The IMF and sovereign debt

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WASHINGTON, USA – Global public debt levels were elevated already before the COVID-19 pandemic. The crisis is adding to spending needs as countries seek to mitigate the health and economic effects of the pandemic, while fiscal revenues are falling due to lower economic activity. This has pushed debt levels to new heights close to 100 percent of GDP globally. The ability to carry debt varies widely among countries. Debt vulnerabilities have increased especially in low-income countries and some emerging market economies.

Public debt, or sovereign debt, is an important way for governments to finance investments in growth and development. However, it is also critical that governments are able to continue servicing their debt and that their debt burden remains sustainable. Entering into debt distress is often a painful process, which may threaten macro-economic stability and set back a country’s development for years. Supporting member countries in managing debt risks and resolving debt distress is therefore at the heart of the International Monetary Fund (IMF) work. This work takes multiple forms.

The IMF’s analytical work helps identify sovereign debt risks and provides policy advice on how to address these risks at an early stage. Jointly with the World Bank, the IMF fosters debt transparency and supports countries in strengthening their capacity to report and manage their public debt. Technical support to member countries on formulating a debt management strategy and developing their local currency bond markets are at the core of such assistance that promotes a prudent debt structure and adds resilience to withstand economic shocks.

Countries with high debt vulnerabilities need to tackle them through a combination of adjustment and measures to restore growth. An IMF-supported program can facilitate that adjustment, but the IMF can only lend to a member if its debt is sustainable. There are cases where debt is unsustainable, even taking the adjustment efforts into account. If a member country enters into debt distress, only the country’s government can decide whether to solve this by negotiating a debt restructuring with its creditors. An IMF-supported program can support a member in the context of a debt restructuring by providing sound economic policies and new financing, enabling the return to macroeconomic viability. The IMF is also lending its support to improving the international architecture for sovereign debt restructurings, which is critical to enable faster and more effective debt reduction.

Source: IMF

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