A multilateral debt relief program providing targeted assistance to low-income countries with high debt levels needs to be considered on a priority basis even as it is incumbent upon the International Monetary Fund (IMF) and the World Bank to do more for countries in debt distress, Reserve Bank of India Governor, Shaktikanta Das has said. He was addressing the “G20 Finance Track National Event” in Mumbai.

In his address, the RBI governor said, “Recent fault lines in global cooperation have led to under-provisioning of global public goods and erosion of economic welfare.”

“...the lack of timely financial support and creditor cooperation can explain, even if partly, the rising debt stress in some developing economies. High and unsustainable debt levels have severely constrained many countries, limiting their fiscal capacity.”

The Governor observed that while the G20-led initiatives such as the Common Framework (CF) for debt treatment and the Debt Service Suspension Initiative (DSSI) have been discussed intensely, significant progress beyond these have to be achieved.

Three suggestions

“I would like to make three specific suggestions in this context. First, it is essential that Debt Sustainability Analysis (DSA) for countries is realistic on growth, and fiscal projections are fully founded on accurate and comprehensive debt data... A global debt data-sharing platform can help in this regard. Establishing such a platform could be very challenging and may take several years. In the interregnum, therefore, we may examine the possibility of constructing suitable proxies for debt flows,” Das said.

Such proxies may be derived from data on capital flows and locational banking statistics from sources such as the Institute of International Finance (IIF) and the Bank for International Settlements (BIS).

Second, a multilateral debt relief program providing targeted assistance to low-income countries with high debt levels needs to be considered on a priority basis, the Governor said.

He opined that, “This initiative can be designed with a clear focus on utilisation of debt relief for sustainable development projects and poverty reduction efforts. To this end, instruments such as debt-for-development swaps and green debt relief programs could be employed.”

Third, the crucial role of the International Monetary Fund (IMF) and the World Bank in addressing global debt vulnerabilities cannot be overstated, Das said.

The Governor emphasised that, “These institutions are at the centre of international monetary and financial system. Hence it is incumbent upon them to do more for countries in debt distress. At present, the IMF’s precautionary programmes such as the Precautionary Lending Line are available for countries with sound macro-fundamentals; however, there is little reason for countries with strong macro-fundamentals to seek Precautionary Lines.”

Further, Stand-By Arrangements (SBAs) are offered for countries with a balance-of-payments crisis; but SBAs come with performance benchmarks and the attendant stigma.

Focussed corrective measures

He underscored that, “This is an important issue, as the recent experience shows how the perceived stigma of and/or lack of access to IMF programmes can cause countries to seek support from other lenders rather than the IMF, with debt sustainability consequences.“

“It may be helpful if programs can be designed with less conditionality for countries with macro-fundamentals that are not sound but reasonably resilient, if they are not marred by balance-of-payments stress.”

Das stressed that corrective measures, including financing, should be put in place in a timely, non-stigmatised and more open access basis. For this purpose, a bigger and stronger IMF that is capable of managing the levels of country risk assumes crucial importance.

“Since the IMF’s support is linked to the quota size of countries, the 16th general review of quotas and its attendant requirements, including governance reform, need to be completed expeditiously.

“Besides enhancing the legitimacy of the IMF in its oversight of the international monetary and financial system, this will increase traction for the IMF’s policy advice. We must not allow the burden of debt to stifle the potential for global growth,” Das said.

comment COMMENT NOW