World Bank worries about debt distress in developing economies

.Prescribes measures for greater transparency

The World Bank has expressed concern about high risk of debt distress in developing economies, calling for greater transparency, and saying: “It’s time to get a better handle on debt.”

The Bank in its latest Blog is particularly worried about the scale of uncertainty surrounding public debt, saying: “More than half of all low-income countries are already in debt distress or at high risk of it.”

It added that “Debt in low-and middle-income economies has climbed to levels without precedent in modern times. Significant investment will be needed to sustain economic growth in the aftermath of Covid-19.”

At the current level of N3.61 trillion, Nigeria’s Minister of Finance, Budget, and National Planning, Mrs. Zainab Ahmed, on Wednesday, assured that the country’s debt remains sustainable, despite that debt service is 21% of total expenditure and 34% of total revenues.

However, the World Bank noted that public debt of low-income economies remains difficult to pin down either because data continue to be incompletely reported in official statistics or are hidden through confidentiality clauses.

It insists that greater debt transparency can work in two ways – allows governments to make informed decisions about future borrowing and reduces its cost in the long run, and makes it easier for citizens to hold governments accountable for the debt they take on.

Also, accurate and comprehensive debt records benefit creditors, and enable them to fully assess whether a country’s debt is sustainable. They are also able to price debt instruments more accurately as well as facilitate faster and more efficient debt restructurings faster.

More than half of all low-income countries are already in debt distress or at high risk of it.

Three areas of concern

The World Bank in its new research identified three main areas of concern:

Domestic debt – fiscal arrears typically go unreported because accrual-based accounting is not implemented in low-income developed countries. Moreover, only 41% of these countries use market-based auctions as the principal vehicle for issuing domestic debt—and those that use auctions divulge only spotty information to investors.

Resource-backed loans – which use future revenue streams as collateral, with most of these loans left out from statistics because they are not recognized by the debtor country or are contracted off budget. In addition, they often carry steeper interest rates than comparable, non-collateralized financing sources.

Nonmarketable external debt – Information on trading and restructuring of commercial loans is limited. Some central bank instruments may also generate “debt surprises” or dilute the rights of creditors, as in the case of unreported foreign-exchange deposits or over-collateralized repos with own securities.

Improving debt transparency

To improve debt transparency, the Bank urged developing economies to:

  • Make the needed investments in capacity and systems to produce accurate debt data. An annual debt publication should include core public and publicly guaranteed debt statistics at the general government level, including information on contracted individual debt instruments.
  • Make the legal framework more conducive to transparency by establishing clear debt-authorization provisions and require the disclosure of public debt information, regulating its content and frequency. It should also provide a list of permitted debt instruments, transactions, or sources of funding; and require regular audits of outstanding debt.
  • Adopt market-based issuing mechanisms for domestic debt. To promote reforms in this area, the World Bank has recently launched a tool to track the transparency of domestic government security issuances.
  • Develop and adopt a strict analytical and monitoring process for approval and implementation of resource-backed loans. This should include a careful assessment of how sustainability might be affected; a check that the proposed terms and conditions account fairly for the value of the security given. Also, the legal and technical dimensions of the proposed structure are fully taken into account; and careful assessment of how granting collateral might impact other financing, in the context of the country’s debt-management strategy.

Finally, the Bank said international financial institutions are also crucial to good outcomes on debt transparency and sustainability, adding that global practices for data collection on debt ought to be standardized and consolidated.

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