A (Looming) Debt Crisis

According to the IMF’s Global Debt Database, the global debt burden (encompassing public, household and non-financial corporate debt) decreased in 2022 for the second year in a row. However, debt remains above its already-high pre-pandemic level: total debt fell slightly to 238 percent of global GDP in 2022, which was 9 percentage points higher than in 2019. In US dollar terms, global debt amounted to US$235 trillion, or US$200 billion above its level in 2021. 

Global debt is returning to its rising trend 

Despite the economic growth rebound from 2020 and higher-than-expected inflation, public debt has remained stubbornly high, particularly in some sub-Saharan African countries. Large, sustained fiscal deficits and price subsidies are among the reasons for those high public debt levels. Large fiscal deficits reflect ongoing spending pressures as many governments seek to boost growth while post-COVID-19 tax and other revenues remain constrained. In addition, while many pandemic-related fiscal support mechanisms have ended, governments have had to respond to food and energy price spikes caused by the war in Ukraine and global supply chain disruptions by providing increased price subsidies. 

Low-income countries’ debt has also increased significantly 

Before the pandemic, global debt-to- GDP ratios had been rising for decades. Global public debt has tripled since the mid-1970s to reach 92 percent of global GDP (or just above US$91 trillion) by end-2022. Private debt also tripled to 146 percent of global GDP (or close to US$144 trillion), but over a longer time span between 1960 and 2022. 

China has played a major role in the increase in global debt in recent decades, as as countries' borrowing has outpaced economic growth. However, debt in low-income countries (LICs) – many of which are in sub-Saharan Africa – also increased significantly in the last two decades, which has created challenges and vulnerabilities. A spree of LIC borrowing from capital markets in the post-global financial crisis – aided and abetted by ultra-low interest rates – has led to a multitude of debt problems, for example in Ghana and Zambia, with a restructuring now taking place. 

Using the IMF and World Bank’s debt analysis indicators, more than half of LICs are in or at high risk of debt distress. Moreover, about one fifth of middle-income countries (MICs) that have issued sovereign bonds now see their bonds trading at distressed levels. 

Limited hopes for global debt resolution prospects 

To prevent the significant problems faced by several LICs (notably in sub- Saharan Africa) from spreading across to many others, the leading policy advice is to take urgent action in order to help reduce debt vulnerabilities and reverse the growth in debt. But what does this actually mean in practice? 

For governments seeking to strengthen management of their public debt the overarching goal should be to introduce and implement stronger public financial management (PFM). Weaknesses over many years in PFM have generally led to the multitude of problems that some of the OPEC Fund’s partner countries face. 

The first step in this direction revolves around building a credible fiscal framework to help balance spending needs with revenue streams so as to achieve debt sustainability. For many OPEC Fund partner countries improving the capacity to collect additional tax revenues is a crucial step in achieving this necessary sustainability. 

Meanwhile, for governments with unsustainable debt a comprehensive approach is needed which encompasses fiscal discipline as well as debt restructuring under the G20 Common Framework – the multilateral mechanism for forgiving and restructuring sovereign debt (see box). Is the Common Framework fit for purpose? 

The hopes and aspirations of what the Common Framework could help provide have been elusive for a number of reasons, raising questions about its effectiveness in resolving LIC debt problems. One of the main obstacles is the need for financing assurances from China for the IMF to lend, which has led to long delays in the provision of IMF financing. And the Common Framework took around two years to provide a structure for starting to negotiate financial terms in one of the most important test cases – Zambia. 

The main source of difficulty is that some official creditors act like commercial creditors. This was dramatically demonstrated in late November 2023 when Zambia was forced to suspend a deal of almost US$4 billion in dollar bonds, derailing its attempts to move on from its years-long default. 

Most other official bilateral creditors, together with the IMF and the World Bank, have accepted that claims on LICs should carry concessional rates. China maintains that the World Bank and other multilateral development banks (MDBs) should “take a haircut” alongside bilateral and commercial creditors. However, the World Bank is highly unlikely to agree to this, given its preferred creditor status. Revoking this status would lead to large losses, jeopardizing its financial stability and its AAA rating, which enables the bank to issue bonds to commercial investors at extremely low rates. 

The other obstacle is posed by the change in the source of financial flows to LICs and how these should be better coordinated in the future in a post-debt resolution environment. The debt burden faced by LICs in particular is framed by an increase in bilateral lending from new creditors (mostly China) together with commercial borrowing from China and the bond market. MDB lending after the Heavily Indebted Poor Countries debt reduction initiative in the early- to mid-2000s has been undertaken in a financially responsible manner, highlighting the role of China and new commercial lenders and the increase in borrowing demand from LICs supported by ultralow interest rates following the global financial crisis. 

Resolving debt vulnerabilities remains work in progress 

Securing a return to debt sustainability for many LICs that are in default or in debt distress requires finding the basis for an agreement with China's policy banks, its state commercial banks and commercial bond holders that provides a clear path back to resumption of payments and leaves a country with a sustainable debt structure. In addition, a more coordinated and accountable system of lending to LICs at concessional rates is needed to ensure debt vulnerabilities once treated do not rise again. 

The World Bank’s “playbook” for development that was launched at its annual meeting in October 2023 focuses on ending poverty on a livable planet through more concessional resources provided by a boost to its capital adequacy is part of this solution. So too is the hope that a less confrontational geopolitical environment, highlighted by the competition and rivalry between the US and China, can be achieved. 

Given the trials and tribulations of the Common Framework to date, the new debt restructuring architecture that is likely to materialize will probably emerge out of case law precedents and actual practice rather than from more abstract discussions. With an uncertain geopolitical environment it has to be feared that sub-Saharan Africa’s debt problems could worsen before they start to improve. 

The Common Framework for Debt Restructuring 

The Common Framework for debt treatment beyond the Debt Service Suspension Initiative* (DSSI) (Common Framework) is an initiative endorsed by the G20, together with the Paris Club, to support LICs with unsustainable debt in a coordinated process. The Common Framework considers debt treatment on a case-by-case basis, driven by requests from eligible debtor countries. In response to a request for debt treatment, a creditor committee is convened. Negotiations are supported by the IMF and the World Bank, including through their Debt Sustainability Analysis. 

The Common Framework approach aims to address debt solvency problems with a long-term perspective, accompanied by reforms ensuring the future sustainability of public debt and consistent with the parameters of an IMF-supported program. Ensuring the participation of private sector creditors and other official creditors through the comparability of treatment clause included in the multilateral agreement implies debt treatments are provided on favorable terms. 

*At the start of the pandemic, the World Bank and the IMF urged the G20 to set up the DSSI. Established in May 2020, the DSSI helped countries concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people. Forty-eight out of 73 eligible countries participated in the initiative before it expired at the end of December 2021. From May 2020 to December 2021, the initiative suspended US$12.9 billion in debt-service payments owed by participating countries to their creditors, according to the latest estimates.