IMF: developing countries face mounting debt problems

"Pivoting away" now could mean "the fight against inflation may not succeed," IMF chief economist Pierre-Olivier Gourinchas said. But further tightening could mean more hardship for developing countries as banks further limit foreign lending, increasing the cost of borrowing.

Debt distress will be top of the agenda at the annual spring meetings of the World Bank and the IMF, which take place in Washington from 10 to 16 April.

Many least-developed countries have to pay double-digit interest rates on loans needed to buy food and fuel on the global dollar market. In sub-Saharan Africa "we see a strong funding squeeze" along with "a surge in food and energy prices," said Gourinchas

Worsening the outlook further is a wave of maturing bonds which are imminent. Repayments on international bonds in emerging markets will reach €27bn in 2024, significantly higher than the €7.6bn for this year. If the lack of access to global capital markets in low-income countries persists, this could lead to countries defaulting on their loans.

The IMF's resilience and sustainability trust — a lending facility for climate and pandemic preparedness for low-income and some middle-income nations — can offer some respite.

But despite receiving financial aid from multilateral and bilateral lenders to navigate the fallout from the Covid-19 pandemic, floods and high food and energy prices, countries like Kenya, Tunisia and Pakistan face severe debt problems, and many say deeper reform is needed to help low-income countries weather the storm.

Tunisia faces a "real possibility" of bankruptcy in the short-term, according to rating agency Fitch. The country's president Kais Saied in October reached a tentative agreement for a €1.9bn IMF bail-out package but last week rejected it after the fund pushed his government to remove state subsidies on basic goods and fuel.

"Regarding the IMF, foreign diktats that will lead to more poverty are unacceptable," Saied told reporters on Thursday. "Social peace is not a game." In December 2010, inflated food prices helped trigger the Tunisian revolution, which led to hundreds of deaths and the overthrow of longtime president Zine El Abidine Ben Ali.

In chapter three of its report, the IMF suggests fiscal consolidation can reduce debt burdens, but only if the economy is growing and the general economic outlook is good. It also suggests countries are too reluctant to restructure their debts — which the IMF report shows is a good way to reduce the cost of debt — out of fear of being seen as unreliable by foreign investors.

Sri Lanka, Zambia, and Ghana have already defaulted on their overseas debt and are currently negotiating debt restructuring with foreign creditors, but it is often a slow and painful process and suffers from a lack of a common framework for debt resolution. This week countries will debate how to come up with a working system, but so far, progress has been slow.