Resolving the Debt Crisis

As the number of developing countries likely to default on external debt service commitments increases, the effort to resolve debt crises in countries that have defaulted many months back remains unsuccessful. The experience of Zambia, the first African country to default following the onset of the COVID-19 pandemic, is telling. The reason is the presence of private creditors, especially bondholders, who are unwilling to accept the haircuts (recommended by the International Monetary Fund) needed for a potentially sustainable solution. This has implications for other African countries like Ghana that have also defaulted recently, but in whose case private creditors dominate, with the share of bondholders in total debt stocks being extremely high.

Even as new signals from Egypt and Pakistan, for example, of likely defaults on external debt servicing emerge, the crisis in countries like Sri Lanka that have halted payments many months back remains unresolved. A continent where this failure stands out starkly is Africa, where debt crises or debt-stress bordering on crises abound, afflicting Angola, Chad, Ethiopia, Gabon, Ghana, Kenya, Mali, Nigeria, and Zambia, among other countries. The problem in all these cases (as much as elsewhere in the world) is the inability of the international community to fashion an early resolution, despite the urgent need for one—not only for humanitarian reasons related to circumstances in the debtor countries, but also because debt crises are preventing progress on addressing global challenges such as climate change.