IMF says debt restructuring is improving but needs to happen faster

The International Monetary Fund (IMF) said this Sunday that debt restructuring processes in struggling countries are moving faster, but noted that relief mechanisms need to be accelerated.

“When countries fall into financial default [default, no original em inglês]”Restructuring is critical to containing the damage, and restructuring must be done as quickly as possible because delays exacerbate problems, make adjustments more difficult, and increase costs for both creditors and debtors,” the IMF said in a blog post about the government debt restructuring process for the most indebted countries.

“While some sovereign debt restructuring processes have encountered significant delays, we are working with our partners to accelerate the process, and the progress we have made to date shows that the world can work together to reduce risks,” he added in article. signed by Director of the Department of Strategies, Policy and Review, Ceyla Pazarbasioglu.

The global economy, according to the economist, “has avoided what could have been a systemic debt crisis during the turbulence of recent years, but vulnerabilities remain significant in the context of high debt servicing costs,” especially among developing countries, 15% of which have interest rates considered unsustainable, and among low-income countries, which will need to refinance about $60 billion, about 56 billion euros, over the next two years, equivalent to tripling the need over the past decade.

“About 15% of low-income countries are in debt crisis. [‘debt distress’, no original em inglês] and another 40% are at high risk of finding themselves in such a situation,” writes Ceyla Pazarbasioglu.

In the article, the director of the department charged with liaising between the IMF and various international institutions such as the G20 says that despite the difficulties, debt restructuring processes, the most recent model of which is the Common Framework and Debt Roundtable, are improving the situation.

“Results are emerging that shorten the time between the technical agreement with the IMF, which is a key step for an IMF program, and the provision of financial guarantees from official creditors needed for the program to be approved by the Fund,” he said, meaning “much-needed financial assistance can be accelerated for the country.”

As an example, Pazarbasioglu points to Ghana, whose agreement this year took five months, more or less half of what it took for Chad in 2021 and Zambia in 2022, “and negotiations with Ethiopia should go faster, by about two to three months.”

The improvements are a result of non-traditional lenders such as China, India and Saudi Arabia entering the scene, as “familiarization with the process helped parties know what to expect, built confidence and allowed lenders to overcome what they had previously considered insurmountable obstacles.”

In April, the IMF announced that it had streamlined the process for approving financial programs to allow for faster disbursement of funds and intervention in cases where there are problems with coordination among creditors, in addition to a new procedure that does not require official letters and only evaluates the presence of a “credible official process with creditors,” emphasized the person in charge.

This year, the Fund plans to present additional proposals that will clarify the process, including a review of the parameters of the debt sustainability analysis for low-income countries, which is conducted jointly with the World Bank and determines whether countries can receive financing, he concludes.