Indermit Gill, the chief economist at the World Bank, is urging new strategies to deal with the growing debt issue that is affecting many nations, including measures to take into account domestic borrowing when determining a country’s debt sustainability.

According to Gill, the Common Framework established by the Group of 20 major economies to aid the poorest nations had only produced glacial progress because it failed to take into account the 61% of external debt owned by private creditors in developing countries—a much higher percentage than in previous decades.

At the height of the COVID-19 pandemic in late 2020, only four nations—Zambia, Chad, Ethiopia, and Ghana—applied for relief through the G20 mechanism, despite the IMF’s estimate that a much larger number—60% of low-income nations—are in or at high risk of debt distress.

Only Chad has negotiated a debt relief agreement with its creditors, and it excludes any debt reduction in real terms.

As in the 1980s, rising interest rates in the United States and other developed nations would cause money to continue to flow out of emerging markets for a while, which, according to Gill in an interview this week, would lead to “more train wrecks.”

“Debt levels are already starting to hurt prospects, getting them into the wrong kind of spiral,” he said ahead of a World Bank seminar on debt on Wednesday. “Many of these countries are in debt crisis already. A country like Egypt is under water.”

In the toughest language uttered by a World Bank representative, he argued that the Common Framework should be replaced. It’s not the proper equipment.

For instance, about two-thirds of Ghana’s external debt is held privately, but the framework is concentrated on official Paris Club creditors and more recent lenders like China, who is currently the largest sovereign creditor in the world. He said that it lacked standard guidelines for handling nations’ debts.

He claimed that although debtor countries and business sector participants were included in a new sovereign debt roundtable established to address difficulties in the debt relief process, it produced only minor progress.

According to IMF officials, China and other participants came to the consensus that multilateral development banks could deliver positive net flows of loans and grants to nations in need rather than taking “haircuts.”

Gill, however, asserted that given that the meeting was not meant to serve as a decision-making tool, China probably did not view that as obligatory.

Brady bonds, which are sovereign debt securities backed by U.S. Treasuries and issued during the 1980s financial crisis, may be able to address some of the flaws, according to Gill, who also pointed out that the fact that those bonds have been fully retired indicates their success.

One major problem persisted in the way the IMF and the World Bank evaluated the debt sustainability of nations without taking into account domestic borrowing, which hid excessive amounts of borrowing.

According to Gill, this occurred in part as a result of developing nations expanding their domestic financial sectors without accompanying long-term fiscal frameworks.

“Suddenly your assessment tool, which is only looking at assuming that these guys can only borrow abroad, is no longer appropriate,” he said.

(Adapted from USNews.com)

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