World Bank Arm To Boost Loans To Nations Facing Debt Distress

(Bloomberg) -- The World Bank arm that provides help to the poorest countries plans more concessional loans and grants to nations facing higher risks of debt distress, a move that could unlock impasses hindering the restructure of billions of dollars of debt held by low-income nations.

The plans for the International Development Association were announced Wednesday following a meeting of creditor and debtor nations known as Global Sovereign Debt Roundtable — a forum helmed by the International Monetary Fund, World Bank and the 2023 Group of 20 president India to iron out issues with handling debt restructurings for cash-strapped nations. Those include sticking points in the G-20’s own so-called Common Framework on tackling debt relief.

IDA’s provision of positive net flows and “implicit debt relief through increased concessionality and grants to countries facing higher risks of debt distress was welcomed,” roundtable participants said in a statement.

China — the biggest bilateral creditor to poor countries — had pushed to reschedule payments rather than take losses and also wanted multilateral development banks to accept so-called haircuts, or otherwise participate more in debt relief. The move on Wednesday could help meet that demand.

The US — which is the biggest shareholder in the World Bank — opposes the inclusion of loans by multilateral development banks in any debt restructuring, arguing that any haircut would undermine those bodies’ ability to respond to crises and make concessional loans.

China has decided to soften “relevant positions” given broader diplomatic considerations, according to a person familiar with the matter.

The roundtable discussions were aimed at ending a deadlock among the biggest creditor nations on how to renegotiate poorer nations’ debt, which had become unsustainable amid surging inflation and a stronger dollar.

The discussion on Wednesday was important because it shows that two years after the Common Framework was put into place and after many delays, “creditors are talking,” Mark Flanagan, deputy director of the IMF’s strategy, policy and review department, said on a panel hosted by Open Society Foundations in Washington. “That’s overall a very positive development.”

“I do think there is momentum,” he said, adding that more work will be necessary in the coming months.

Assurance Deadlines

The participants in Wednesday’s roundtable didn’t reach agreement on a proposal for a three-month deadline from when the IMF reaches a staff-level agreement with a debtor country for creditors to offer financing assurances. Such assurances are essential for the IMF’s board to sign off on any loans, and work remains to accomplish the goal of the fund and World Bank to speed that up.

“All of us at the roundtable have to work hard to bring it to a useful conclusion,” Flanagan said.

More than 70 low-income nations face a collective $326 billion debt burden. About 15% of low-income countries are already in debt distress and another 45% face high debt vulnerabilities, and the list is growing.   

Besides China and the chairing organizations, other participants in the roundtable included official bilateral creditors such as Paris Club chair France, Japan, and the US, as well as debtor countries like Ecuador, Ethiopia, Ghana, Sri Lanka, Suriname and Zambia. The Institute of International Finance, International Capital Markets Association, Blackrock Inc. and Standard Chartered Plc represented the private sector.  

Roundtable participants plan more work on cut-off dates, formal debt-service suspension, how to treat arrears, and the scope of debt to be restructured, including domestic loans. 

“This work will also help in clarifying potential timetables to accelerate debt restructurings,” the participants said in the statement.

--With assistance from Shawn Donnan.

(Updates with comment from IMF official in eighth paragraph.)

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