meaningful manner.

Secondly, as Joseph Stiglitz and Hamid Rashid recommend in their article ‘How to prevent the looming sovereign debt crisis’ buybacks of sovereign debt voluntarily. They elaborate this in the same article as ‘A buyback program’s principal objective would be to reduce debt burdens by securing significant discounts (haircuts) on the face value of sovereign bonds, and by minimizing exposure to risky private creditors.’ Such a policy will help free-up a lot of fiscal space for making public investments. Moreover, availing the option of buybacks is much better than the harsh conditionalities that usually accompany a debt swap.

The debt challenge facing the developing countries is indeed daunting, as Stiglitz and Rashid highlighted in their research paper ‘Averting catastrophic debt crises in developing countries: extraordinary challenges call for extraordinary measures’ as ‘There is no need for a war to get us out of the current debt crisis. But we must forge global collective action. Unless we address the unsustainable debt burden of the developing countries, a dystopian future will become a reality. Forcing developing countries to make $130 billion in debt service payments this year is tantamount to squeezing water out of stone. Pre-emptive measures to prevent a cascading debt crisis in these economies will save the world billions of dollars in humanitarian assistance, peacekeeping and peace building operations in the near term.’

The role of the IMF is indeed immense in supporting a possible buyback initiative, as highlighted by the two authors in the same research paper as ‘The IMF is perhaps the best option for managing the bond buy-back operation on behalf of the developing countries. The IMF is mandated to take such responsibility as stipulated in its Article of Agreement, “making the general resources of the Fund temporarily available to … [its members] under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” The IMF is mandated to “shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members”.

(The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund) He tweets@omerjaved7)

Copyright Business Recorder, 2020