Recent Challenges to the IMF's Role in Sovereign Restructurings

The role of the International Monetary Fund (IMF) in sovereign debt restructurings has been evolving in recent years, driven notably by the emergence of China as a major creditor to developing economies. This chapter discusses challenges faced by the IMF during sovereign debt restructurings and associated policy developments. First, the IMF&s;s debt sustainability analysis usually defines the quantum of debt relief required during sovereign restructurings. However, China has challenged this role in recent cases, raising important questions related to the IMF&s;s methodology and, more broadly, the perimeter of the restructuring. China&s;s concerns have notably revolved around the debt of state-owned enterprises, non-resident holdings of domestic debt, or debt earmarked for the financing of specific infrastructure projects. Early lessons can be drawn from recent restructuring cases (e.g., Zambia and Sri Lanka). Second, the IMF relies on two sets of policies to approve programs for countries undergoing a default or restructuring: financing assurances and arrears policies. These two sets of policies had been designed to fit the specificities of the Paris Club, including traditional Western bilateral creditors. China&s;s emergence in the creditor landscape and its inability to comply with these policies have caused significant delays in the approval of IMF programs during restructurings (e.g., Zambia). This led the IMF to approve a reform of these policies, which will facilitate China&s;s involvement, building on recent experience in Suriname and Sri Lanka. Third, the IMF&s;s role regarding intercreditor issues is indirect but crucial. In principle, the IMF expresses a view on the overall quantum of debt relief, and not on the burden allocation across creditor classes. However, the IMF relies on the comparability of treatment when approving programs, for instance, to support the assumption that non-Paris Club bilateral creditors will consent to a comparable debt treatment. Finally, in 2024, the IMF leaned toward a stronger role in the enforcement of comparability of treatment provisions: it applied a strict policy regarding arrears arising from the triggering of such comparability provisions.