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1 1 (February 21, 2023)

handle is hein.crs/govekqm0001 and id is 1 raw text is: Congressional Research Service informing the Iegislative debate since 1914 0 Updated February 21, 2023 Sovereign Debt Concerns in Developing Countries The Coronavirus Disease 2019 (COVID-19) pandemic and the ongoing conflict in Ukraine has had significant economic and financial consequence for low-income countries. The World Bank estimates that the pandemic led to 97 million more people being in poverty in 2020. Several countries have already defaulted on their sovereign debt, and many others are at high levels of debt distress, potentially impeding their ability to support recovery. The United States is participating in two G20 creditor country-led debt relief initiatives. The Biden Administration requested $52 million in FY2022 funds from Congress to support these efforts. These funds were appropriated in P.L. 117-328, Consolidated Appropriations Act, 2023. Members of Congress have also introduced sovereign debt- related legislation aimed at improving the transparency of the scale and scope of creditor countries' sovereign lending (e.g., S. 1169), the Strategic Competition Act of 2021, in the 117t Congress. China is now the largest creditor to developing countries, and some Members have raised concerns about the economic and security impacts of China's economic diplomacy. Some Members have also expressed concerns about the growing complexity of sovereign debt financing and its associated risks. Debt Vulnerabilities The debt stock of low- and middle-income countries rose on average 5.6% in 2021 to a year-end total of $9 trillion. According to the IMF and the World Bank, a majority - 60% of low-income countries - are in debt distress, meaning that that there is a risk that a country may be unable to meet its financial obligations and might require debt restructuring or possibly debt forgiveness. According to the IMF, as of January 31, 2023 and based on the most recently published data, 9 countries are in debt distress, 28 countries are at high risk and 25 countries are at moderate risk. The IMF also noted that overall borrowing jumped by 28 percentage points to 256% of GDP in 2020, with government borrowing accounting for about half of this increase. Alongside increased borrowing, recent years have seen an increase in in sovereign defaults. Since the end of 2019, nine countries (Argentina, Belize, Ghana, Ecuador, Lebanon, Sri Lanka, Russia, Suriname, and Zambia) have defaulted on sovereign debt obligations. The landscape of sovereign borrowing has changed over the past few decades. Following a sharp decline after the 2005 G8-led Multilateral Debt Relief Initiative, sovereign debt began accumulating during the 2007-2009 global financial crisis and has continued to rise through the COVID-19 pandemic. According to World Bank figures, total external government debt of low- and middle-income countries increased from $1.7 trillion in 2011 to $3.5 trillion in 2021. While the earlier waves of sovereign debt accumulation consisted primarily of bank loans and bilateral borrowing from advanced economies and the multilateral development banks, recent increases in aggregate sovereign debt are largely attributable to China's emergence as a key developing country creditor and the rising use of private sector bonds to finance developing country public debt. Both of these trends have raised new challenges in resolving sovereign defaults. China's Lending to Developing Countries Since the early 2000s, China has become the largest creditor to low-income countries, surpassing a core group of traditional donor governments (organized informally as the Paris Club), the International Monetary Fund (IMF), and the World Bank (Figure 1). Unlike the IMF, the World Bank, or the 22 countries that compose the Paris Club, China rarely discloses the amounts or terms of its bilateral debt agreements. According to one 2019 National Bureau of Economic Research study, half of China's official lending to developing countries is not reported in World Bank/IMF debt statistics. China is not a member of the Paris Club and, until recently, did not participate in multilateral debt relief initiatives. Figure I. China's Emergence as a Leading Creditor 2011 2015 2020 L ft Germany ; France Ku wai . S.Korea 10 - India S. Araia U p a nce 4 Germany Russ a r abia JAE B Kuwait 9 S. Korea Inda a U.S. Rank among all classified bilateral lenders, based on total guaranteed debt to developing countries. Source: Figure created by CRS based on WB IDS Statistics 2022 data. While China is participating in multilateral debt discussions, including a new sovereign debt roundtable chaired by the IMF and India, many U.S. and international officials are concerned that China's unwillingness to

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