Suriname: blurred lines between IMF policies
In 2021 the IMF approved a program under the Extended Fund Facility for Suriname. The country’s debt was unsustainable and needed to be restructured, yet the IMF let the program move forward without specific and credible financing assurances from major bilateral creditors, namely India and China.
This led Brent Neiman at the US Treasury to point out recently the “unusual application” by the IMF of its own policies in that specific case. In this blog post I try to understand how the IMF indeed managed to approve the Suriname program in 2021, what happened since then as the program went off-track, and what are some interesting takeaways for ongoing restructurings such as Zambia and Sri Lanka.
To the best of my understanding, it appears the IMF could not satisfy the textbook financing assurances policy with regards to China and India. Instead, it relied on the arrears policies to make assumptions on the restructuring of Chinese and Indian claims, hoping the comparability of treatment principle of the Paris Club and rational incentives would force both countries to participate in the restructuring – something that has not yet materialized.
Financing assurances and arrears policies: the theory
As discussed earlier in detail for a blog post about Sri Lanka, the IMF has two different sets of policies which need to be satisfied before a UCT program approval: financing assurances, and the arrears policies.
I won’t go too deep into the weeds again, but the challenges are the following with bilateral creditors if we simplify slightly:
Financing assurances: when debt is unsustainable, the IMF needs a firm commitment from relevant bilateral creditors to provide a debt treatment in line with the program parameters.
Arrears: either they are tentatively cleared by the restructuring commitment described above, or there is a representative Paris Club agreement, or relevant bilateral creditors need to provide consent to Fund financing despite the arrears. See box 2 here for more details about the Lending Into Official Arrears (LIOA) policy.
A key idea is that in theory these are two related but different issues, as noted by Daniel Munevar: one policy can be satisfied when the other is not, e.g. a consent to Fund financing despite arrears should in theory not equate to the provision of financing assurances.
Concretely in the case of Suriname: if a major bilateral creditor consents to financing despite its arrears, the LIOA policy is satisfied. However, if debt remains unsustainable without a restructuring of these claims, then the financing assurances policy should not be considered as satisfied.
Whatever happened in Suriname?
In April 2021, the IMF reached a Staff-Level Agreement with Suriname on a three-year EFF program. The press release said:
Board would consider approval of this agreement in the coming weeks, after the […] receipt of the necessary financing assurances. Debt relief from Suriname’s official bilateral partners and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps.
This meant that the country was expected to engage with its bilateral creditors, present them with the economic situation and tentative IMF program parameters, then ask for a commitment from each creditor to provide debt treatment in line with these parameters.
Who are these bilateral creditors? According to the IMF, mostly China at 17% of GDP, followed by the Paris Club in a much smaller amount (2% of GDP) and then India. A takeaway from this breakdown is that there is no way for the IMF to consider an agreement with the Paris Club as representative under the LIOA policy and deem away Chinese claims.
Source: IMF, 2021
On December 22, 2021, the IMF board approved the program, allowing a first disbursement to avert a deeper economic crisis, and the press release did not mention whether the IMF had indeed received the financing assurances. It just said:
To achieve debt sustainability, the authorities are negotiating debt relief from private and official creditors in line with program parameters.
Then the staff report provided more information. On arrears, it said:
Paris Club creditors and China have provided their consent to proceeding with Fund financing. India has requested more time to consider consenting to Fund financing notwithstanding these arrears.
That is a first roadblock: India did not consent to IMF financing despite the arrears. The only textbook option, looking at the LIOA policy, would be to deem away these arrears to India through a representative Paris Club agreement, but the IMF could not do that since the Paris Club represents such a small share of the claims.
Bottom line, either the IMF bent the rule slightly and made the judgement call that India would consent afterwards, or maybe it considered that arrears to India could be deemed away by the sum of Paris Club and Chinese claims for which consent had been provided. Coincidently, in the latest update of the Arrears Policies the IMF details how non-Paris Club debt can count to determine the representativeness of an agreement under the Common Framework process (para. 53).
Then onto financing assurances, the staff report first indicates:
Financing assurances have been received from the Paris Club in anticipation of an Agreed Minute. China and India have also provided assurances, although less specific than those provided by the Paris Club creditors, that they intend to work with Suriname towards a debt restructuring that will restore sustainability.
This means that at that point the textbook financing assurances policy (requiring “credible and specific” commitments) could not be satisfied: there was no way that debt could be considered as prospectively sustainable, since China represents too big of a share in the debt stock. Assuming China did not restructure, this would have required an outsized contribution from other creditors to get all DSA indicators to go back down below their respective thresholds.
But here comes the tricky part, as the report also says the following:
On the basis of these assurances, together with the Surinamese authorities’ commitment to continuing working with all creditors to achieve a debt treatment consistent with program parameters, staff expect that Suriname’s debt to China and India will be treated on comparable terms with other bilateral creditors.
In essence, the IMF could consider that the program was fully financed and debt would return to a sustainable level by making the assumption that China and India would accept a restructuring which they had explicitly refused to commit to in a specific and credible manner. Strange.
Fast forward to March 2022, when the IMF approved the first review of the program, including a specific review of financing assurances. The staff report says:
Paris Club creditors have provided specific and credible financing assurances indicating that they will provide debt relief in line with program parameters. China and India continue to consent to the use of Fund resources despite Suriname running arrears on their official debt. Conditional on the expected implementation of debt treatments on both official and private debt, Suriname’s debt is sustainable on a forward-looking basis.
In other news nothing changed apart from the fact that India was now consenting to Fund financing despite the arrears, meaning that at least the arrears policies were entirely satisfied. The unusual application of the financing assurances policy continued, enabling an additional disbursement.
The IMF program goes off-track
In May 2022, the IMF reached a Staff-Level Agreement on the second review of the program, subject to approval by the Fund’s Executive Board. The press release said nothing on arrears or financing assurances.
It appears the second review did not make it to the board as the program went off-track, and hence the staff report was not published. It is important to stress that the program did not necessarily go off-track because of the arrears and financing assurances shenanigans. Indeed it was also reported in September 2022 that the authorities were trying to renegotiate the terms of the EFF.
In parallel, there were significant roadblocks in the negotiations with private creditors. The IMF refuses for now to incorporate the economic upside of recent oil discoveries in its macro-fiscal framework, considering that it will not certainly materialize – exploration is still underway. Private creditors on the other hand do not want to accept the required relief considering the capacity to repay of Suriname will likely increase significantly in coming years. As Lee Buchheit once said, creditor will usually argue that principal haircuts, like true love, are forever.
To bridge the expectation gap, the government made a restructuring proposal to investors combining a fixed income leg with a value-recovery mechanism (VRM). This VRM fits in the broader species of state-contingent debt instruments which have a long history of being disliked by investors for various reasons related e.g. to liquidity, pricing or index-inclusion.
The Suriname VRM would be even more complex than traditional oil warrants because its financial characteristics depend not only on the price of oil but also on the binary outcome of whether the country will actually be able to pump oil out of the ground and get revenues from it. As a result, negotiations appear to have stalled, and at least one restructuring proposal was formally rejected by bondholders.
Due to all these reasons, it is now unclear what will happen of Suriname’s program. The IMF spokesperson said in a press briefing in September 2022 that “It will require, you know, a lot of determination and hard work to get it back on track.” The IMF Managing Director signalled the next day the Fund’s openness to “adapt” the program in light of the latest economic developments.
Now back to our focal point: what really happened in the first place when it comes to the arrears policies and financing assurances?
A tale of incentives and friendly noises
Jeromin Zettelmeyer, who recently left his position as Deputy Director of the Strategy and Policy Review Department at the IMF, provided additional context on the Suriname case in a podcast about the latest update of the IMF Arrears Policies – quotes in this section are from the podcast and transcription errors are all mine. It is a rare and welcome deep dive into the inner workings of the IMF and the way it applies its arrears and financing assurances policies concretely.
Basically Jeromin Zettelmeyer indicates that the decision to lend in Suriname was based on two defining factors.
The first factor was so-called “friendly noises” that China and India gave to the IMF staff, e.g. through their respective chairs at the Executive Board:
We decided to lend to Suriname because we had sufficient confidence that although China and India had not committed to restructuring, they had given us sort of friendly noises that they would restructure once the private sector restructuring was underway or completed, and we were sufficiently confident that the restructuring would actually happen within the program period to conclude that debt is sustainable.
These friendly noises are probably what the IMF’s initial Staff Report referred to as assurances that were “less specific” than the Paris Club ones. However, this confirms to some extent the lax application of the financing assurances policy in the case of Suriname, since these noises cannot be assessed to be “credible and specific” as required in the textbook.
Interestingly Jeromin Zettelmeyer discusses the assumptions made by the IMF on what the Chinese and Indian restructurings would look like:
In the sustainability analysis we knew at that point what the Paris Club had offered and so when we concluded that probably debt is sustainable yes we made the assumption that this [NB: China and India restructuring] would be on comparable terms. Now do we have the instruments to enforce it? Not really, except that we will have to let the program go off track unless the restructuring happens.
This confirms the understanding stemming from Staff Reports that the IMF decided to shift the burden to the Paris Club in terms of ensuring the participation of China or India in the restructuring, acknowledging that the IMF lacks enforcement mechanisms for these non-traditional creditors. Unfortunately, this means that the only card left for the IMF afterwards – letting the program go off-track – probably hurts the country more than it hurts the holdout creditors.
Finally, the second factor which led the IMF to approve the program is the following, according to Jeromin Zettelmeyer:
The question really was: will China and India have sufficient incentives to actually do the restructuring. And in this case we concluded – and this might be a case by case decision, so it’s not clear that because it was the answer in Suriname it needs to be the answer in other cases – that yes this is probably the case. The reason is that if they don’t restructure within the program period it’s really not clear they will get their money back.
This is particularly interesting. As far as I understand, financing assurances policies are required especially because even when it is in their theoretical interest to restructure, some creditors might hold out and then engage in disruptive behaviors which can derail IMF programs or restructuring negotiations for years down the road.
Concluding that we can bypass financing assurances requirements by assuming creditors will behave in an economically rational way might underestimate the importance of other factors, not least geopolitical ones, which can be used by creditors to enforce their claims at a later stage in spite of the requirement for comparability of treatment.
The Paris Club remains cautious
An additional interesting aspect of the Suriname story is the attitude of the Paris Club since the phrasing of IMF Staff Reports on Suriname seems to indicate that the Fund counts on the strength of the Club’s comparability of treatment principle to make China and India participate in the restructuring. And, as noted by Jeromin Zettelmeyer, Paris Club creditors were rather unhappy with the whole process:
If non-Paris Club creditors can simply consent to lending into arrears then this sort of lowers the incentive for them to actually come up and participate in the restructuring.
As a result, when the Paris Club provided a debt treatment to Suriname in June 2022 it chose a two-step approach. A first treatment would cover the IMF program period, and the treatment of claims falling due beyond 2025 would only happen if non-participating creditors had actually participated in the restructuring in the meantime. Here’s the wording from the Paris Club press release:
Additionally, based on a future assessment that the Republic of Suriname has fulfilled all its commitments under the agreement, notably the comparability of treatment, and maintaining sound macroeconomic policies consistent with long-term debt sustainability, Paris Club creditors are committed to reschedule all maturities in capital falling due starting on 1 January, 2025.
The prudence of the Paris Club with regards to Chinese arrears seems warranted to some extent. Indeed, the IMF writes the following in footnote 8 of the first program review:
In February 2022, China EXIM withdrew US$1.4 million from a US$2.9 million repayment reserve account that was set up offshore as a credit enhancement for a US$94 million loan to Suriname. […] Payment from the repayment reserve account for the Telesur loan will be reflected in the eventual debt restructuring with China EXIM to ensure there is comparability of treatment with other official creditors.
(As a side note, this confirms the rule that the interesting bits of IMF reports are always in the footnotes.)
This shows that part of the Chinese arrears could end up being serviced during the program period, threatening the comparability of treatment and hence the Paris Club treatment after 2025. The footnote also says that the government confirmed to the IMF this resource account was the only occurence of collateralisation in the debt stock.
The use of escrow or resource accounts has been largely documented in the recent “How China Lends” paper by Anna Gelpern and colleagues, and appears to be a routine way for Chinese policy banks to increase their recovery values when loans go south. In turn, this makes the enforcement of restructuring commitments more difficult and complicates the application of policies and principles such as financing assurances and comparability of treatment.
Now the interesting point about this is that, as noted by Diego Rivetti, the Paris Club has never withdrawn a debt treatment due to a breach of the comparability of treatment principle. The reliance of the IMF on this principle for its financing assurances, combined with the cautious two-step Paris Club deal and the (partial) payment of Chinese arrears was setting the scene for a perfect storm which could have made Suriname the first country to have its Paris Club treatment cancelled for a breach of the comparability of treatment, had the program stayed on track. This will be a major development to watch if and when the country restarts the program.
The way forward
The main takeaway from Suriname is hence probably that what works for Paris Club creditors or bondholders does not necessarily work for other lenders like China, and this includes relying on a nod or friendly noises to approve a program when debt is not sustainable – a fact which apparently we are learning the hard way in Zambia too.
It appears from public information available on the Suriname IMF program that the arrears policies were seen as a way to override the requirement for a strict application of the financing assurances policies. This could become an incentive for countries to wait until push comes to shove and fall into arrears, as Jeromin Zettelmeyer nails down with a tad of euphemism, again in the same podcast:
This is a little bit of an issue in the future because it can basically weaken the incentive for official creditors to give us restructuring assurances ex ante.
This mechanism is at odds with the prevailing view in the literature and policy circles that sovereign debt restructurings should be treated preemptively rather than post-defaults. As showed by Tamon Asonuma and Christoph Trebesch, preemptive restructurings “have lower haircuts, are quicker to negotiate, and see lower output losses”.
With restructuring negotiations coming to a halt or stalling in many landmark cases such as Zambia, policymakers are realizing the importance of the arrears and financing assurances policies and the probable need to make them fit for an ever-changing creditor landscape, as illustrated again in Brent Neiman’s speech:
Details about financing assurances – their form, scale, provenance, etc. – should be more transparently reported and tracked in staff reports.
It is a welcome reckoning, but now comes the harder part of making concrete policy proposals to remove the sand in the gears of the international financial architecture. There have been several contributions to the public debate recently, e.g. by Gabriel Sterne, Jill Dauchy or Sean Hagan, and I think a middle ground can be found between a complete revamp of the policies and using them as they are.
Reforms could include taking into account the track record of countries to define the level of commitment to debt treatment required from them before approving a program, or seeking assurances at a more granular level for each lending entity (e.g. policy banks) within a single creditor country – something which to the best of my knowledge is not written in any IMF official document. I intend to expand on these policy proposals in upcoming blog posts.
It comes down to the timing
Finally, while the focus of this post was on IMF policies, it appears that a defining factor of the stalemate in Suriname’s negotiations was the perennial question of the timing of sovereign debt restructurings among different classes of creditors. Talking about China and India, Jeromin Zettelmeyer said for instance that “one of the reasons they wanted to wait is because they wanted to make sure that the private creditors would restructure.”
This echoes recent policy debates around the timeframe of the G20 Common Framework which does not involve private creditors until after a deal has been struck with bilateral official creditors. To break the stalemate in all these cases, there has notably been renewed interest for so-called Most Preferred Creditor (MPC) clauses, as discussed by Lee Buchheit and Mitu Gulati recently in the FT: to be continued.
I am grateful to Mathilde Gassies and Teal Emery for valuable comments.
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