![](https://addisfortune.news/wp-content/uploads/2023/04/opinion-1.jpg)
My Opinion | Apr 22,2023
Sep 3 , 2022
By Xu Qiyuan , Wan Tailei
Many developing countries are teetering on the edge of a debt crisis, with the COVID-19 pandemic, soaring food and energy costs, and the monetary tightening of major economies all threatening to push them over. But the international community has yet to do what is necessary to pull at-risk countries back from the brink.
For some economies, such as Lebanon and Sri Lanka, the crisis has already arrived. They could soon be joined by many more. As of the end of March, 38 of 69 low-income countries were either already in or at high risk of debt distress. Middle-income developing countries’ debt-service burden is at its highest level in 30 years.
The international community has taken some action in response to the problem. Soon after the pandemic began, the G20 introduced the Debt Service Suspension Initiative (DSSI), under which 12.9 billion dollars in payments owed by 73 low-income countries was suspended between May 2020 and December 2021. Moreover, in November 2020, the G20, together with the Paris Club of sovereign creditors, created the Common Framework for Debt Treatments Beyond the DSSI to help DSSI countries restructure their debt and manage insolvency and protracted liquidity problems.
But these initiatives are nowhere near enough to resolve developing economies’ debt problems. One problem is stigma: When a debtor resorts to the Common Framework, it can face a sovereign credit downgrade. Most countries are not willing to take that risk, especially given the initiative’s limited scope.
Moreover, although the Common Framework relies mainly on support from official creditors, it is private creditors who own the majority (60pc) of the claims. The perception that private creditors are freeriding could discourage official creditors from accepting more debtor-friendly terms. And debtor countries know that, even if they undergo a Common Framework restructuring, they will still have their burdens of private debt to deal with. It is little wonder that only three debtor countries have so far applied to restructure their debt under the Common Framework.
There is a better way. In August 2021, the International Monetary Fund (IMF) approved a general allocation of 650 billion dollars in special drawing rights (SDRs, the IMF’s reserve asset), which was distributed to member countries in proportion to their quota shares. If used wisely, these funds can go a long way toward supporting indebted countries.
The obvious proposal would be for countries with idle SDRs simply to donate them to struggling countries. But, beyond the risk of moral hazard, this approach is unlikely to produce enough funds to make much difference. After all, loan commitments to the IMF’s Poverty Reduction & Growth Trust (PRGT) totalled just 7.8 billion dollars in 2021. That is better than nothing but still far from adequate.
To make a real difference, SDRs must be used more imaginatively. Developing economies suffer from the so-called original sin problem - they cannot borrow abroad in their own currency. Moreover, they often struggle to borrow in international bond markets, owing to weak sovereign credit ratings. But if SDRs were used to boost their credit ratings, private investment could be leveraged to tackle high debts.
The first step would be for the IMF to borrow interest-free SDRs from member countries and put them into a trust – whether the PRGT, the Resilience & Sustainability Trust, or a new entity. Next, debtor and creditor countries would jointly apply for SDR loans from the trust, or a debtor country would apply alone before negotiating terms with its creditors.
Either way, the application process would be open, transparent, and market-based. The IMF could work with creditor and debtor countries to establish a reporting mechanism that covers all debt claims and relevant data. Participants would cooperate to ensure that the debt restructuring followed best practices and met transparency standards.
Once the application was approved, the IMF trust would extend a concessional SDR loan to the debtor country with a very low – even zero – interest rate. Since the SDR is neither a currency nor a claim on the Fund, borrowers would then convert the funds into one of the asset’s five constituent currencies – the US dollar, the euro, the Chinese renminbi, the Japanese yen, or the British pound – which would be used to purchase high-rated government bonds issued by reserve-currency countries. With these risk-free assets as collateral, debtor countries could issue “international anti-epidemic cooperation bonds,” using the proceeds to roll over or repay debt.
Such a credit-enhancement program – consistent with the Common Framework – would ease liquidity pressures and reduce debt risks while avoiding moral hazards. More important, it would spur the private sector to participate actively in the debt-restructuring process and boost the resources being channeled toward development financing. Despite fees and commissions, we estimate that this program could save a typical debtor country 30-50pc in interest costs, compared to a bond issuance without collateral.
Our proposed program could also be adapted to advance other imperatives, such as creating innovative financing instruments for supporting sustainable development and investment in green infrastructure. In addition to the IMF, the World Bank and regional development banks, such as the African Development Bank and the Asian Infrastructure Investment Bank, could participate in such initiatives.
Pressure on the developing world is not set to ease any time soon. But an SDR-backed credit-enhancement program could spare it from another debt crisis.
PUBLISHED ON
Sep 03,2022 [ VOL
23 , NO
1166]
My Opinion | Apr 22,2023
Radar | Jun 18,2022
Radar |
My Opinion | Oct 28,2023
Viewpoints | Apr 28,2024
Fortune News | Jul 13,2024
In-Picture | Feb 17,2024
Fortune News | Dec 30,2023
Radar | May 27,2023
Fortune News | Jun 08,2024
My Opinion | 110337 Views | Aug 14,2021
My Opinion | 106672 Views | Aug 21,2021
My Opinion | 105415 Views | Sep 10,2021
My Opinion | 103643 Views | Aug 07,2021
Aug 18 , 2024 . By AKSAH ITALO
Although predictable Yonas Zerihun's job in the ride-hailing service is not immune to...
Jul 13 , 2024 . By AKSAH ITALO
Investors who rely on tractors, trucks, and field vehicles for commuting, transportin...
Jul 13 , 2024 . By MUNIR SHEMSU
The cracks in Ethiopia's higher education system were laid bare during a synthesis re...
Jul 13 , 2024 . By AKSAH ITALO
Construction authorities have unveiled a price adjustment implementation manual for s...
Sep 1 , 2024
Addis Abeba's skyline is being dramatically altered. Once characterised by unremarkab...
Aug 25 , 2024
It may appear distasteful, unappealing and cumbersome to sight. But, the Addis Abeba...
Aug 18 , 2024
The economy is in turmoil, and describing the situation as merely dire could be an un...
Aug 10 , 2024
The past few weeks have been anything but uneventful on the economic front. Across th...
Sep 1 , 2024
In a landmark diplomatic manoeuvre sought to defuse rising tensions in the Horn of Af...
Sep 1 , 2024 . By AKSAH ITALO
The Ethiopian Bankers Association (EBA) has voiced strong objections to a draft regulation on Value Added Tax (VAT) under review by the Mini...
Sep 1 , 2024 . By AKSAH ITALO
Representatives of businesses and traders in Tigray Regional State are calling for loan repayment extensi...
Sep 1 , 2024 . By TIZITA SHEWAFERAW
Purpose Black S.C. an aspirant real estate and grocery store chain investor, is facing a serious crisis a...