• Blames model for slow pace of efforts to deal with debt mountain
• Points at debt issues in Zambia, Sri Lanka, Ghana
• Adds current model ‘too lopsided’ in favour of creditors

The World Bank stated that the existing model of debt restructuring is outdated and needs to change as the efforts to deal with mounting debts have proven to be too slow in countries such as Zambia, Sri Lanka, and Ghana.

In an interview with Financial Times, World Bank Chief Economist Indermit Gill said that the existing framework for dealing with unsustainable debt burdens is no longer fit for the purpose and “needs to change”. 

“We are applying a restructuring model that was devised for another time,” he said, adding that the current system was “too little, too late” for countries in danger of default and “too lopsided” in favour of commercial creditors. 

He said that the surge in global borrowing costs, along with the strong dollar and high inflation, have made it hard for some developing countries to meet repayments on both foreign and local currency debts. 

The World Bank Chief Economist has thus called for an urgent overhaul of the system for dealing with unsustainable debt, as the institution warned of a coming wave of sovereign defaults by developing countries.

The World Bank has warned that countries are increasingly struggling under soaring debt servicing costs and the strains on public finances caused by multiple crises, including the pandemic and Russia’s war in Ukraine. 

He said that poor global growth makes it even more urgent to tackle the issue now. “Our best forecast for next year is a third lower than it was a few months ago, and 2024 doesn’t look a lot better,” he added.

Critics say efforts to deal with mounting debts have moved too slowly in cases such as Zambia, Sri Lanka, and Ghana, which this week became the latest developing economy to default.

“You can have long periods [between problems arising and being resolved] in which very bad things can happen,” Gill said, as it took Zambia almost two years after defaulting to secure an IMF loan. 

The World Bank Chief Economist blamed the lack of a set of globally-agreed standards for the delays, and said dealing with defaults and restructurings on a case-by-case basis was creating “the same problem five years down the road”.