Wholesale Debt Relief: Do LICs Need a New Package?

Abstract

About three decades ago, many low-income countries (LICs) were bailed out from debt crises through the Heavily Indebted Poor Countries (HIPCs) debt relief initiative. Today, many of those countries are again facing renewed debt vulnerabilities, prompting critical questions. Are LICs on the brink of another systemic debt crisis? Is another HIPC-style debt relief package the solution? This paper compares the debt problems of LICs today with the situation on the eve of the HIPC initiative and shows that, despite high vulnerabilities, debt burden indicators today are not as dangerous as they were in the mid-1990s. Nevertheless, if current trends persist and in the absence of policy reforms to address LICs' debt problems, we could face another systemic debt crisis in LICs within the near to medium term. If such a crisis materialises, today's global financial architecture would pose significant challenges to mobilise and deliver wholesale debt relief for LICs. Therefore, a pragmatic, case-specific approach to restructuring pockets of localised debt crisis in LICs could prove a more effective approach to address the debt crisis today.