{"id":128971,"date":"2022-10-04T15:58:06","date_gmt":"2022-10-04T22:58:06","guid":{"rendered":"https:\/\/www.lankaweb.com\/news\/items\/?p=128971"},"modified":"2022-10-04T15:58:06","modified_gmt":"2022-10-04T22:58:06","slug":"imf-debt-sustainability-analysis-in-times-of-compounding-crises-still-unfit-for-purpose","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2022\/10\/04\/imf-debt-sustainability-analysis-in-times-of-compounding-crises-still-unfit-for-purpose\/","title":{"rendered":"IMF debt sustainability analysis in times of compounding crises: Still unfit for purpose"},"content":{"rendered":"<h2><span style=\"color: #0000ff;\"><em>https:\/\/www.brettonwoodsproject.org\/<\/em><\/span><\/h2>\n\n\n<h3 class=\"wp-block-heading\">SUMMARY<\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>IMF operationalises new Debt Sustainability Analysis framework while methodology kept confidential<\/li><li>A history of over-optimistic IMF assessments casts doubt on whether latest changes will make a difference<\/li><li>Compounding economic, climate, health, and food security crises call for comprehensive large-scale debt workout<\/li><\/ul>\n\n\n\n<p>In July, massive protests engulfed Sri Lanka as the debt-distressed country sank deeper into crisis. Two months later, the IMF&nbsp;<a href=\"https:\/\/www.imf.org\/en\/News\/Articles\/2022\/09\/01\/pr22295-imf-reaches-staff-level-agreement-on-an-extended-fund-facility-arrangement-with-sri-lanka\">announced<\/a>&nbsp;a $2.9 billion package for Sri Lanka, and shortly thereafter another&nbsp;<a href=\"https:\/\/www.theguardian.com\/global-development\/2022\/sep\/02\/crisis-hit-zambia-secures-13bn-imf-loan-to-rebuild-stricken-economy\">$1.3 billion<\/a>&nbsp;loan to Zambia, which had defaulted on its debts in 2020. The latter comes with tough conditions: According to the loan agreement, Zambians will have to shoulder a large, front-loaded and sustained fiscal consolidation.\u201d But further interventions from the Fund may soon be needed. Based on the IMF\u2019s latest&nbsp;<a href=\"https:\/\/www.imf.org\/external\/Pubs\/ft\/dsa\/DSAlist.pdf\">numbers<\/a>&nbsp;from 29 August, eight low-income countries are already in debt distress and 29 at high risk. Meanwhile, Pakistan\u2019s climate disaster risks unravelling their recent IMF loan restart (see&nbsp;<em>Observer<\/em>&nbsp;<a href=\"https:\/\/bit.ly\/PakistanClimate\">Autumn 2022<\/a>).<\/p>\n\n\n\n<p>Against this backdrop, on 8 August the IMF&nbsp;<a href=\"https:\/\/www.imf.org\/en\/Publications\/Policy-Papers\/Issues\/2022\/08\/08\/Staff-Guidance-Note-on-the-Sovereign-Risk-and-Debt-Sustainability-Framework-for-Market-521884\">published<\/a>&nbsp;a staff guidance note to operationalise its new&nbsp;<em>Sovereign Risk and Debt Sustainability Framework<\/em>&nbsp;for advanced and emerging market economies \u2013 a process which is key to determining whether countries\u2019 debt is \u2018sustainable\u2019 as global economic headwinds worsen (see&nbsp;<em>Observer&nbsp;<\/em><a href=\"https:\/\/www.brettonwoodsproject.org\/2021\/03\/imf-debt-sustainability-review-lacking-in-ambition-and-transparency\/\">Spring 2021<\/a>). With rising inflation and interest rates compounding the economic, climate, health, food and fuel crises, the time for the establishment of a long-demanded comprehensive multilateral&nbsp;<a href=\"https:\/\/campaignofcampaigns.com\/index.php\/en\/debt-cancellation-and-sovereign-debt-workout-mechanism\">sovereign debt workout mechanism<\/a>&nbsp;has never been more urgent. Yet, with increasing complexity of the creditor landscape, the international sovereign debt architecture remains a melange of inadequate and insufficient attempts, including the expired Debt Service Suspension Initiative (DSSI) and the hardly-used G20 Common Framework (see&nbsp;<em>Observer<\/em>&nbsp;<a href=\"https:\/\/www.brettonwoodsproject.org\/2022\/07\/highly-indebted-countries-face-further-cuts-to-public-spending-to-service-debts\/\">Summer 2022<\/a>,&nbsp;<a href=\"https:\/\/www.brettonwoodsproject.org\/2022\/04\/ineffective-debt-service-suspension-initiative-ends-as-world-faces-worst-debt-crisis-in-decades\/\">Spring 2022<\/a>).<\/p>\n\n\n\n<p>While comprehensive multilateral solutions may not currently be politically feasible, decisive action is needed to prevent a domino of defaults. However, the IMF\u2019s unfounded optimism about countries\u2019 ability to service debts, along with unrealistic fiscal consolidation targets and resistance from large private and multilateral creditors to debt haircuts, has meant that the debt restructuring has fallen short.<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>Excess IMF optimism can involve pretending that countries face illiquidity and not insolvency, letting creditors avoid significant upfront losses and blithely dissembling that debt can simply be rolled over<\/p><cite>MARK SOBEL, FORMER US IMF EXECUTIVE DIRECTOR<\/cite><\/blockquote>\n\n\n\n<h3 class=\"wp-block-heading\">Determination of liquidity vs solvency crisis is highly political<strong><\/strong><\/h3>\n\n\n\n<p>While the Fund has released its overall framework for debt sustainability analysis (DSA), its precise methodology remains strictly confidential\u201d, with the argument that it is market-sensitive\u201d and nondisclosure avoids disruptive reactions\u2026particularly if judgement is needed.\u201d This continued lack of transparency is problematic, as the DSA framework is legally and macroeconomically biased towards\u2026underestimating sovereign insolvency problems,\u201d&nbsp;<a href=\"https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=3935377\">according to<\/a>&nbsp;Dr Karina Patricio of University of Leeds (see&nbsp;<em>At Issue<\/em>&nbsp;<a href=\"https:\/\/bit.ly\/DebtMechanism\">Autumn 2022<\/a>), resulting in a persistent pattern\u2026that underpins the widespread trend of post-pandemic austerity in the Global South.\u201d This bias has created a history of self-admitted <a href=\"https:\/\/blogs.imf.org\/2017\/02\/23\/dealing-with-sovereign-debt-the-imf-perspective\/\">heroic<\/a>\u201d over-optimism, which can involve pretending that countries face illiquidity and not insolvency, letting creditors avoid significant upfront losses and blithely dissembling that debt can simply be rolled over and extended,\u201d&nbsp;<a href=\"https:\/\/www.ft.com\/content\/b7133f4e-797f-4c25-b70b-346fa8870478\">wrote<\/a>&nbsp;former US IMF representative Mark Sobel in the&nbsp;<em>Financial Times<\/em>&nbsp;in August. As a result, private sector lenders have repeatedly been paid off with IMF-backed public funds, while the local population bears the burden of ensuing austerity and deepening inequality (see&nbsp;<em>Dispatch&nbsp;<\/em><a href=\"https:\/\/www.brettonwoodsproject.org\/2022\/04\/are-we-heading-towards-an-austerity-based-recovery\/\">Springs 2022;<\/a>&nbsp;<em>Observer<\/em>&nbsp;<a href=\"https:\/\/www.brettonwoodsproject.org\/2020\/10\/over-optimistic-imf-forecasts-risk-dire-consequences-for-covid-19-response\/\">Autumn 2020<\/a>). Denying countries adequate debt relief thus not only has significant&nbsp;<a href=\"https:\/\/www.ohchr.org\/en\/documents\/thematic-reports\/a76167-international-debt-architecture-reform-and-human-rights-report\">human rights implications<\/a>, but also contributes to the erosion of the public sector and the financialisation of development, in line with the World Bank\u2019s&nbsp;<a href=\"https:\/\/www.stampoutpoverty.org\/live2019\/wp-content\/uploads\/2019\/05\/Billions_to_trillions_web.pdf\">Billions to Trillions<\/a>&nbsp;and GRID agenda. As the IMF itself has&nbsp;<a href=\"https:\/\/blogs.imf.org\/2022\/05\/20\/social-unrest-is-rising-adding-to-risks-for-global-economy\/\">noted<\/a>, these dynamics contribute to social unrest.<\/p>\n\n\n\n<p>Research by Boston University\u2019s Global Development Policy Center has also&nbsp;<a href=\"https:\/\/www.bu.edu\/gdp\/2021\/04\/05\/imf-austerity-is-alive-and-impacting-poverty-and-inequality\/\">shown<\/a>&nbsp;that DSA is far from politically neutral: Borrowing countries with high foreign direct investment from Western European private lenders face harsher austerity conditions, while those whose trade and diplomacy align with Europe get lighter ones. Moreover, the lack of adequate early restructuring extends a debt crisis, leading to prolonged suffering and frequent failure of later IMF programmes, as evidenced by the Fund\u2019s&nbsp;<a href=\"https:\/\/www.imf.org\/en\/Publications\/Policy-Papers\/Issues\/2019\/05\/20\/2018-Review-of-Program-Design-and-Conditionality-46910\">2018 Review<\/a>&nbsp;and a September&nbsp;<a href=\"https:\/\/erlassjahr.de\/produkt\/studie-a-decade-of-rosy-forecasts\/\">report<\/a>&nbsp;from Germany-based civil society organisation (CSO) Erlassjahr. The massive failure of&nbsp;<a href=\"http:\/\/www.imf.org\/external\/pubs\/ft\/scr\/2013\/cr13156.pdf\">Greece\u2019s IMF program<\/a>&nbsp;demonstrated many of these dynamics: excessive over-optimism, politicised decision-making, dire austerity, delayed restructuring, and deep recession (see&nbsp;<em>Observer<\/em>&nbsp;<a href=\"https:\/\/www.brettonwoodsproject.org\/2015\/03\/imf-in-greece-a-slush-fund-for-its-political-masters\/\">Spring 2015<\/a>). While Zambia\u2019s announcement called for a large-scale debt restructuring, it remains unclear how much will be cancelled or simply rescheduled by a decade, as&nbsp;<a href=\"https:\/\/twitter.com\/tim_jones6\/status\/1567175079078805507\">highlighted<\/a>&nbsp;by Tim Jones, of UK-based CSO Debt Justice, on Twitter.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Effective DSA needs transparency and developmental lens<\/h3>\n\n\n\n<p>A lack of transparency in sovereign debt is a major hurdle to more realistic assessments, something leading IMF and World Bank economists have&nbsp;<a href=\"https:\/\/www.imf.org\/en\/Blogs\/Articles\/2021\/03\/05\/vc-key-to-resolving-covid-s-global-debt-crunch-transparency\">stressed<\/a>. The arguments for not disclosing its analysis then seem specious, especially given the major signalling power of the IMF\u2019s debt sustainability assessment as the lender of last resort\u201d. Making its criteria public and assessments more conservative would create greater legitimacy and accountability. It might also enable the Fund to make a credible assertion that it will not rescue a country without serious debt restructuring, including by private creditors, thus eschewing the current moral hazard-inducing expectation that IMF-facilitated official debt relief will eventually enable private debt repayment, something over 100 experts&nbsp;<a href=\"https:\/\/debtjustice.org.uk\/press-release\/over-100-experts-call-on-blackrock-to-cancel-zambias-debt\">called out<\/a>&nbsp;in September.<\/p>\n\n\n\n<p>A DSA fit for the current global context requires a view of debt sustainability that is conducive to long-term development strategies and is based on consistent macroeconomic policies and the sustainability of the balance of payments in the longer term, rather than short-term debt service goals,\u201d writes Patricio. Otherwise, there is a&nbsp;<a href=\"https:\/\/debtjustice.org.uk\/press-release\/growing-debt-crisis-to-worsen-with-interest-rate-rises\">significant risk<\/a>&nbsp;that many low-income and climate-vulnerable countries will remain trapped in a spiral of debt, austerity, and bailouts from which they are unlikely to emerge (see&nbsp;<em>Observer<\/em>&nbsp;<a href=\"https:\/\/bit.ly\/PakistanClimate\">Autumn 2022<\/a>), while the prospects of regaining the fiscal space needed for&nbsp;<a href=\"https:\/\/womensmajorgroup.org\/reflections-after-hlpf-towards-unga\/\">achieving sustainable development<\/a>,&nbsp;<a href=\"https:\/\/www.ohchr.org\/en\/documents\/thematic-reports\/a76167-international-debt-architecture-reform-and-human-rights-report\">realising human rights<\/a>, and responding to climate change effectively fade into the distance.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>https:\/\/www.brettonwoodsproject.org\/ SUMMARY IMF operationalises new Debt Sustainability Analysis framework while methodology kept confidential A history of over-optimistic IMF assessments casts doubt on whether latest changes will make a difference Compounding economic, climate, health, and food security crises call for comprehensive large-scale debt workout In July, massive protests engulfed Sri Lanka as the debt-distressed country sank [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[193],"tags":[],"class_list":["post-128971","post","type-post","status-publish","format-standard","hentry","category-imf-bailout-package"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/128971","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=128971"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/128971\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=128971"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=128971"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=128971"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}