Indermit Gill, the World Bank’s chief economist, wants to include domestic borrowing in sustainability assessments to solve the growing debt issue.
Gill told Reuters that the Group of 20’s Common Framework to aid the poorest nations had made only slow progress since it did not account for 61% of developing countries foreign debt owned by private creditors, much higher than decades earlier.
The International Monetary Fund estimates that 60% of low-income countries are at or at high risk of debt distress. Still, only Zambia, Chad, Ethiopia, and Ghana have applied for relief under the G20 mechanism set up in late 2020 during the COVID-19 pandemic.
Only Chad’s debt relief pact with creditors does not reduce debt.
In an interview this week, Gill predicted rising interest rates in the U.S. and other advanced nations will keep money streaming out of emerging markets, exactly as in the 1980s, causing “more train wrecks.”
“Debt levels are already starting to hurt prospects, getting them into the wrong kind of spiral,” he warned at a World Bank debt conference on Wednesday. “Many of these countries have debt crises. Egypt submerged.”
He strongly recommended replacing the Common Framework. “It’s not the right machinery.”
The framework prioritizes Paris Club official creditors and younger lenders like China, the world’s largest sovereign creditor. About two-thirds of Ghana’s external debt is privately owned. However, he said that it lacked debt-management standards.
He claimed a new sovereign debt conference to discuss debt relief difficulties included debtor governments and business sector partners but yielded only limited achievements.
IMF officials said China and other participants agreed that multilateral development institutions could deliver positive net flows of loans and grants to needy countries instead of accepting “haircuts.”
Gill said China probably didn’t consider that binding since the gathering wasn’t meant to make decisions.
Gill suggested issuing Brady bonds, national debt instruments denominated in dollars and guaranteed by U.S. Treasuries, as during the 1980s debt crisis.
The IMF and World Bank’s exclusion of domestic borrowing from debt sustainability assessments hid excessive borrowing.
Gill said emerging countries built grown their domestic finance sectors without viable budgetary frameworks.
“Suddenly your assessment tool, which is only looking at assuming that these guys can only borrow abroad, is no longer appropriate,” he added.
