Debt Distress Research Articles

Debt, distress, dispossession: towards a critical political economy of Africa’s financial dependency

SUMMARY With China's rise to become Africa's largest bilateral creditor, much research has focused on an evidence-based critique of the politicised narrative about China's supposed ‘debt trap diplomacy'. At a more fundamental level, this debate problematises the function of debt and related power differentials in late capitalism and calls into question development paradigms, notably the hegemonic infrastructure-led development regime, that have sustained Africa's financial dependency into the 2020s. As the International Monetary Fund is yet again shuttling between Addis Ababa, Lusaka, and Nairobi to resurrect fiscal discipline and to ensure debtor compliance for the post-pandemic ‘payback period', it is argued that (i) periodic cycles of debt financing, debt distress and structural adjustment are a systemic feature of the malintegration of Africa into the global capitalist economy, and (ii) critical research on the social costs and economic beneficiaries of renewed rounds of austerity and privatisation in Africa’s current debt cycle is needed.

Sierra Leone: Third and Fourth Reviews Under the Extended Credit Facility Arrangement, Requests for Extension and Rephasing of the Arrangement, Waivers of Nonobservance of Performance Criteria, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Sierra Leone

Following two emergency Rapid Credit Facility disbursements in June 2020 and March 2021 to assist in addressing the impact of the COVID-19 pandemic, the Sierra Leonean authorities are committed to resuming the program supported by the Extended Credit Facility arrangement. The program is an important policy anchor for the authorities, and its main objectives—revenue mobilization, safeguarding financial stability, and addressing external vulnerabilities—remain valid. While an economic recovery is underway, driven by the mining sector, risks to the outlook are considerable and, the risk of debt distress is high but remains sustainable. This is predicated on the authorities’ ambitious fiscal adjustment and continued reliance on concessional financing and grants. External vulnerabilities are expected to persist over the medium term.

Alleviating debt distress and advancing the sustainable development goals

AbstractExternal debt levels will be unprecedented in 2021—in this last decade of action to secure the sustainable development goals (SDGs)—and mostly in distress for low‐income‐developing countries (LIDC) and least developed countries (LDCs). However, increased levels of debt distress were on the horizon even before the dire economic effects of COVID‐19. These high levels of external debt and a decreasing inability to access international capital were already expected to impede the advancement of the SDGs; the situation has become far graver because of the Great Lockdown and efforts to stymie transmission of COVID‐19. The international community faces perhaps its greatest challenge: it must alleviate poor countries debt burdens exacerbated by COVID‐19 to effectively combat its spread, but there is no consensus as to how to achieve this. Though there is no historical parallel to the current debt crisis, the heavily indebted poor country initiative (HIPC) suggests debt relief alone will be insufficient to keep the SDGs on track. While the challenges that arise with regards to the scaling up of debt swap initiatives—learned from previous efforts—are formidable, this article provides critical reflection as to their effective operationalization within the current context: responding to the economic and social devastation wrought by COVID‐19 and keeping the SDGs on track. It shows how debt swaps can be effectively deployed as part of a revitalized global partnership for development, for the advancement of the SDGs and broader debt sustainability.

Special issue: The poverty‐inequality‐environment frontier in the age of crises

This Special Issue is part of a joint initiative on “Financial Crises, Poverty, and Environmental Sustainability” by the Sussex Sustainability Research Project (SSRP) of the University of Sussex, the UNDP-UNEP Poverty-Environment Action for Sustainable Development Goals, and the United Nations Research Institute for Social Development (UNRISD). The aim of the project is to foster an evidence-based understanding of the multiple and complex ways in which poverty and environmental dynamics interact in moments of economic crises and how this interaction can be managed in a way that facilitates the transition to sustainability. The Special Issue includes the following papers: 1. The Great Stagnation and environmental sustainability: A multidimensional perspective Bernardo Cantone, Alexander S. Antonarakis, Andreas Antoniades (University of Sussex) 2. Confronting inequality in the ‘New Normal’: hyper-capitalism, proto-socialism and post-pandemic recovery Tim Jackson (University of Surrey), Peter A. Victor (York University, Toronto) 3. Transformative social policies as an essential buffer during socio-economic crises Isabell Kempf, Paramita Dutta (UNRISD) 4. Alleviating debt distress and advancing the Sustainable Development Goals Howard Haughton (King’s College London), Jodie Keane (Overseas Development Institute - ODI) 5. Bracing for the typhoon: Climate change and sovereign risk in Southeast Asia John Beirne, Nuobu Renzhi (Asian Development Bank Institute, Tokyo), Ulrich Volz (SOAS) 6. Climate shocks and poverty persistence: Investigating consequences and coping strategies in Niger, Tanzania, and Uganda Vidya Diwakar, Antoine Lacroix (Overseas Development Institute – ODI) 7. Class and climate change adaptation in rural India: Beyond community-based adaptation models Maryam Aslany (University of Oxford), Shannon Brincat (The University of the Sunshine Coast)

The impact of public external debt on private investment. Evidence from Zimbabwe under the multi-currency system.

The levels of public debt have grown significantly in both emerging and developed countries even during times of peace. The rising levels of debt pose substantial debt sustainability issues to developing countries including Zimbabwe. A defaulting country usually has limited access to new international credit lines or tends to borrow at a higher cost, due to high perceived country risk premium, making the country a less attractive investment destination. Zimbabwe is currently suffering debt distress and has since the year 2000 struggled to service her external debt from international multilateral financial institutions. Zimbabwe’s external debt continues to pile up due to penalties on defaults. This paper examines the impact of public external debt on private investment in Zimbabwe, using quarterly time-series data for the period 2009 and 2017. The period of study was a period of relative stability when Zimbabwe operated under a multicurrency system. Interest rates, political risk, trade openness and household consumption are control variables of this study. Using the Vector Error Correction Model (VECM), we find that external debt and external debt squared have a negative impact on private investment in the long run. Results suggest that Zimbabwe’s external debt is crowding out private investment. In the short-term, we urge the government of Zimbabwe to apply for debt rescheduling to avoid penalties that have so far contributed to the ballooning of Zimbabwe’s external debt obligations. In the medium term, we urge the government of Zimbabwe to design comprehensive debt and arrears reduction strategies, to reduce Zimbabwe’s external debt to sustainable levels. In the long term, after regaining borrowing rights, we urge the government of Zimbabwe to invest external borrowings in productive ventures, to facilitate debt amortisation. Secondly, we recommend that external debt be invested in education, health and infrastructure, which can potentially stimulate private investment, and thus create a multiplier effect on economic growth. Lastly, we recommend the government to invest foreign loans in sectors where Zimbabwe enjoys a comparative advantage, to ensure reliable export revenue for debt servicing.

Government and Private Household Debt Relief during COVID-19

We follow a representative panel of US borrowers to study the suspension of household debt payments (debt forbearance) during the COVID-19 pandemic. Between March and October of 2020, loans worth $2 trillion entered forbearance. On average, cumulative payments missed per individual in forbearance during this period were largest for mortgage ($3,200) and auto ($430) borrowers. We estimate that more than 60 million borrowers will miss $70 billion on their debt payments by the end of 2021:Q1. This large amount of debt relief significantly dampened the household debt distress, which can help explain household delinquencies below pre-pandemic levels—a significant difference from other economic crises when delinquencies sharply increased along with unemployment. Forbearance thus may have had potentially large aggregate consequences for house prices and economic activity. Relief flows more to higher income individuals than those receiving stimulus checks, partially due to their higher debt balances: 60% of aggregate forbearance is provided to above median income borrowers. On the other hand, forbearance rates are higher among the more vulnerable populations: individuals with lower credit scores and lower incomes. Borrowers in regions with a higher likelihood of COVID-19 related economic shocks and higher shares of minorities were more likely to obtain debt relief. One third of borrowers in forbearance continued making full payments, suggesting that forbearance acts as a credit line, allowing borrowers to “draw” on payment deferral if needed. More than a quarter of total debt relief was provided by the private sector outside of the government mandates. Exploiting a discontinuity in mortgage eligibility under the CARES Act we estimate that implicit government debt relief subsidies increase the rate of forbearance by about 25%. Government and private relief follow similar patterns across income and creditworthiness, suggesting that borrower self-selection in requesting forbearance is an important determinant of debt relief incidence, and drives the distribution of relief across different population strata. Government relief is provided through private intermediaries, which differ in their propensity to supply relief, with shadow banks less likely to provide forbearance than traditional banks.

Debt Distress and Recovery Episodes in Africa: Good Policy or Good Luck?

Debt Distress and Recovery Episodes in Africa: Good Policy or Good Luck?

An Analysis of the Reporting of Contingent Liabilities in Kenya’s Public Debt Management Legal Framework

Kenya’s ballooning public debt has been a major concern in the recent past. In fact, there are fears about the country’s debt sustainability levels. Last year, the International Monetary Fund raised Kenya’s risk of debt distress to high from moderate. What this means is that although the country is not currently facing any repayment difficulties, it may have difficulties servicing its debt due to the slowdown in economic activity. The downgrade from moderate to high risk has been attributed to the outbreak of the COVID-19 pandemic. Over the past few years, the country’s public debt has grown exponentially. The outstanding total public debt and publicly guaranteed public debt at the end of the 2019/2020 financial year was Kshs. 6.7 trillion. This is an equivalent of 65.6 per cent of the Gross Domestic Product. The percentage is way above the 50 per cent level recommended by the World Bank.The increase in public debt has also seen an increase in publicly guaranteed debt and other contingent liabilities. In the financial year 2019/2020, public guaranteed debt increased by Kshs. 5,841 million to Kshs. 165,245 million from Ksh. 159,408 million at the end of June 2019. In the same period, the government has had to pay Kshs. 661.2 million as called up guaranteed debt debts owed by public enterprises that were in financial distress. From the above, it is clear that contingent liabilities form a substantial part of the public debt. However, they are not given much attention. This paper explores the reporting of these liabilities.

Sovereign Debt in the 21st Century: Looking Backward, Looking Forward

How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing “lessons learned” in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign “doom-loop” and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale sovereign bailouts from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.

Sovereign Debt in the 21st Century: Looking Backward, Looking Forward

How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the Eurozone debt crisis, placing “lessons learned” in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign “doom-loop” and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale “sovereign bailouts” from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Sovereign debt and growth in Zambia: determining the tipping point

From the mid-1980s to mid-2000s, Zambia was in egregious debt distress, which resulted in debt relief under the HIPC initiative and MDRI in 2005. Surprisingly, Zambia's debt-to-GDP ratio has increased astronomically from about 22 percent in 2011 to 56 percent in 2018. In view of that, we study the long-run effect of sovereign debt on growth by exploring if, at all, the debt-growth nexus varies with the level of indebtedness. This paper estimates the sovereign debt-growth nexus over the period covering 1970 to 2017, by employing the linear and non-linear specifications. The study finds evidence in support of a non-linear relationship between sovereign debt accumulation and growth in Zambia. With regards to the debt-threshold effect, the tipping point for Zambia is around 40 percent of debt-to-GDP, at this point, the positive effect of debt on economic growth becomes negative. Far more importantly, policy recommendations are prescribed from these study findings.

Belize’s 2016–17 Sovereign Debt Restructuring – Third Time Lucky?

This paper examines the causes, process, and outcome of Belize’s 2016–17 sovereign debt restructuring – its third episode in last 10 years. As was the case in the earlier two restructurings, in 2006–07 and in 2012–13, the 2016–17 debt restructuring was executed through collaborative engagement with creditors outside an IMF-supported program. While providing liquidity relief and partially addressing long-term debt sustainability concerns, the restructuring will need to be underpinned by ambitious fiscal consolidation and growth-enhancing structural reforms to secure durable gains and avoid future debt distress situations.

Predicting Macroeconomic and Macrofinancial Stress in Low-Income Countries

In recent years, Fund staff has prepared cross-country analyses of macroeconomic vulnerabilities in low-income countries, focusing on the risk of sharp declines in economic growth and of debt distress. We discuss routes to broadening this focus by adding several macroeconomic and macrofinancial vulnerability concepts. The associated early warning systems draw on advances in predictive modeling.

Avoiding a lost decade—sovereign debt workouts in the post-Covid era

In the late summer of 2020, Ecuador and Argentina each concluded restructurings of their foreign currency bonds These were not the first post-Covid era sovereign debt workouts;they were the last pre-Covid sovereign debt restructurings Both countries had been in debt distress before the pandemic began and, somewhat ominously, the financial terms of the two debt restructurings may have been framed without regard to the longer-term consequences of the Covid crisis © The Author(s) (2020) Published by Oxford University Press All rights reserved

External Debt Distress in South Asia: Evidence from Panel Data Analysis

This study is an attempt to explore social and economic determinants of external debt distress in five selected South Asian countries, that is, Bangladesh, India, Nepal, Pakistan and Sri Lanka, from 1980 to 2018, by using the contemporary panel fixed effect model and system generalized methods of moments. The findings revealed that the major determinants of external debt distress in selected South Asian countries are large and increasing current account deficits, lower gross capital formation, foreign direct investment and large military expenditures. Among selected socio-economic variables, the increase in life expectancy increases external debt distress, whereas urbanization reduces it considerably. The study urges selected South Asian countries to correct highly unfavourable current account balance, resolve regional conflicts leading to the reduction of the arms race and make the macroeconomic environment friendly for domestic and foreign investment to reduce exploding external debt distress. JEL Classification: C33, E22, F32, H63

Public Debt Dynamics and Intra-Year Exchange Rate Fluctuations

The public sector, in carrying out its operations, often incurs foreign currency denominated liabilities and, as such, is exposed to exchange rate fluctuations that could affect the value of public debt to GDP ratios over time. This paper shows that converting foreign currency denominated flows and stocks into local currency using the average and the end-of-period exchange rates, respectively, as envisaged in public finance manuals, gives rise to an identifiable stock-flow adjustment term—due to intra-year exchange rate fluctuations—that affects public debt accumulation. Importantly, the inclusion of this often-ignored stock-flow adjustment term is critical to accurately project public debt levels and any related indicator that could in turn inform about the risk of debt distress. Using a novel dataset covering 82 countries during 2008–19, the paper shows that this stock flow adjustment term is sizable in countries experiencing large exchange rate depreciations, namely above the 99th percentile of the full sample, reaching 1.2 percent of GDP. Interestingly, the measurement of policy-related concepts such as interest rate-growth differentials and debt stabilizing primary balances are also affected by intra-year exchange rate fluctuations, and in non-negligible ways.

Public Debt Dynamics and Intra-Year Exchange Rate Fluctuations

The public sector, in carrying out its operations, often incurs foreign currency denominated liabilities and, as such, is exposed to exchange rate fluctuations that could affect the value of public debt to GDP ratios over time. This paper shows that converting foreign currency denominated flows and stocks into local currency using the average and the end-of-period exchange rates, respectively, as envisaged in public finance manuals, gives rise to an identifiable stock-flow adjustment term—due to intra-year exchange rate fluctuations—that affects public debt accumulation. Importantly, the inclusion of this often-ignored stock-flow adjustment term is critical to accurately project public debt levels and any related indicator that could in turn inform about the risk of debt distress. Using a novel dataset covering 82 countries during 2008–19, the paper shows that this stock flow adjustment term is sizable in countries experiencing large exchange rate depreciations, namely above the 99th percentile of the full sample, reaching 1.2 percent of GDP. Interestingly, the measurement of policy-related concepts such as interest rate-growth differentials and debt stabilizing primary balances are also affected by intra-year exchange rate fluctuations, and in non-negligible ways.

Reform of the Policy on Public Debt Limits in IMF-Supported Programs

This paper evaluates the IMF’s policy on the use of quantitative limits on public debt in IMF-supported programs (the “debt limits policy”) and proposes a number of modifications. The review is taking place at a time when many countries are experiencing heightened debt vulnerabilities or actual debt distress, aggravated by the COVID-19 shock, and occurring against the backdrop of a changing credit landscape in which concessional finance is scarcer relative to countries’ investment needs.

The Distributional Impacts of Fiscal Consolidation in Uganda

While Uganda is considered to be at low risk of debt distress, the stagnant tax effort and large planned capital expenditures might significantly alter this position. This paper employs the dynamic stochastic general equilibrium (DSGE) model to examine tax design issues that arise in addressing debt increases. The results suggest that Uganda may improve it debt position by permanently increasing tax rates by 5 percentage point. However, an increase of consumption tax rates (VAT and Excise) by this magnitude to meet debt reduction is found to be relatively more distortionary affecting consumption, especially for the poor households, in both the short and long run leading to large temporary reductions in the gross domestic product (GDP).

China’s Belt and Road Initiative: Will it Make or Mar Development in the Central and West Africa Subregions?

The West, chiefly Europe, left political footmarks in Africa from the Colonial Era, along with varying economic footprints and surviving engagements in the immediate Post-colonial Era. However, the relationships between Africa and her former colonial masters have hardly yielded much to the former following the wave of independence, leading to the perception of failed relationships. This perception of failure to deliver on their undertakings has left Africa with only one option—China. The latter has been addressing some of Africa’s urgent infrastructure needs in return for natural resources and agricultural products. These engagements on the surface appear to be good business, but on further examination seem questionable notably as it relates to debt distress on vulnerable economies. To increase her footprint within the continent, China extended her Belt and Road Initiative (BRI) to most African nations who have signed a memorandum of understanding for future development projects. Though the commitments usually are unspecified, China’s investments have seen rapid growth since the early 2000s, largely owing to the implementation of the BRI. The memoranda have had the potential to strengthen ties with partner nations. The expansion to include Africa in its economic participation in the BRI has left the West questioning China’s motives while reinforcing suspicions about possible future US-China conflict. The impact of BRI on the African continent is quite visible in all the subregions, especially in their improved gross domestic products. A burning question has been whether these partnerships represent win-win relationships for sustainable growth or debt-growth dynamics.