Averting Debt Disaster in the Developing World
In August 2021, the International Monetary Fund approved a large allocation of its reserve asset, special drawing rights, which were distributed to member countries in proportion to their quota shares. If used wisely, these funds can go a long way toward supporting highly indebted developing countries.
BEIJING – Many developing countries are teetering on the edge of a debt crisis, with the COVID-19 pandemic, soaring food and energy costs, and the monetary tightening of major economies all threatening to push them over. But the international community has yet to do what is necessary to pull at-risk countries back from the brink.
For some economies, such as Lebanon and Sri Lanka, the crisis has already arrived. They could soon be joined by many more. As of the end of March, 38 of 69 low-income countries were either already in or at high risk of debt distress. Middle-income developing countries’ debt-service burden is at its highest level in 30 years.
The international community has taken some action in response to the problem. Soon after the pandemic began, the G20 introduced the Debt Service Suspension Initiative (DSSI), under which $12.9 billion in payments owed by 73 low-income countries was suspended between May 2020 and December 2021. Moreover, in November 2020, the G20, together with the Paris Club of sovereign creditors, created the Common Framework for Debt Treatments Beyond the DSSI to help DSSI countries restructure their debt and manage insolvency and protracted liquidity problems.