Easing Africa’s Debt Burden: A New Approach, Based on an Old Idea

The statistics are grim: 54 governments, including 25 African, devote at least 10% of their revenue to servicing their debt; 48 countries, home to 3.3 billion people, spend more on debt service than on health or education.

Among them, 23 African countries spend more on debt service than on health or education.

While the international community remains inactive, these countries are servicing their debts and failing to achieve their development goals.

The Group of 20’s current approach to addressing low-income country debt is the Common Framework.

It requires the debtor to first discuss his problems with the International Monetary Fund (IMF) and obtain its assessment of the amount of debt relief he needs. It must then negotiate with its official creditors – international organizations, governments and government agencies – the amount of debt relief they will grant. Only then can the debtor reach an agreement – ​​under conditions comparable to those of official creditors – with its commercial creditors.

Unfortunately, this process was not optimal.

One reason is that it works too slowly to meet the urgent needs of struggling borrowers. As a result, this condemns debtor countries to financial limbo. The resulting uncertainty is in no one’s interest. For example, Zambia has been following the cumbersome G20 process for more than three and a half years and has not yet finalized agreements with all its creditors.

The need for a new approach is extremely obvious. Although the current crisis has not yet become the “systemic” threat that it was in the 1980s, when several countries defaulted on their debt, it is a “silent” sovereign debt crisis.

We propose a two-part approach that would improve the situation for sovereign debtors and their creditors. This proposal builds on the lessons we have learned from our work on the legal and economic aspects of the debt of developing countries, particularly African debt.

First, we suggest that official creditors and the IMF create a strategic buyer of “last resort” capable of buying the bonds of countries in difficulty and refinancing them at better terms.

Second, we recommend that all parties involved in sovereign debt restructurings adopt a set of principles that they can use to guide the debtor and its creditors in reaching an optimal agreement and in monitoring its implementation. artwork.

The current approach fails to effectively and fairly address the concerns of creditors and all of the legal obligations and responsibilities of the debtor. Our proposed solution would provide debtors with debt relief that does not compromise their ability to meet their other legal obligations and responsibilities, while taking into account private creditors’ preference for cash payments.

Our proposal is not without risk. And buyouts are not suitable for all debtors. Nonetheless, it offers a principled and workable approach to confronting a silent debt crisis that threatens to undermine international efforts to address global challenges such as climate, poverty and inequality.

It uses existing IMF resources to address both bondholders’ preferences for immediate liquidity and the need of developing countries to reduce their debt burdens in a transparent and principled manner.

It also helps the international community avoid widespread default on debt and development.

Bondholders are a major problem

Foreign bondholders, who are the largest creditors of many developing countries, have proven particularly difficult to provide substantial debt relief in a timely manner. In theory, they should be more flexible than official creditors.

Developing countries pay a premium to bondholders to reward them for providing financing to borrowers perceived as risky. As a result, bondholders have already received larger payments than official creditors. They should therefore be better placed than official creditors to assist the debtor in restructuring processes.

However, despite receiving large returns from defaulted bonds, bondholders remained stubborn in debt restructurings.

Our proposal aims to overcome this obstacle in a manner that is fair to debtors, creditors and their respective stakeholders.

How would it work

First, official creditors and the IMF should create and finance a strategic “buyer of last resort” that could buy distressed (and expensive) debt from bondholders at a discount. The buyer, now a creditor of the troubled country, can repackage the debt and sell it to the debtor country on more manageable terms. The net result is that bondholders receive cash for their bonds, while the debtor country receives substantial debt relief. Additionally, the debtor and its remaining official creditors benefit from a simplified debt restructuring process.

This concept has precedent. In 1989, as part of the Heavily Indebted Poor Countries Initiative, the international community’s effort to address the then-existing debt burden of poor countries, the World Bank Group established the Debt Facility. debt reduction, which helped eligible governments buy back their external commercial debts at very high prices. reductions. It completed 25 transactions that helped wipe out approximately US$10.3 billion in debt principal and more than US$3.5 billion in interest arrears.

Some countries have also bought back their own debt. In 2009, Ecuador bought back 93% of its defaulted debt at a deep discount. This allowed the government to reduce its debt stock by 27% and promote economic growth in the following years.

Unfortunately, currently over-indebted countries do not have sufficient foreign exchange reserves to pursue such a strategy. They must therefore find a “friendly” buyer as a last resort.

The IMF is well placed to play this role. Its mandate is to support countries in times of financial crisis. It also has the resources to finance such a facility. It can use a combination of its own resources, including its gold reserves, and donor financing, such as some of the US$100 billion in Special Drawing Rights (SDRs), the IMF’s reserve currency, which rich economies are committed to reallocating for development. purposes.

Such a facility would, for example, have allowed Kenya to refinance its debts at the SDR interest rate, currently 3.75% per year, rather than the rate of 10.375% that it was paying on the financial markets.

It is worth noting that the 47 low-income countries identified as needing debt relief have only $60 billion in outstanding debts to bondholders. Our buyer of last resort proposal would help reduce the burden on these countries to manageable levels.

Second, we propose that debtors and creditors commit to the following set of shared principles, based on internationally accepted norms and standards in debt restructuring.

Guiding principles

1. Guiding Standards: Sovereign debt restructurings must be guided by six standards: credibility, accountability, good faith, optimality, inclusiveness and efficiency.

Optimality means that negotiating parties should aim to achieve an outcome which, taking into account the circumstances in which the parties are negotiating and their respective rights, obligations and responsibilities, offers each of them the best possible combination of economic aspects , financial, environmental, social, human. governance rights and benefits.

2. Transparency: All parties should have access to the information they need to make informed decisions.

3. Due Diligence: The sovereign debtor and its creditors should each conduct due diligence before entering into a sovereign debt restructuring process.

4. Evaluation of optimal results: The parties should publicly disclose why they hope their restructuring agreement will achieve an optimal outcome.

5. Monitoring: There should be credible mechanisms to monitor the implementation of the restructuring agreement.

6. Inter-creditor comparability: All creditors should make a comparable contribution to the debt restructuring.

7. Fair sharing of the burden: The burden of restructuring should be shared equitably between the negotiating parties.

8. Maintain market access: The process should be designed to facilitate future market access for the borrower at affordable rates.

Current G20 efforts to resolve the silent debt crisis are failing. They contribute to the likely failure of low-income countries in Africa and the rest of the Global South to provide all their residents with the opportunity to lead lives of dignity and opportunity.