Good Practices

In Sovereign Debt Borrowing
22 FEB 2021
The pandemic and the resulting collapse in economic activity have significantly increased the risk of debt distress in many countries, especially the poorest ones. A number of initiatives, notably the G20 debt relief for the world’s poorest countries, have been unveiled to avert instances where servicing existing debt would compound and constrain those countries’ response to the crisis. As the debt position of many countries and its long-term sustainability have been extensively scrutinised – and debt premia have increased as a result – the importance of assessing the real need to incur new debts and to improve transparency in sovereign borrowing has been also recognised. Several recent debt scandals confirm that debts sometimes are wrongly incurred, or the purpose of their use is not the appropriate one. The G20 have stressed the importance of transparency (G20 Operational Guidelines for Sustainable Financing) while the Institute of International Finance has recently published a set of voluntary principles to improve transparency in sovereign debt markets (IIF Principles for Debt Transparency). It is clearly important to deal with debt ex post and ensure that countries are able to manage their debt and mitigate the risk of facing distress situations. This issue that has been evident through several crisis and restructuring situations, the most recent ones being Argentina and Ecuador. It is, however, equally important to deal with debt ex ante; this means assessing whether and at which conditions countries should incur in debt obligations. Focusing on debt resolution will only deal when the problems as they occur but it will not attempt to tackle the source of the problem: it cures rather than prevent.