The (un)Common Framework: push comes to shove
The G20 Common Framework somehow assumed that China could behave like Paris Club creditors within the international financial system. The Zambia restructuring is proving that this assumption is overstated for the time being, as the IMF ramps up pressure ahead of the Spring Meetings next week.
The Fund faces a difficult trade-off: approving the review and making disbursements will diminish the incentives for China to start playing ball in the restructuring. Withholding disbursements, on the other hand, lets Zambia bear the full cost of geopolitical blame games despite having implemented all required policies as part of the IMF program.
Uncertainty around the Zambia IMF program
The IMF just reached Staff-Level Agreement on the first review of Zambia’s program, approved in September 2022. As part of every program review when a restructuring is ongoing, the IMF conducts a financing assurances review to ensure that it still has “specific and credible” assurances that the required debt treatment is underway.
Absent any progress in Zambia, it seems difficult for the IMF staff to convince the Board that these assurances are present when there are press reports every other week indicating that China is pushing back on virtually any common practice that forms the thin bedrock of the architecture for sovereign debt restructurings.
For now indeed, the wording of the press release in Zambia seems to imply that the $188m disbursement will be held up unless the country makes significant progress on the restructuring front, such as turning financing assurances from bilateral creditors into a concrete restructuring deal:
Zambia will have access to about US$188 million in financing once the review is approved by IMF Management and formally completed by the IMF Executive Board. To remove any hurdles to the timely completion of the review, Zambia needs official creditors to move forward and reach agreement on a debt treatment in line with the financing assurances they provided in July 2022.
This analysis is further supported by a quote from the Mission Chief for Zambia:
The staff-level agreement is subject to IMF Management approval and Executive Board consideration once the necessary financing assurances have been received. An agreement with official creditors on a debt treatment in line with program parameters would provide the needed financing assurances.
The fundamental ambiguity of the IMF’s wording is that it does not say what else, apart from a restructuring deal, would constitute sufficient financing assurances. This could indicate that, despite trying to apply pressure on China, the IMF wants to give it a temporary face-saving exit as noted by Brad Setser.
It is worth noting that the stalemate we are witnessing now was embedded from the start in the design of the Zambia program, as the commitment to achieve a restructuring before the first program review was included in the memorandum on econonomic and financial policies (MEFP, para. 73):
We are committed to finalizing the MOU with official creditors by the time of the first program review, and reaching agreements on comparable terms with other creditors soon after, by the time of the second review at the latest.
In hindsight, the inclusion of such a commitment in the program strikes me as odd. It had the perverse consequence of giving China a veto over the IMF program and subsequent disbursements – exactly what the IMF’s Lending Into Official Arrears (LIOA) policy is meant to avoid. Making the authorities commit to a specific timeframe weakened from the start the ability of the IMF to use its arrears policies and apply pressure on China.
A delayed reckoning for the Common Framework
Taking a step back, the Zambia stalemate can be considered as a reckoning for the Common Framework as a whole. As I mentioned in a previous blog, the only way to get China on board with this initiative was to give up from the start on the IMF DSA as the bedrock for the negotiations, complementing it with “the participating official creditors’ collective assessment” – whatever this meant in practice.
The statement that was considered as sufficient financing assurances for Zambia by the IMF looks rather vague in hindsight. Especially, creditors said they supported Zambia’s IMF program but did not commit to provide a debt treatment in line with the parameters of this program. It paved the way for China to drag its feet and question any assumption that the IMF made.
In essence, the Common Framework assumed that China would behave like Paris Club creditors, who for decades have turned their financing assurances into restructuring agreements in a timely manner. Experience now tells us that it is anything but true, notably because of differences in the decision making process idiosyncratic to China: no entity is able to commit to a debt treatment on behalf of all stakeholders involved – be it the PBoC, MoF, or policy banks.
This fragmented landscape goes against the very principle of the financing assurances policy whereby the creditor country needs to provide a unified commitment binding for all national entities involved. In that view, Zambia provides a counter-example for recent policy proposals to move the provision of financing assurances after the IMF Board approval, or to assume they have been received by default. The issue is not the timing of financing assurances, rather the fact that China is structurally unable for now to provide assurances in line with what the IMF needs.
Acknowledging this, the IMF is now changing tack, setting up a Global Sovereign Debt Roundtable to try and agree on a set of basic common rules – something which would have come in handy when drafting the “Common” Framework – and ramping up pressure on China at the country level as illustrated by Kristalina Georgieva’s statements in recent weeks.
With this in mind, it will be interesting to watch whether the IMF continues to encourage eligible countries seeking debt treatments to apply for the Common Framework in coming months, absent any improvement of the mechanism.
The potential stalemate comes at the worst time for Zambia, with inflation on the rise and the currency taking a hit. The inability of the IMF to approve the review and move the program forward would reinforce these dynamics while the country has to cope with a challenging global economic environment. Incentives are high, and rightly so, for the IMF to use any lever available and approve the review to keep the program afloat.
As it became clear that China was not playing ball in restructuring negotiations, the IMF hence insisted that Zambia had done all it could and support should not be held back by recalcitrant creditors. It is probably no coincidence, then, that on the same day both the IMF Managing Director and the US Treasury Under Secretary for International Affairs hinted publicly that the IMF might have to lend into arrears to China.
The recent change of tack is best illustrated by this quote from Kristalina Georgieva with Bloomberg:
China has been very slow to recognize that multilateral debt restructuring requires China to play by the rules that are already established. Now is the time for China to demonstrate that they are capable of playing by these rules.
With the IMF Spring Meetings coming up next week, it will be interesting to see how this narrative translates into policy actions, both at the country level in Zambia or the global level with the roundtable.
Finally, it is worth remembering in any case that China’s behavior remains rather unpredictable. It can lead to positive surprises as illustrated a few weeks ago by the provision of textbook financing assurances in Sri Lanka – although we might come to learn that these assurances were worth as much as these provided in Zambia.
This unpredictable behavior in any case begs deeper questions with regards to the international financial system, beyond sovereign debt restructurings. They are illustrated for instance by ongoing debates around the 16th IMF quota review due in 2023: in his remarks outlining the priorities of the US for the IMF meetings, Jay Shambaugh rightly asked if it would be appropriate to give more weight in international institutions to countries which do not behave responsibly in the international financial system, including on debt issues.
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