April 2023 Global Sovereign Debt Roundtable [UPSC Current Affairs]

The World Bank and IMF will present proposals to address the mounting debt problems of poor countries at the Global Sovereign Debt Roundtable. The proposals aim to improve transparency and accelerate debt restructuring, which has been delayed by disagreements between traditional sovereign debt restructuring countries and China, a major international creditor.

In this context, read more on the Global Sovereign Debt Roundtable, the reasons for mounting global debt and the way forward. This topic is important for the IAS exam from both an economy and an IR perspective.

Global Sovereign Debt Roundtable (GSDR)

As stated by the IMF, “the objective of the Global Sovereign Debt Roundtable is to build greater common understanding among key stakeholders involved in debt restructurings, and work together on the current shortcomings in debt restructuring processes, both within and outside the Common Framework, and ways to address them.” The roundtable is co-chaired by the IMF, World Bank and India (G20 Presidency) and comprises official bilateral creditors (both traditional creditors members of the Paris Club and new creditors), private creditors and borrowing countries.

Reasons for Mounting Debt of Developing Countries in Recent Years

• Covid-19 Pandemic:
  • Pandemic-related spending and revenue loss have worsened the debt outlook.
  • Countries had to borrow heavily to finance stimulus packages and health measures.
  • The sharp drop in economic activity and reduced trade and investment flows have also hurt revenues.
    
• Commodity Price Decline:
  • Developing countries reliant on commodity exports have been hit by falling prices.
  • Reduced export revenues have led to balance of payment pressures and higher borrowing.
    
• High-Interest Rates:
  • Many developing countries have had to borrow at high-interest rates due to their weak creditworthiness.
  • This has made debt servicing costs high, further exacerbating debt problems.
    
• Capital Flight:
  • Capital flight from developing countries has increased due to economic uncertainty and global market volatility.
  • This has led to a shortage of foreign exchange reserves and increased borrowing to fill the gap.
    
• Weak Governance and Corruption:
  • Weak governance and corruption have led to poor economic policies and wasteful spending, exacerbating debt problems.
  • Mismanagement of loans and inadequate debt monitoring has led to debt accumulation.
    
• Climate Change:
  • Developing countries are disproportionately affected by climate change, which has led to natural disasters and reduced agricultural yields.
  • These impacts have led to economic and fiscal pressures, increasing the need for borrowing.
    
• China’s Belt and Road Initiative:
  • China’s Belt and Road Initiative has led to increased borrowing by developing countries for infrastructure projects.
  • Concerns have been raised over the sustainability of these projects and their impact on debt levels.
  • For example, the recent Sri Lankan economic crisis.
    
• Conflict and Political Instability:
  • Conflict and political instability, such as the ongoing Russia-Ukraine conflict, have led to increased military spending and economic disruption.
  • This has led to reduced revenue and increased borrowing to finance military operations and rebuilding efforts, exacerbating debt problems.
  • The conflict has also contributed to higher global food and petroleum prices, which have impacted developing countries’ balance of trade and inflation, adding to their debt burdens.

Possible Consequences of Developing Countries getting Bankrupt

• Economic Recession:
  • Bankruptcy could trigger an economic recession in the country, with reduced economic activity, rising unemployment, and falling incomes.
  • Reduced economic activity would mean lower tax revenues for the government, making it more difficult to service its debts and implement economic reforms.
    
• Social Unrest:
  • Bankruptcy could lead to social unrest, as people protest against rising unemployment, falling incomes, and reduced public services.
  • Social unrest could further undermine economic stability and increase the risk of political instability.
    
• Reduced Access to Capital:
  • Bankruptcy would likely lead to a reduction in the country’s credit rating, making it more difficult and expensive for the government and private sector to access capital markets.
  • This could make it more difficult for the country to fund investment and infrastructure projects, further undermining economic growth.
    
• Loss of Sovereignty:
  • In extreme cases, bankruptcy could lead to loss of sovereignty, as international financial institutions or other countries demand control over the country’s economic policies in exchange for financial support.
  • Loss of sovereignty could further undermine public trust in government institutions and lead to political instability.
• Negative Impact on Global Economy:
  • A wave of bankruptcies in developing countries could have a negative impact on the global economy, as it would reduce demand for goods and services from developed countries and reduce investment flows.
  • This could lead to a global economic slowdown or recession, with potentially significant negative consequences for the world’s poorest and most vulnerable populations.

The Solutions proposed by World Bank

• Debt Sustainability Analysis:
  • The World Bank and IMF propose to share their debt sustainability analysis with all creditors involved in discussions at the same time, in order to improve transparency and information sharing.
  • This would help to calculate the size of debt relief needs and provide a more comprehensive picture of the debtor’s financial position.
• Accelerated and Strengthened Restructuring:
  • Creating clear timelines for steps, including the formation of creditor committees, the provision of financing assurances, and the signing of actual restructuring agreements, would accelerate and strengthen the restructuring process.
  • Suspending debt service payments at the start of the process would provide incentives for reaching a deal and protect debt repayment ability.
    
• Country-Specific Solutions:
  • The World Bank is actively engaged in individual country cases, such as Zambia, Ghana, and Ethiopia, to find solutions for their debt problems.
  • The official creditor committee for Zambia, led by China and France, plans to meet in April 2023, and the World Bank is hoping for a positive outcome.
  • Technical meetings on Ghana are progressing well, but faster progress is needed on Ethiopia.
    
• Urgent Action:
  • With more than half of the world’s low-income countries at high risk of debt distress, urgent action is needed to address the growing debt crisis.
  • The G-20 largest economies agreed in 2020 on a plan called the Common Framework to smooth the process of restructuring loans that governments could no longer afford to service or repay, but not a single nation has yet received relief under it.
  • All parties must turn their words into action to address the debt crisis.

Conclusion: The World Bank and IMF are proposing concrete solutions to address the mounting debt problems of poor countries, including increased transparency and information sharing among all creditors involved in debt restructuring, creating clear timelines for restructuring steps, and suspending debt service payments at the start of the process. With over half of the world’s low-income countries at high risk of debt distress, urgent action is needed to turn words into action and prevent the negative consequences of developing countries from going bankrupt.

April 2023 Global Sovereign Debt Roundtable:- Download PDF Here