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Desperately Seeking a Mechanism for Sovereign Debt Restructuring

Past experience has shown that sovereign debt restructuring needs to be accompanied by reform programs to ensure future economic performance and debt sustainability. But in today's world, the emergence of new and more varied creditors has made the process more difficult, pointing to the need for a new global facility.

WASHINGTON, DC – When the economy is going well, the poor benefit more than others. But when things are going badly, it is the poor who are hurt the most. This is especially true in the case of the COVID-19 pandemic, which has hit poor countries – and the poorest people within them – especially hard.

Some poor countries were facing economic difficulties before the pandemic, which intensified their troubles. Others were reasonably well managed, but suddenly faced the need for unanticipated expenditures. International support for this latter group can be highly productive. But for countries that already had big problems, financial assistance must be accompanied by economic-policy reforms if it is going to have any success.

Among heavily indebted countries with ill-advised economic-policy frameworks, Sri Lanka – a middle-income country – may currently be in the most trouble. Despite rapidly growing fiscal deficits and a foreign-exchange crisis that has caused severe shortages of food, medicine, and fuel, Sri Lankan authorities long continued to insist that they would service their debts at all costs, rather than approach the International Monetary Fund for support.

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