Creditors and analysts are increasingly blaming the IMF for deadlocks between debt-distressed countries such as Zambia and Sri Lanka and their creditors, saying the fund’s approach is too complex and inconsistent.
Ahead of a crucial summit in Paris this week, critics are also taking aim at the IMF’s unwillingness to publicly criticise China, by far the world’s biggest bilateral creditor.
Mark Sobel, US chair at think-tank Official Monetary and Financial Institutions Forum and a former US representative at the fund, said: “The IMF needs to be far more publicly aggressive and outspoken about China’s official lending.”
Several of the world’s most troubled economies have waited years for a resolution to talks on how to restructure their debt burdens — an issue that many creditors have blamed on China’s unwillingness to give debt relief in line with what they are willing to offer.
But senior figures with insight into the negotiations say it is not just Beijing’s intransigence that is holding up deals. They say the Fund’s focus on complex and inconsistent techniques to calculate countries’ creditworthiness is also delaying agreements.
Critics say the fund’s criteria for assessing a country’s ability to repay its debts — the so-called debt sustainability analysis, or DSA — are out of date and have been used arbitrarily, adding to uncertainty in the process.
“Chinese intransigence has unambiguously been holding things up,” said Brad Setser, senior fellow at the Council on Foreign Relations think-tank and a former US Treasury official. “[But] an observer from Mars would not understand how the IMF was focusing on different variables and on different levels of debt as sustainable.”
Beijing has insisted multilateral lenders, including western-led institutions such as the IMF, break with norms and offer debt relief. However, its views have become more closely aligned with those of other creditors in recent months.
The criticism of the IMF comes ahead of French president Emmanuel Macron’s “Summit for a New Global Financing Pact” in Paris on Thursday and Friday. Creditors warned ahead of the meeting that delays in debt workouts are adding to the human costs of default, including slower economic growth, reduced life expectancy and worsening child mortality.
“We’ve got to work within a reasonable amount of time, until now it’s taken too long,” Paris Club head Emmanuel Moulin was reported by Reuters as saying on Wednesday. “We can’t leave countries waiting for more than two years for a debt treatment.”
Zambia, which defaulted in 2020, is yet to reach an agreement with its creditors — although the presence of Zambian president Hakainde Hichilema and Chinese premier Li Qiang at the Paris summit has raised hopes of a breakthrough.
Chad asked to restructure its debts in January 2021, but was saved from default by rising oil prices. Ghana defaulted last December and has reached a preliminary deal with the IMF and bilateral creditors.
Mark Flanagan — deputy director of the IMF’s strategy, policy and review department — pointed to progress in these countries and accused critics of being “impatient”.
“You have to keep your eye on the ball, and that doesn’t mean getting a programme started at any cost,” he said, adding that the IMF was also engaging properly with China.
“We are being appropriately careful,” he said. “When a creditor is big enough it has leverage — you have to work with that majority creditor and get them on board.”
When it comes to calculating debt sustainability, the IMF has two frameworks: one for so-called market-access countries — middle-income and advanced economies — and the other for low-income countries.
Yet such distinctions often no longer apply. Sri Lanka, which defaulted just over a year ago, is being assessed under the IMF’s market access framework, which involves more discretion in applying the terms of bailouts. But Zambia and Ghana are not, despite issuing bonds on international capital markets and borrowing from China on commercial terms.
For low-income countries, the IMF describes debtors as having a weak, medium or strong capacity for carrying debt. Critics say the method used to arrive at this classification is both too backward-looking and too dependent on unreliable forecasts. “It is an inherently judgmental process with a lot of very complex technical assumptions that can be questioned from start to finish,” Sobel said.
Flanagan said the framework for low-income countries could take account of market access. A forthcoming review would consider taking a more country-specific approach.
Zambia still issues debt on its domestic market since its default, and continues to pay foreign holders of those securities — unlike holders of its external bonds.
Its finance ministry said in October that paying them consumes about 80 per cent of the money available to service all Zambia’s external debts — leaving other creditors feeling severely short-changed. “There’s a reason why China is being so intransigent,” said one debt investor involved in the negotiations.
Sobel said both bilateral creditors and private lenders have been able to hide behind discord such as this to resist giving deep debt relief. The IMF, having set the restructuring terms, “tends to stand back”, he said. “It doesn’t want to get into a big fight between creditors and debtors — and nobody wants to tangle with China.”
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