Debt restructuring framework must improve to help distressed countries, Pakistan’s ex-central banker says

Global bodies like the IMF need to step up and improve the framework for sovereign debt financing so that emerging market economies, like Sri Lanka, can get out of their debt distress problems faster.

That’s according to the former governor of the State Bank of Pakistan, the country’s central bank. 

Reza Baqir, currently the global head of sovereign advisory services at Alvarez and Marsal, pointed out that Sri Lanka is still waiting for the International Monetary Fund debt relief to help restore stability as the country grapples with dire economic conditions.

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Sri Lanka “stopped paying its creditors in spring of last year and it’s been close to nine months, and we are still waiting for a meeting of the IMF board,” noted Baqir. “We need a more proactive response from the international financial community.”

When a country gets into debt distress, there needs to be a better financial architecture to get it quickly out of debt distress.

Reza Baqir

ex-central bank governor of Pakistan

Sri Lanka is facing a huge debt burden and runaway inflation which led to severe shortage of essential goods and social unrest last year.

“Sri Lanka’s case, I think, illustrates a broader point right now — that the international frameworks of sovereign debt restructuring leave something to be desired,” Baqir told CNBC’s “Squawk Box Asia” on Monday.

“When a country gets into debt distress, there needs to be a better financial architecture to get it quickly out of debt distress,” he added. 

Anti-government protesters gather to demonstrate outside the president’s office in Colombo, Sri Lanka, on Wednesday, July 13, 2022. Sri Lanka and the International Monetary Fund (IMF) have reached a preliminary agreement on an emergency loan to the crisis-hit country and a formal announcement will be made on Thursday, four sources with direct knowledge of the matter said.

Buddhika Weerasinghe | Bloomberg | Getty Images

Outlook for emerging markets

Baqir also said the outlook for emerging markets “has deteriorated very sharply” over the past two years despite some recent improvement in appetite. The key reason is the rapid rise in public debt, he added.

“Those that have made progress in tightening monetary policy earlier to bring inflation down, those that have a good track record of macroeconomic policy implementation are going to be rewarded by investors,” Baqir said.

“But then many that have high debt and don’t have a good track record of macroeconomic management, they are going to continue to face challenges because the world funding rates are still much higher than they were five years ago.”

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