The urgency of resolving the sovereign debt crisis of developing countries continues to grow. As global temperatures rise and the threat of irreversible damage looms over the planet, the burden of debt prevents many low-income countries (GDP) from Africa and other regions invest in climate action. The attempt to find answers through G20 common framework for debt treatment is bogged down by disputes between creditors, negating any chance of a timely and meaningful resolution.
One issue that has been particularly discussed is whether multilateral development banks (MDBs) will share in the losses along with other creditors. The G20 asked MDBs are encouraged to develop cost-sharing formulas, but no systematic plan has emerged. China (unlike the Paris Club of sovereign creditors) insisted in which the MDBs accept a debt write-off, but then softened his stance at this year's spring meetings of the World Bank Group and the International Monetary Fund. But at the recent summit of the BRICS group reiterated the call for the MDBs to participate.
And it's a reasonable request. As we show in a new report, the participation of MDBs in sovereign debt restructurings is not only feasible, but also necessary to resolve the current logjam. For starters, at least half of all external sovereign debt of 27 over-indebted countries, many of which are low-income countries (GDPs) or small island developing states (SIDS), is owed to multilateral creditors. So even by canceling all bilateral and private debt, some of the world's most vulnerable countries will not achieve a full recovery unless the MDBs participate in the restructuring.
Second, perceptions matter. Having all external creditors (including MDBs) involved in the restructuring will remove any impression of unfairness (or “others paying the costs”); That in turn will make bilateral and private creditors more willing to negotiate.
Third, debt relief obtained through cost sharing would be in line with the MDBs' core mandate of supporting sustainable economic development and eliminating extreme poverty. Without a solution to the crisis, over-indebted countries will not be able to make progress towards the United Nations Sustainable Development Goals, much less achieve them before 2030. The only way for affected governments to invest in high-priority areas is for them to have more fiscal space.
Finally, a prolonged debt crisis will be very costly for the concessional lending divisions of the MDBs: as GDP distress indicators rise, so will the concessional portion of MDB assistance. Take, for example, the International Development Association (IDA), the World Bank agency charged with providing credit to the poorest countries. According to our calculations, IDA's grants based on debt sustainability criteria increased from $600 million in 2012 to $4.9 billion in 2021, or from 8% to 36% of its commitments. Thus, accelerating the search for a solution to the debt problem will benefit the MDBs.
But MDBs offer loans on more favorable terms than other creditors. Therefore, for the distribution of losses to be equitable, it is necessary to apply treatment comparability rules fair, that take into account the cost of the loan.
Using these rules, we calculate that granting debt relief of $55 billion (39%) to 41 over-indebted countries and SIDS with access to IDA funds would result in a loss of $8 billion for the MDBs and $27 billion for creditors private. This scenario would cost the IDA two billion dollars, much less than what it currently spends on donations dependent on debt distress indicators. With a more generous reduction of 64% (similar to what was provided during the Heavily Indebted Poor Countries Initiative), the total losses for the MDBs would be $25 billion.
And if the MDBs were to participate in a broader debt write-off, including 61 countries with serious debt problems (including some middle-income countries such as Egypt, Nigeria and Pakistan), a 39% reduction with fair treatment comparability rules It would cost them $37 billion. It is not a minor figure. But by accepting this loss, the MDBs would make possible $305 billion in overall debt relief (including $209 billion with private creditors). That is, every dollar donors contribute through the MDBs would convert to seven dollars of total debt relief, a staggering multiplier.
It is possible to share losses without jeopardizing the MDBs' high credit ratings or their privileged access to low-cost capital. Past sovereign debt restructurings indicate that MDBs can cover costs by drawing on donor contributions and internal resources. They can also revive institutional arrangements such as the World Bank's debt relief fund (DRTF) and use their precautionary balance sheets as soon as they receive fresh capital injections.
If we really want to solve the growing debt crisis in the global south, the MDBs have to be willing to accept a haircut. It is the only way to make progress towards debt restructuring. But for the distribution of losses to be equitable, fair treatment comparability rules must be used, which take into account the cost of the loan and the degree of concessionality. Debt relief comes at a price, but it is a price worth paying to put vulnerable countries, and the world at large, on a path toward climate resilience and sustainable development.
You can follow Future Planet in x, Facebook, instagram and TikTok and subscribe here to our newsletter.
#Multilateral #development #banks #accept #debt #writeoffs
