Between a rock and a hard place: How can IMF provide support amidst debt restructure deadlock?

5 April 2023

Anti-government protest in Sri Lanka in front of the Presidential Secretariat, April 2022. Credit: AntanO

The IMF’s ability to adequately respond to crises remains in question as the institution faces unprecedented delays in providing financial support to countries in debt distress. Chad, Zambia and Suriname are among the countries that received IMF loans almost a year after reaching staff level agreements. Continuing this trend, Sri Lanka, Tunisia and Ghana signed staff level agreements last year but are still waiting on IMF board sign-off due to clashes between China and Western economies over debt relief (see Observer Winter 2022).

The IMF is proving ineffective both in supporting countries on the brink of default as well as in their debt restructuring processes (see Observer Autumn 2022). Pakistan – amongst the top five IMF debtors – is at risk of default as the country’s foreign exchange reserves sank to less than the equivalent of a month’s imports. As the country wrestles with a deepening financial crisis, it is struggling to receive a second IMF loan tranche due to the lack of progress on fiscal consolidation required by the Fund (see Observer Summer 2022, Spring 2022, Winter 2021). Indeed, the IMF’s harsh austerity conditionality requires Pakistan to raise VAT to 25 per cent, liberalise exchange rates and increase electricity tariffs, raising concerns about the impact of such policies on the most vulnerable (see Observer Winter 2022).

Sri Lanka and Ghana are expecting IMF loans of $2.9 and $3 billion respectively, but since they announced defaults on their debt in 2022, their bailout package will be signed off only when they undergo debt restructuring – which has proven difficult under the G20 Common Framework (see Observer Winter 2020). The rift between China and the Paris Club is further widening as China remains reluctant to offer debt relief, demanding that multilateral development banks and private creditors also participate in debt restructuring. Indeed, in Africa alone, governments owe three times more debt to private lenders than to China.

Breaking the creditor deadlock

As private lending becomes a much bigger component of national debt, the IMF should consider using its lending into arrears policy (LIA). The policy can be applied when lending to a country in default on obligations to its commercial creditors and official bilateral creditors. While a big step forward in lending without being constrained by uncooperative creditors, the policy cannot be applied to official bilateral creditors if it has a negative effect on the Fund’s ability to mobilise official financing packages in the future. Moreover, given that private creditors are by-and-large not participating in debt restructuring (see Observer Winter 2021), even if accumulating arrears, countries are still expected to repay this debt, effectively using IMF resources to pay off private creditors. In the end, applying LIA involves weighing one risk against another: giving a creditor veto power over IMF financing, using IMF resources to bailout private lenders, or risking the Fund’s future ability to finance its programmes.