International Monetary Fund (IMF) Managing Director, Christine Lagarde, has expressed concern that the high debt levels that low-income countries have built up through non-traditional sources could complicate any debt restructuring.
The IMF boss gave this charge at a sovereign debt restructuring conference at the IMF’s headquarters on Thursday in Washington, DC.
In view of the worrisome debt trend, Lagarde advocated the need for bilateral creditors to collaborate more in areas involving debt restructuring, particularly among not traditional creditors.
Reuters quoted the IMF leader as saying that “we need better collaboration to prepare for debt restructuring cases that involve non-traditional lenders.
“With substantial non-Paris Club debt, we need to think about new ways in which official creditor coordination – often so critical to debt crisis resolution – can take place. Building trust in sovereign borrowers is now more important than ever, especially in low-income counties”, Lagarde advised.
She explained further that with 40 percent of low-income countries already facing “significant debt challenges, the shift towards new borrowing sources generally meant higher interest rates and shorter maturities.
Lagarde said. “Borrowing from non-Paris Club lenders also means that creditor coordination will likely become more complicated. Managing these debt vulnerabilities is critical.”
According to her, borrowers and their new creditors need to be more transparent about their liabilities.
This is even as she pointed out that “a key challenge is preventing ‘debt surprises’, which can be driven by poor governance, off-balance sheet borrowing, and weak debt recording and reporting.
“There is room to significantly strengthen the institutions that record, monitor, and report debt in individual countries. One-third of low-income countries do not report debt guarantees for state-owned enterprises; and fewer than one in 10 report debt of public enterprises.
“Greater transparency can help prevent these contingent liabilities from turning into massive government obligations”, Lagarde added.
Citing the case of Mozambique in 2016, when it was unable to keep servicing its US$727m 2023 bonds after several sovereign-guaranteed loans were disclosed, Lagarde noted that “we have seen a sharp rise in the number of cases where debt contracts are not publicly disclosed by either the borrower or the lender.
“By working together, both parties can ensure better disclosure, which reduces risk and increases accountability”, she added.
Statistics on the rising global sovereign debt profile indicate that China has become a major provider of credit to low-income countries but it is not a member of the Paris Club of bilateral lenders, which has developed guidelines on how to restructure any such debts.