Debt restructuring for commodity exporters

THE world is in the midst of a debt crisis. A recent report estimates that 61 emerging-market and developing economies – nearly one-third of the International Monetary Fund’s (IMF) member countries – are facing debt distress. The Group of 20’s Common Framework for Debt Treatments, which aims to help low-income countries restructure their sovereign debts, was supposed to prevent this crisis from spiralling out of control. But progress so far has been slow and uneven.

Many of the world’s debt-distressed countries are in Africa. Chad, for example, restructured its debt in 2021, the first to do so under the Common Framework. Zambia defaulted on its foreign debt in 2020 but has not convinced its creditors to agree on how to restructure its debt, partly because of China’s refusal to join the Paris Club. Ghana, which defaulted on its external debts in December 2022, appears to be on its way to a successful restructuring. Meanwhile, negotiations between Ethiopia and its creditors, delayed due to the country’s civil war, may resume soon. And Angola, which agreed to a three-year debt-relief package in September 2020, is still in trouble.

One of the main challenges facing debt-distressed developing countries is that they remain vulnerable to external shocks such as oil price volatility. Suppose, for example, that the IMF supports a debt restructuring deal in which the creditors agree to a big write-down, and the indebted country agrees to strengthen its budget balance. Even if these measures are enough to stabilise the country’s debt-to-gross domestic product (GDP) ratio today, the chances of an unforeseeable shock undermining its debt position in the future are worryingly high.