The first necessity in debt relief

As poorer nations seek help for rising debts during the pandemic, global creditors insist even more on honesty in financial data. Truthfulness has become a lubricant for debt forbearance.

The logo of the International Monetary Fund at its headquarters in Washington.

In war, as the saying goes, truth is often the first casualty. During the pandemic and its economic shocks, however, truth has become a blessing for some. Take the African country of Chad. When its debt levels grew too onerous late last year, it was forthcoming with creditors about its finances. By February, the International Monetary Fund (IMF) agreed to loan it $560 million. In return, Chad promised to improve its “debt transparency.”

For poor countries with rising foreign debts, honesty in financial data has become a necessity if they expect credit relief. Even before the pandemic, nearly half of low-income countries were already in debt trouble. Now with the worst recession in peacetime since the Great Depression, many big borrowers have either defaulted, such as Lebanon and Zambia, or are at risk of doing so. For Africa, its average ratio of debt to gross domestic product is expected to rise by 10 to 15 percentage points this year, up from around 60% before the pandemic. Brazil’s public debt is higher than its GDP.

But creditors, whether private or government, often doubt official financial figures, especially about loans from China that are generally not published. The value of openness in governance has never been more important. Last April, the Group of 20, representing the world’s richest nations, agreed to freeze the debt obligations of some 73 countries. More than 40 have taken advantage of the offer – knowing that international creditors such as the IMF and its sister organization, the World Bank, would insist on better disclosure of data.

With the G-20’s window for debt leniency closing in June, the group has again hinted at fresh relief. This time it might come through loans that rely on the IMF’s own currency, known as “special drawing rights.” And again, the G-20 is stressing financial probity.

Any debt relief for African countries would require a credible commitment to bold governance reforms, states Akinwumi Adesina, president of the African Development Bank Group, in a new report. “The nexus between governance and [economic] growth is the right focus for putting Africa on a sustainable debt path and forestalling any need for a future debt relief,” he wrote.

Debt transparency can play a critical role in reducing the cycles of boom and bust in indebtedness, write Ceyla Pazarbasioglu of the IMF and Carmen Reinhart of the World Bank in a Bloomberg commentary. “Transparency is a global public good,” they state. It helps create trust among creditors. It may also help lift the pandemic-hit economies of poorer nations. Many, like Chad, have already seen the benefits of honesty.

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