The sharp rise in world food and energy prices due to the war in Ukraine is hitting poor countries, and better mechanisms to deal with sovereign debt stress will be needed to avoid defaults, said the IMF on Monday.
“The war in Ukraine adds risks to unprecedented levels of government borrowing while the pandemic still weighs on many government budgets,” wrote Vitor Gaspar, director of the International Monetary Fund’s Fiscal Affairs Department, and Ceyla Pazarbasioglu, chief strategy officer of the IMF, in a press release.
“With elevated sovereign debt risks and financial constraints back on the political agenda, a cooperative global approach is needed to achieve an orderly resolution of debt issues and avoid unnecessary defaults. »
The food and energy price spikes have hit low-income countries particularly hard, and they may need more subsidies and highly concessional financing. Countries should undertake reforms to improve debt transparency and strengthen debt management policies to reduce risk.
According to the authors, regarding 60% of low-income countries were already in debt distress or at risk of being so. Rising interest rates in major economies might cause spreads to widen for countries with weaker fundamentals, making it more expensive for them to borrow.
The credit crunch has been exacerbated by a decline in overseas lending from China, which is struggling with solvency issues in the real estate sector, COVID-19 lockdowns and problems with existing loans to developing countries. development, they said.
Measures taken by major economies were insufficient, they said, noting that a freeze on official bilateral debt payments adopted at the start of the pandemic had ended and no restructuring had been agreed within a defined framework. by the Group of 20 industrialized countries.
Options were needed for a wider range of countries, which were not yet eligible for debt relief.
“The confusion will amplify costs and risks for debtors, creditors and, more broadly, global stability and prosperity,” they wrote. “Ultimately, the impact will be felt hardest by households that can least afford it. »
