EDITORIAL: A senior official of the World Bank has suggested changes in the laws of sovereign debts so that the governments should have more control to manage crises and restructure debt. The argument is relevant to the current global crisis where a large number of poor and low middle income countries are in a deep financial distress.
Some have defaulted on debts and others are on the verge of default. The social cost of sovereign default is very heavy for energy importing countries — case in hand is Sri Lanka’s. The falling global growth and rising interest rates are increasing the debt stress while the available mechanisms to tackle such socioeconomic crisis are missing. That calls for rethinking to create room for countries to withstand such torrential pressures.
The economies started coming into deficits after the pandemic hit the world. The big and rich economies paid huge handouts to people for staying home while ensuring certain consumption for economic wheels to keep on churning.
When all supply of money started unfolding in the form of higher demand, the commodities went into the super cycle and the situation worsened by the Ukraine war. There are many exogenous factors that are bringing many economies to the brink. For instance, Sri Lanka’s economy was badly hit by a big fall in tourism during the pandemic and the country could not withstand the debt burden and the economy crippled in the commodity super cycle.
The developed world came up with common framework debt relief plan. However, not much was delivered back then. The World Bank official argued that it’s time to make it useful by bringing some key changes in it; one of which is in relation to legal changes in bond contracts where lenders have a legal duty to cooperate in good faith in restructuring of a loan.
That is important as debt stress at times has high social costs on the inhabitants of a defaulting country. Then all sovereign debts should limit how much a creditor can collect through lawsuits outside a collective action. This is to limit the vulture funds out from the practice of opportunity seeking. They see the funds’ performance while the larger social economic implications are totally ignored.
He further argued that the Western countries should not treat Chinese loans as different from the others and there are cases where a debtor country is not being given concessions on paying loans back to China. Sri Lank had Chinese loans. Pakistan has similar issues. Such discrimination puts these countries into a tight spot at a time when the economic vulnerabilities are at the peak.
The governments have a compelling public interest to adopt legislation to end the imbalances. It is in the larger interest of world to restructure the debts of falling economies while the world is going through a tough economic patch. There could be cases of using the funds for feeding corrupt elite. For having such checks, the IMF and WB frameworks could be altered to the needs of borrowers and let the economies have a few years plan to recoup.
Copyright Business Recorder, 2022
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