Creditors and analysts have increasingly blamed the IMF for the impasse between debt-troubled countries such as Zambia and Sri Lanka and their creditors, saying the fund’s approach is overly complex and inconsistent.
Critics also took aim at the IMF’s reluctance to publicly criticize China, by far the world’s largest bilateral creditor, ahead of a key summit in Paris this week.
“The IMF needs to be more aggressive and vocal about official Chinese lending in public,” said Mark Sobel, U.S. chairman of the Official Monetary and Financial Institutions Forum think tank and former U.S. representative at the IMF.
Several of the world’s most troubled economies have been waiting for years to resolve negotiations on how to restructure their debt loads — a problem that many creditors have blamed on China’s reluctance to provide debt relief in line with what it is willing to provide.
But senior people with knowledge of the negotiations said it wasn’t just Beijing’s toughness that was holding up the deal. The IMF’s complex and inconsistent technique, which focuses on calculating countries’ creditworthiness, also delayed the deal, they said.
Critics say the fund’s criteria for assessing a country’s ability to service its debts – the so-called Debt Sustainability Analysis, or DSA – are outdated and used arbitrarily, adding to uncertainty in the process.
“China’s hard-line attitude has definitely been holding things back,” said Brad Seiser, a senior fellow at the Council on Foreign Relations think tank and a former U.S. Treasury Department official. “(But) observers from Mars won’t understand how the IMF looks at different variables and different levels of sustainable debt.”
Beijing has insisted that multilateral lenders, including Western-dominated institutions such as the International Monetary Fund, break the mold and provide debt relief. In recent months, however, its views have become more in line with those of other creditors.
The IMF came under fire on Thursday and Friday ahead of French President Emmanuel Macron’s “new global financing pact summit” in Paris. Creditors warned ahead of the meeting that delays in debt resolution were increasing the human costs of default, including slower economic growth, shorter life expectancy and worsening child mortality.
“We have to work in a reasonable amount of time and until now it has taken too long,” Paris club president Emmanuel Mullin said, Reuters reported on Wednesday. “We cannot allow countries to wait more than two years to resolve their debt problems.”
Zambia, which defaulted in 2020, has yet to reach a deal with its creditors – although the presence of Zambian President Hakaind Sichilema and Chinese Premier Li Qiang at the Paris summit raised hopes of a breakthrough.
Chad asked to restructure its debt in January 2021, but was saved from default by higher oil prices. Ghana defaulted in December and has reached a preliminary agreement with the International Monetary Fund and bilateral creditors.
Mark Flanagan, deputy director of the IMF’s strategy, policy and review department, noted the progress these countries had made and accused critics of being “impatient”.
“You have to keep in mind that this is not about launching a project at all costs,” he said, adding that the IMF was also engaging China appropriately.
“We’re taking an appropriate level of caution,” he said. “When the creditors are big enough, it has leverage – you have to work with the majority of creditors and get them involved.”
When calculating debt sustainability, the IMF has two frameworks: one for so-called market access countries — middle-income and advanced economies — and one for low-income countries.
However, such distinctions generally no longer apply. Sri Lanka, which defaulted more than a year ago, is being assessed under the IMF’s market access framework, which involves more discretion in applying the terms of the bailout. This is not the case for Zambia and Ghana, although they issue bonds in international capital markets and borrow from China on commercial terms.
For low-income countries, the IMF describes debtors as having weak, moderate or strong debt sustainability. Critics say the methodology used to arrive at this classification is both too backward-looking and too reliant on unreliable forecasts. “It’s an inherently judgmental process with a lot of very complex technical assumptions that can be questioned from start to finish,” Sobel said.
Frameworks for low-income countries could consider market access, Flanagan said. A forthcoming review will consider a more country-specific approach.
Since the default, Zambia has still issued bonds in its domestic market and has continued to pay foreign holders of those securities — unlike holders of external bonds.
Its finance ministry said in October that paying them would consume about 80% of available funds to service all of Zambia’s external debt — leaving other creditors feeling a severe shortfall. “There is a reason why China is so intransigent,” said one debt investor involved in the negotiations.
Sobel said both bilateral creditors and private lenders were able to hide behind such discord to resist deep debt relief. The IMF, which has set the terms of its restructuring, is “inclined to back down,” he said. “It doesn’t want to be drawn into a big battle between creditors and debtors — and nobody wants to get entangled with China.”