Debt crises and multilateral solutions

How do countries think of debt? How can debt be managed and why does it sometimes become unsustainable? Welcome to Debt Talks, the podcast from Searnsport Chair in Sorven debt and Finance. I'm Pallus Baki and in each episode with my guest, I explore economics, politics and legal side of debt. Looking at past crises, analyzing current challenges, unpacking legal debates and examining the forces then shape global finance. Join us for expert insights, thoughtful discussions and stories then go beyond the numbers. This is Debt Talks, where debt meets the debate. Hello, I'm Pallus Baki, I'm here at Searnsport. It's a great honor to have with us today, Jela Bazar-Basholu, Director of the Strategy Policy and Review Department at the International Monetary Fund, otherwise known as the IMF. A position that Jela, you had held since 2020 and your portfolio is very broad and you work on the strategic direction of the IMF, on the design and implementation of policy, which means it's not just the IMF policy, but global policy, policy with a global impact. And in particular, you're dealing with lending strategies. And so this is a topic that is obviously very dear to us here at the chair of sovereign debt and finance here in Searnsport. So yeah, I would like to start this conversation with looking at the last five years, which have been very important in terms of managing debt against a number of, you know, several crises, because we started with COVID and we're going towards and then political, geopolitical termoils and so on. So again, I would like to really slow with you the role of the IMF in supporting countries facing that distress. And in particularly starting in 2020, in the middle of COVID, where measures like the suspension initiative and then the common framework were announced by the IMF in the G20. Great. So great to be here, Paula. Thanks for having me. We, it's like ages ago, the pandemic 2020s, but that was a very difficult time. Yes. And if you remember in March of 2020, we were all really worried about the sudden stop of capital flowing to countries. So the debt service suspension initiative was actually something that the IMF and the World Bank worked on. Actually, I was at the World Bank at the time and then joined the fund back again. But the idea there was that the countries were going to have difficulties in accessing markets. Some of the low income countries really needed the support. So the idea was to voluntarily ask the official creditors as well as the private credit creditors to suspend the debt service. It wasn't a debt relief effort. It was more of a liquidity because we didn't know how long the pandemic would last and so on. So at that time, a lot of the official creditors actually agreed to the debt service suspension initiative. China was actually one of the countries that had large exposures to some countries. And they have been leader in actually the, in terms of suspending the debt service for many countries. The private sector did not participate at the time because it was voluntary. And as you remember, soon after, because we had all the fiscal spending by advanced economies, emerging markets and so on, we didn't have the sudden stop that we all worried about. So that was the debt service suspension initiative, which I think was timely. Several countries benefited from it. And it really gave them breathing space to manage their revenues at a time when they had a lot of problems. Then came the common framework, which was the idea of coordination across different creditors. As you know, we work with Paris Club. You have a whole episode on that. And we have been four decades as the fund in the bank have been working with the Paris Club. And for the last ten years, the creditor landscape has changed a lot. We have non-Paris Club creditors who are not used to debt restructuring. So the whole idea with the common framework, which was adopted by the G20, was to bring the official sector around a framework that determines how the debt restructuring should be done. So those were two important initiatives. We can talk more about it, especially the global sovereign debt round table and the accomplishments since then. But that's very important. Because what you said very clearly is when you have a crisis, you need to have the tools to respond to the crisis. This is something we learned very well at the time of the global financial crisis, where we were talking about, again, liquidity and there is a probability of liquidity, a probability of solvency. Sometimes countries found themselves in a difficult position just because of the sort of, because liquidity just got very dry. And there was again something that was recognized by the G20 at the time of the global financial crisis. I remember very well the London summit, where again, a facility is to help countries in debt-specific liquidity crunch as opposed to being in solvency crisis. So again, this is really very important and that is something we need to reflect, is a, and it's very interesting to really rethink the step by step, step by step the process around the pandemic. And then again, you mentioned the global sovereign debt round table, which again is a new initiative and that was created in 2023 and it's been very active. And I like to, in particular, ultimately in providing guidance. And so I like to really just look at the latest round table, they'll say, improving further than they're restructuring, but also helping countries to manage their debt and then creating resilience. So what we call here, I sense, that prevention, crisis prevention, so helping countries to manage their debt and incurring debt in a responsible way, but at the same time, also then, should be responsible. Right. Right. The global sovereign debt round table has been, has played a very pivotal role in strengthening the broader debt-restructuring architecture. And what it does for the first time, it brings different creditors together, together with the borrowers. So we have around the table, it's about 20 members. And so we have the borrowing countries, we have official landers, both Paris Club and non-Paris Club and the private sector and the IFI. So it's chaired by the World Bank president, the IMF managing director and the G20 presidency. So it gives legitimacy to the whole round table in terms of discussing, what are the key impediments bottlenecks to debt-restructuring? And how can we reach common understanding across the different creditors so that we can make the process much more timely and efficient? So that was the whole idea with the GSDR. And I would like to think that it's actually, has been very successful for also, for the fund and the bank, because we also learned during the process in terms of, what is it that the creditors need from us? And we use that to revise some of our policies, revise some of the way that we share information and we continue to do that. And we also use the opportunity for the creditors to talk to each other and raise issues that wouldn't have been discussed in such a high platform elsewhere, right? So that has been very important. The issues included things like, what is the role of MDBs in debt-restructuring? What is the role of IFIs? What, how do we reach comparability of treatment? How do we get a process which is much more timely and efficient? So those were key parts of what we have worked with, information sharing. So the IMF prepares the debt sustainability analysis with, for the low-income countries, it's actually joined with the World Bank. How do we share that? When do we share it? How do we make sure that different creditors have access to the information so that we don't have this sequential approach which makes it much longer process so that we can actually have parallel negotiations that can go on? the GSDR, the Global Sovereign that Roundtable. able meets twice a year at the head level, so at the ministerial and heads of the institutions level, both during the spring meetings and annual meetings of the IMF and the World Bank. But there are lots of other meetings, which is much more inclusive. Workshops with credit rating agencies, with other stakeholders, CSOs, and so on. So it also provides a platform of technical discussions that ban brings proposals to the ministerial level so that common understandings can be reached. - And listen to you. I cannot avoid thinking about the complexity of the international financial architecture. And again, it's pressed by the IMF, the World Bank, the multilateral development banks, and the World Bank in particular, and how complexities to bring everybody in and achieve a level of cooperation, which maybe from the outside could be frustrating and too slow, but actually requires a huge amount of work. And in particular, you mentioned information sharing. And again, I remember some of the work done with the G20, immediately after the global financial crisis, again, information sharing around, for example, monetary policy, fiscal policies, was very, very important. Is it sort of the bedrock of policy cooperation, which is so incredibly important? - That's very true. And so that was the whole objective to bring parties which had their tensions, trade tensions, and other geopolitical tensions around the objective of, this is good for everyone, right? This is, if we have faster and more reliable that restructuring, it's good for the borrowing country, but it's also good for the crevator country. So it has been very important to incentivize everyone to act and to be much more transparent about what happens. And we have this playbook which we published in April. It's important because it's, what we also observe is that countries come too late to restructuring, they wait because it's politically and in many ways very costly to restructure. It's the last resort, if you like. But that also makes it even costlier because the country's then going to crises and makes the process much more complex. So if they can come earlier in the cycle to restructure their debt, that already profile there that that would be, of course, much more welcome. So the playbook, what it does is for a country to think about what are the steps that they need to go through? What do they need to do? What do they expect from others? And what are best practices that we have learned in the last few years that can help them prepare better? And so that's what's in this restructuring playbook. Together with a schematic presentation at the last page, all what are the different steps that we have to do as the IMF and other international landers, official creditors, the borrowers themselves, and the time frame and how they can reduce that time frame and make it much faster by doing certain things in a more orderly and preemptive way. So that has been, we hear a lot all the common framework is very slow, it's not predictable and so on. But I do think, and we have examples in the playbook, as well as in the GSDR Co-Chair summary, where we do document that it has become much faster in terms of the time between reaching staff level agreement for an IMF program and the understandings, the memorandum of understanding with the creditors. That time frame was much longer for Chad. It has been much shorter for Ghana and Ethiopia. So we've seen an improvement in the process and again, it's a learning by doing. But Jaila, let me ask you a provocative question. So has they same Britain? The IMF is not everybody's cup of tea. And there is a lot of controversy. On the other hand, I think I'd like to do a thought experiment and say, what would be the word without the IMF? Probably we'll miss it. And so, again, be careful about what you wish. But the point is, again, there is a lot of acquisition and a lot of criticism of how the IMF operates. Some actually correct. And so I accept it by the IMF itself, particularly on process and the evaluation, independent evaluation of his recent report, put all the things. But let me pick up again the issue about the IMF and the austerity programs imposed on countries in that distress. And so the recent Vatican legend, Jubilee report, suggests that the International Financial Institution, not only the IMF, should avoid imposing growth reducing austerity policies that could undermine a country's long term development trajectory. So that is clearly a policy goal. On the other hand, there is also, let's say, the moral hazard then could be around some debt situation that need to be addressed at the same time. So yeah, I mean, at the end of the day, IMF is the lender of last resort. We help countries that go into crisis. And the reason they go into crisis is because of sometimes bad luck, but it's usually bad policies. So I think it's important that the fund comes at the time when the country has no alternative, no alternative source of financing. And the idea is, with an adjustment, they can have better growth prospects and catalyze investment with the reforms and the adjustment policies. What we have recently worked on is because what we are seeing now is many countries having liquidity problems. That servicing costs have gone very sharply in the last decade. Some countries are spending 10, 15, some even 25% of their revenues into servicing their debt, which becomes a catch-22. It's very hard to grow when you are spending a lot of your revenues in servicing your debt. So the idea with this three, what we call three-pillar approach is that the countries do the reforms. The reforms include not so much fiscal austerity, but better systems, better collection of revenues, better spending, developing local capital markets, and so on. These take time. These are usually reforms that countries benefit from within three to five years. So that's the first pillar, with the understanding that the reforms take time to bear the fruit and the success of the reforms. The second pillar actually provides more financing, both from the IFIs, the World Bank, ourselves, official creditors, so that countries can actually do growth and enhancing capital expenditures and other expenditures. So that's growth issue comes in the second pillar. And then the third pillar is bringing the private sector. So either providing credit enhancements or other forms of support to countries so that they can retire more costly debt, more costly private sector debt, reprofile, or issue at lower costs. So with these three pillars, actually countries should benefit from an agenda which reforms brings more transparency, more investment, both in terms of foreign direct investment and their own capital investments, and also provide a much more stable and higher growth, because otherwise it's very difficult to get out of the debt trap. Absolutely. And of these three pillars, the number two and number three are quite implementable within reasonable amount of time. The first one is effectively structural change, structural reform, then impact on institutions and governance, and that will take more time to be implemented. But-- and we had some other episodes of our talks series-- it is actually proven in many academic research that good institution, good governance have an impact on cost of debt. So countries with good democracy have lower-- they face lower costs for borrowing. Yeah, there is less risk in reality. Institutions are very important, because it's also better governance, as you said, more transparency as to how much debt is issued. What are the forms of issuing debt, which is actually-- countries-- most of these countries need debt. They are not able to grow with domestic savings. So they do need debt. But there's good debt, bad debt, and ugly debt. Right, so we need to avoid the latter too. Good debt is debt that actually brings returns so that countries can grow and be able to pay their debt and over time be able to attract even more capital. Bad debt is when it's poorly managed because they don't have the right institutions and so on and then ugly debt is all this hidden debt and corruption, governance and so on, which is definitely to be awarded. Yeah, absolutely. I like to wrap up our conversation with something that comes up every time there is a crisis or every time we have that sort of situation of that sort of sustainability. Or just when there is the suggestion of that Jubilee and it's actually this idea that we need to have an effective multi-latera mechanism for debt restructuring. That was something that was suggested in the early 2000 and then was dropped and then in reality we don't have this multi-latera mechanism. There are people say we don't need it. It's an old story why we care. But this stuff comes back and I really like to get to your view and we don't know we need it. So the sovereign debt restructuring mechanism, the SDRM was proposed, as you said, years ago decades ago actually, and a lot of discussion and at the end the members decided that at the end it has to be agreed by the main credit donations. At the end it was not agreed upon and there was a lot more emphasis put on to contractual ways of making restructuring easier and more efficient. So we have contractual debt clauses, as you know the CACS and now the majority, the provisions for the private sector for non-bounded debt. So there are ways of making private sector that easier to restructure. We are using the GSDR. We are using our own policies in terms of making the process faster. There are many different ways of addressing this issue and making the debt restructuring more predictable and timely. I think yes, you know, a chapter 11 type bankruptcy procedure would have been good, but that's not something that's feasible at this point in time because there's not enough support. And I think it's much better to really put the emphasis into making sure that the private sector debt contracts can be restructured and that the countries themselves are more transparent and they actually put together, put in place legislation and regulations which allow them to be much more transparent because some countries you don't even have different agencies in countries that issue debt. Sometimes it's not even centralized. We're using these mechanisms to have debt more transparent, easier to reconcile. Those are very critical. And then from our side, making sure that we provide the information we bring the creditors together, coordinate the coordinators if you like. I think with this, we can actually support countries in a way that we have seen in the recent episodes that make the restructuring relatively fast. Jela, good practice, strong institutions, policy coordination are all essential ingredients for, say, effective international cooperation. And they show why international institutions matter. So lots of good work and impressive work here and even more to come. So thank you for being with us and it was a pleasure having you and to give you a good insights. Thank you. In the next episode, we dive into the intricacies of that management. It's easy to talk about how to deliver, we're having the right skills and enough capacity really matters. My guess is Nicole Kierz of the African Legal Support Facility. There is much to learn and much to discuss. Don't miss it. [MUSIC]