2023-09-03 15:41:49
Developing countries are in the grip of debt… Will the G20 summit succeed in alleviating it?
The ongoing and destructive debt problems afflicting a number of countries in the developing world will be a major topic during the G-20 summit in New Delhi this weekend.
As the world’s largest bilateral creditor, China is central to talks on making significant progress in debt relief for many countries, through the “joint framework” led by the G20.
More than 70 low-income countries face a collective debt burden of $326 billion, more than half of which are in or near debt distress, including Zambia and Ghana. In many of these cases, China is the largest creditor. For example, 75 percent of Zambia’s debt that must be restructured is owed to China, according to the International Monetary Fund.
However, the possibility of Chinese President Xi Jinping’s absence from attending the summit may undermine efforts to restructure debts, thus contributing to alleviating the burden on developing and poor countries.
At its summit held in Saudi Arabia in 2020, the Group of Twenty reached the development of what is known as the “common framework”, as an initiative to accelerate and simplify the process of restoring debtor countries to the pace of their economic growth.
However, the continuing differences between rich countries and China over the debt restructuring process prevented finding a solution to it. China wants multilateral lenders (such as the International Monetary Fund and the World Bank) to absorb some of the losses that these institutions and many developed countries, especially the United States, are resisting.
Here is a look at some of the countries currently facing debt problems, according to a Archyde.com report:
Zambia
Zambia was the first African country to default during the COVID-19 pandemic, and following a long-awaited burst of progress in recent months, it finally looks like it’s getting closer to a reform plan.
In June, Zambia struck a $6.3bn debt rewriting deal with creditor nations (the Paris Club) and its other big bilateral lender, China. Details are still being worked out. But the government also hopes to reach an agreement in the coming months with the international funds holding its unpaid sovereign bonds.
The progress has also been hailed as a success for the G20’s “Common Framework” (Debt Service Payments Suspension Initiative) that was set up during the pandemic to try to streamline debt restructuring, but has been difficult to get it to work in practice.
Sri Lanka
Sri Lanka announced a debt reform plan at the end of June, and has continued to make progress since then, though not in everything.
Almost all dollar-denominated CDB holders in Sri Lanka have agreed to exchange their bonds for five new notes, dominated by the Sri Lankan rupee, which will mature between 2025 and 2033.
Another part of the domestic debt plan has faced delays, with the main deadline for the Treasury swaps being pushed back three times, now set for September 11th.
Central bank chief Nandlal Wirasinghe said the country’s major foreign creditors (such as India and China) are waiting for the domestic debt process to end before continuing discussions.
He said the negotiations would take place in parallel with the first review of the $2.9 billion International Monetary Fund bailout program, which is scheduled to begin on September 14. Failure to complete domestic debt reform by then might lead to delays; Both in terms of IMF payments and talks with creditors.
Ghana
Ghana defaulted on most of its foreign debt at the end of last year. It is the fourth country to seek reformulation in the joint framework, and aims to reduce its international debt payments by $10.5 billion over the next three years.
Its progress has been relatively rapid, compared to countries like Zambia. The government recently agreed to treat nearly $4 billion of its domestic debt through a pension fund debt swap and dollar-denominated bond exchange.
It has sent a restructuring plan to its “formal sector” creditors – the wealthiest government – and the finance minister said he also expects to reach an agreement with the country’s bondholders by the end of the year.
The funds realize they will be asked to write off the funds; But she hopes it will also include a “recovery tool,” meaning Ghana pays back more of that money over time, if its economy recovers quickly.
Pakistan
Pakistan needs more than $22 billion to service the external debt and pay other bills for fiscal year 2024.
The interim administration takes charge until elections, which must be held by November. Inflation and interest rates are at historic highs, and it is struggling to rebuild following the devastating 2022 floods.
In June, Pakistan reached a deal following 11 hours of negotiations with the International Monetary Fund, for a $3 billion bailout. This agreement was followed by Saudi Arabia and the UAE announcing cash injections of $2 billion and $1 billion, respectively.
Reserves, which had fallen to $3.5 billion, had rebounded to $7.8 billion by late August. Observers say that Pakistan may have enough money to get to the elections; But there are big questions regarding how long you’ll be able to avoid default without a major subsidy.
Tunisia
The North African country, reeling from multiple blows since the 2011 revolution, is facing a full blown economic crisis. most of the debt is internal; But foreign loans are due to be repaid later this year. Credit rating agencies said Tunisia might default.
Tunisian President Kais Saied criticized the conditions required to open $1.9 billion from the International Monetary Fund, as “dictates” that he would not fulfill.
The tourism-dependent economy also continues to suffer from a shortage of imported food and medicine.
Egypt
Egypt remains another major country that is seen as at risk of getting into trouble. North Africa’s largest economy has regarding $100 billion in debt, most of it denominated in dollars, to pay off over the next five years, including a massive $3.3 billion in bonds next year. The government spends more than 40 percent of its revenue on debt interest payments.
Cairo has a $3 billion International Monetary Fund program and has devalued the pound by regarding 50 percent since February 2022. But the privatization plan is still slow. And last month, it announced a position different from what was agreed upon with the International Monetary Fund, by saying that it would keep subsidized electricity prices unchanged until January.
El Salvador
El Salvador went from default to bond market favourite, spurred on by a surprise debt buyback and the appointment of a former International Monetary Fund official as an adviser to the finance ministry.
In the summer of 2022, Eurobonds for 2025 fell to just under 27 cents on the dollar, weighed down by rising debt servicing costs, and concerns regarding financing plans and fiscal policies.
The same bond was trading at 91.50 cents on August 31. The debt-to-GDP ratio reached 77 percent in December, the lowest level since 2019, and is expected to drop another percentage point this year, according to Refinitiv data.
A relatively light debt repayment schedule until 2027, and the high popularity of President Nayib Bukele, have allayed fears that the country might default.
Kenya
The East African country’s public debt is nearly 70 percent of GDP, according to the World Bank, which puts it at high risk of debt distress.
President William Ruto’s government eased spending and proposed a range of tax hikes, alleviating some fears of an imminent default.
The African Development Bank is in talks with Kenya worth more than $80.6 million to help it bridge its financing gaps this year, and is also discussing budget support from the World Bank.
But concerns remain. Especially since Ruto’s political opposition opposed many of his tax increases, and the protests forced him to halt some reforms, such as cutting fuel subsidies.
Ukraine
Ukraine froze debt payments in 2022 in the wake of the Russia war. It said it would likely decide early next year whether to try to extend that agreement, or start looking at potentially more complex alternatives.
Major institutions estimate that the cost of rebuilding following the war will be at least one trillion euros. The International Monetary Fund estimates that Ukraine needs $3-4 billion a month to keep the country running.
If the war with Russia is not won, or at least mitigated to a much lesser extent, by next year, the debt restructuring dilemma will also have to take into account the US presidential election in November 2024, and the degree of support it would receive should Donald Trump win or Another Republican candidate for the post.
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