Report: Debt Relief by Multilateral Lenders – Why, How and How Much?

As the sovereign debt crisis in the Global South continues to unfold, the lack of involvement of multilateral development banks (MDBs) in debt relief efforts has become a contentious issue among major creditors. Although the Group of 20 (G20) has explicitly called for MDBs to develop options to share the burden of debt relief efforts, MDBs have not presented any concrete and systemic plan thus far on how to contribute to debt relief efforts to countries applying for the G20 Common Framework.

A new report by Marina Zucker-Marques, Ulrich Volz and Kevin P. Gallagher aims to contribute to the ongoing debate over debt relief negotiations and MDBs in three main areas: First, they assess whether there are compelling reasons for including multilateral lenders in debt relief, considering the point of view of debt-vulnerable developing countries, the efficiency of current debt relief negotiations and the sustainability of MDBs’ operational model. Second, they estimate the adequate level of relief MDBs should provide if they partake in debt restructuring. Finally, bearing in mind the importance of maintaining MDBs’ preferred creditor status and high credit ratings for a low cost of funding, they discuss policy options to cover MDBs losses. These suggestions draw on historical experiences of MDB involvement in debt relief (the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative), as well as emerging opportunities.

Main findings:

  • For 61 countries identified as being in or at high risk of debt distress to achieve debt sustainability, the authors estimate more than $781 billion in debt (net present value) needs to be restructured across all creditor classes.
  • Using a range of historical precedents for the size of relief needed (a reduction from 39 percent to 64 percent of net present value), they estimate that haircuts will have to amount to between $305 billion to $500 billion.
  • The contribution of MDBs to the debt relief efforts can be less burdensome by adopting a “fair” comparability of treatment rule instead of a “flat” rate of debt relief.
  • If all creditors to these 61 countries reduced their present value claims by the same proportion, the World Bank International Development Association (IDA) would bear $20 billion to $32 billion in losses. But under a “fair” comparability of treatment rule, IDA’s contribution would account for only $3.5 billion to $23 billion, depending on the overall debt haircut needed by debtor countries.
  • Considering the “fair” comparability of treatment, other MDBs (excluding IDA) would need to contribute between $33 billion and $75 billion, instead of $53 billion to $87 billion under a flat rate treatment.
  • If all MDBs were to participate in the debt restructuring of 61 countries in debt distress with an overall debt reduction of 39 percent, each dollar contributed by donors for debt relief through MDBs would translate into an additional $7 of total debt relief.

Key policy recommendations:

  • All creditors, including MDBs, should participate in debt relief efforts and accept losses on their outstanding claims under a comparability of treatment rule that incorporates the cost of lending and concessionary elements.
  • To compensate MDB losses, MDBs shareholders should:
    • Revamp and expand existing debt relief initiatives.
    • Consider increasing MDB equity.
    • Revive efforts to establish an international financial transaction tax (IFTT).

The bottom line: Including MDBs in debt relief is crucial to effectively addressing the mounting debt crisis in the Global South. While there are costs associated with providing debt relief, it is a prudent investment for the long-term stability and development of debt-vulnerable nations. Implementing policy options to support MDBs in shouldering these costs will be key to ensuring a sustainable future.