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Updated February 21, 2023
Sovereign Debt Concerns in Developing Countries
The Coronavirus Disease 2019 (COVID-19) pandemic and
crisis and has continued to rise through the COVID-19
the ongoing conflict in Ukraine has had significant
pandemic. According to World Bank figures, total external
economic and financial consequence for low-income
government debt of low- and middle-income countries
countries. The World Bank estimates that the pandemic led
increased from $1.7 trillion in 2011 to $3.5 trillion in 2021.
to 97 million more people being in poverty in 2020. Several
While the earlier waves of sovereign debt accumulation
countries have already defaulted on their sovereign debt,
consisted primarily of bank loans and bilateral borrowing
and many others are at high levels of debt distress,
from advanced economies and the multilateral development
potentially impeding their ability to support recovery.
banks, recent increases in aggregate sovereign debt are
largely attributable to China’s emergence as a key
The United States is participating in two G20 creditor
developing country creditor and the rising use of private
country-led debt relief initiatives. The Biden
sector bonds to finance developing country public debt.
Administration requested $52 million in FY2022 funds
Both of these trends have raised new challenges in
from Congress to support these efforts. These funds were
resolving sovereign defaults.
appropriated in P.L. 117-328, Consolidated Appropriations
Act, 2023.
China’s Lending to Developing Countries
Since the early 2000s, China has become the largest
Members of Congress have also introduced sovereign debt-
creditor to low-income countries, surpassing a core group
related legislation aimed at improving the transparency of
of traditional donor governments (organized informally as
the scale and scope of creditor countries’ sovereign lending
the Paris Club), the International Monetary Fund (IMF),
(e.g., S. 1169), the Strategic Competition Act of 2021, in
and the World Bank (Figure 1). Unlike the IMF, the World
the 117th Congress. China is now the largest creditor to
Bank, or the 22 countries that compose the Paris Club,
developing countries, and some Members have raised
China rarely discloses the amounts or terms of its bilateral
concerns about the economic and security impacts of
debt agreements. According to one 2019 National Bureau
China’s economic diplomacy. Some Members have also
of Economic Research study, half of China’s official
expressed concerns about the growing complexity of
lending to developing countries is not reported in World
sovereign debt financing and its associated risks.
Bank/IMF debt statistics. China is not a member of the
Paris Club and, until recently, did not participate in
Debt Vulnerabilities
multilateral debt relief initiatives.
The debt stock of low- and middle-income countries rose
on average 5.6% in 2021 to a year-end total of $9 trillion.
Figure 1. China’s Emergence as a Leading Creditor
According to the IMF and the World Bank, a majority –
60% of low-income countries – are in “debt distress,”
meaning that that there is a risk that a country may be
unable to meet its financial obligations and might require
debt restructuring or possibly debt forgiveness.
According to the IMF, as of January 31, 2023 and based on
the most recently published data, 9 countries are in debt
distress, 28 countries are at high risk and 25 countries are at
moderate risk. The IMF also noted that overall borrowing
jumped by 28 percentage points to 256% of GDP in 2020,
with government borrowing accounting for about half of
this increase.
Alongside increased borrowing, recent years have seen an
increase in in sovereign defaults. Since the end of 2019,
Source: Figure created by CRS based on WB IDS Statistics 2022
nine countries (Argentina, Belize, Ghana, Ecuador,
data.
Lebanon, Sri Lanka, Russia, Suriname, and Zambia) have
defaulted on sovereign debt obligations.
While China is participating in multilateral debt
The landscape of sovereign borrowing has changed over the
discussions, including a new sovereign debt roundtable
past few decades. Following a sharp decline after the 2005
chaired by the IMF and India, many U.S. and international
G8-led Multilateral Debt Relief Initiative, sovereign debt
officials are concerned that China’s unwillingness to
began accumulating during the 2007-2009 global financial
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Sovereign Debt Concerns in Developing Countries
provide comparable debt relief treatment is slowing these
process similar to earlier Paris Club debt treatments,
efforts.
including backing by an IMF lending program and
assurances that the debtor will seek treatment from all its
Proliferation of Debt Instruments
creditors, public and private, on comparable terms. Only
Since1989, private international banks reportedly have
three of the eligible countries have requested Common
exchanged distressed loans for tradable bonds at a discount.
Framework debt relief: Chad, Ethiopia, and Zambia. To
Many developing countries also have turned to selling
date however, only Chad has secured an agreement and
bonds in private equity markets, As a result, the bond
importantly, it reschedules rather than cancels payments.
market has become a key source of public financing
globally. Between 2011 and 2019, sovereign bond
Many eligible countries reportedly are also concerned that
financing to low- and middle-income countries tripled
seeking debt restructuring, especially with commercial
(Figure 2).
creditors, will lead to ratings downgrades and reduce their
future access to financing. Moody’s, for example,
Figure 2. External Public/Publically Guaranteed Debt
downgraded Ethiopia’s sovereign bonds, in part due to the
possibility that a Common Framework agreement might
cause private creditor losses.
The risk of private sector debt downgrades has been less of
an issue with the DSSI, which has been limited to official
sector debt. Despite calls from the IMF and others for the
private sector to participate in the DSSI, there has been
little private creditor appetite. The Institute of International
Finance (IIF), an industry group, has argued that a
comprehensive agreement on private sector debt could risk
reducing countries’ access to the private capital markets.
Source: World Bank International Debt Statistics (IDS).
U.S. Debt Relief and the Role of Congress
As the IMF and others note, sovereign debt is the only debt
Congressional authorization is necessary for the United
instrument without a bankruptcy mechanism. In lieu of a
States to participate in multilateral debt relief efforts. Under
formal bankruptcy procedure, the international community
authority first granted by Congress in 1993 (P.L. 103-87),
has relied on contractual solutions for resolving sovereign
an appropriation by Congress of the estimated amount of
debt crises, such as including collective action clauses to
debt relief is required in advance. The FY2022 budget
steer creditor coordination.
requested $52 million for the DSSI and Common
Framework. According to Treasury, this funding was
Debt Service Suspension Initiative
necessary to restructure and lower U.S. interest rates
On April 15, 2020, the G-20 finance ministers, in
charged to the 48 countries that requested payment
conjunction with private creditors, announced a temporary
suspensions under the DSSI before it expired at the end of
debt payment suspension through the end of 2020 for the
December 2021. This would put U.S. interest rates in line
world’s poorest countries, which have been hard-hit by the
with those charged by other G20 official bilateral creditors,
pandemic-related collapse in commodity prices, export
including China, and fund the cost of debt treatments for
revenues, and tourism. Formalized as the Debt Service
poor countries under the Common Framework. Issues for
Suspension Initiative (DSSI), the effort allows for the
Congress
temporary suspension of interest and principal repayments
on G-20 official bilateral loans. Repayment schedules are to
Some in Congress have raised concerns about sovereign
be net present value-neutral, meaning that no debt is
debt risks, notably with respect to the lack of transparency
actually written off, but rather rescheduled to be paid later.
of China’s lending. For example, in the 116th Congress, the
The DSSI was later extended through December 2021.
House passed H.R. 5932, Ensuring Chinese Debt
According to the World Bank, the DSSI delivered more
Transparency Act of 2020, which would have instructed
than $8.9 billion in official debt relief to more than 48 of
U.S. international financial institution representatives to
the 73 eligible countries. Despite appeals from World Bank
“seek to secure greater transparency with respect to the
and IMF leaders, among others, private creditors did not
terms and conditions of China’s financing” of sovereign
participate in the DSSI.
debt by country members of these institutions. Efforts are
also ongoing at the IMF to improve national disclosure of
From Debt Suspension to Debt Forgiveness
sovereign debt loans and obligations.
While DSSI is providing temporary debt restructuring, the
G-20 and the 22 members of the Paris Club, comprising 39
Members may also consider the increased complexity of
creditors (including China), endorsed a new “Common
sovereign debt markets and various public and private
Framework for Debt Treatments beyond the DSSI” in
efforts to improve coordination among creditors. As debt
November 2020 for providing permanent debt forgiveness.
instruments become more diverse and the creditor base
Debt treatment options under this framework include
becomes more fragmented, debt risks and the costs of
extending the duration of sovereign debt and in extreme
restructurings are increasing.
cases, debt write-offs or cancellation. Unlike the DSSI,
Common Framework debt restructuring requires a formal
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Sovereign Debt Concerns in Developing Countries
Martin A. Weiss, Specialist in International Trade and
Finance
IF11880
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