Today's Editorial

Today's Editorial - 17 June 2024

IMF solve the poor world’s debt crisis

Relevance: GS Paper III

Why in News?

IMF has said it would lend to countries that have defaulted on debts but have not negotiated a deal to restructure all their debts.

Challenges in Resolving the Debt Crisis:

  • Many poor countries have been stuck in debt default for years due to the COVID-19 pandemic, rising costs, and investors pulling capital from risky markets. 
    • Subsequently, higher interest rates in the developed world have compounded pressure on cash-strapped governments over the past two years.
  • Despite growing at a respectable 4% last year, the poorest countries, including those like Kenya borrowing from international markets again, the debt crisis continues as governments that went into default have not managed to restructure their debts.
  • The core difficulty in resolving debt crises is the presence of more creditors with diverse interests compared to the past, including China, India, UAE, and Saudi Arabia.
  • Over 70 years of debt restructurings, Western countries and banks came to do things a certain way. Now decisions require the assent of a new group of lenders, some of which see no reason to comply. 
    • Each part of the process, even if it was once a rubber stamp, can be subject to a protracted negotiation.
  • The seven countries that have sought debt restructuring since the pandemic began have been unable to strike a deal, as no creditor wants a worse bargain than any other, leading to next to no principal debt relief during the worst debt crisis in four decades.
  • Four years ago, G20 countries signed up to the Common Framework, an agreement to take equal cuts in restructurings, but creditors have split over the degree of generosity needed.

IMF's New "Lending into Arrears" Policy:

  • The IMF has announced a new policy of "lending into arrears," where it will lend to countries that have defaulted on debts but have not negotiated a debt restructuring deal with all creditors.
  • Previously cautious about lending into arrears amid restructuring disputes, the IMF now requests assurances that its funds won't repay holdouts
    • This shift aims to accelerate debt restructuring, despite concerns among IMF economists about antagonizing member countries who are also creditors.
  • The IMF's new policy aims to impose discipline on creditors holding out from restructuring negotiations, as they risk not getting anything while others strike a deal.
  • The policy strengthens the hand of debtor countries, as they now have an alternative lender in the IMF if they wish to walk away from creditors like China.
  • Getting cash flowing to troubled countries would be good for their populations, and it may also make the IMF a better broker in distinguishing between countries needing debt write-downs and those needing liquidity.
  • The IMF worries that the new policy may aggravate newer creditors like China, who might turn their back on cooperative restructurings, and some borrowers could seek bailouts elsewhere.

Conclusion:

However, with too many countries in crisis and big developing countries teetering closer to default, the IMF may have little choice but to use its new "lending into arrears" tool to avoid catastrophe.

Book A Free Counseling Session

What's Today

Reviews