Developing Best Practice Guidelines for Responsible Private Investments in Sovereign Debt Instruments

The COVID-19 pandemic, war on Ukraine and ensuing inflationary pressures has presented unique fiscal challenges for many developing countries. In fighting the current multiple crises, developing countries around the world have accumulated historic levels of sovereign debt from a variety of sources such as private lenders, the International Monetary Fund, multilateral development banks as well as from bilateral lenders1. Consequently, some developing countries that are amongst the most vulnerable to financial and climatic shocks are also facing a looming debt crisis.

Further, the World Bank (WB), the International Monetary Fund (IMF), the UN and others have stated that many developing countries will struggle to service their impending debt-related financial obligations. As such, developing countries continue to be drained of resources in the absence of an appropriate institutional framework for public debt management and debt. Against this challenging backdrop, it is important to strengthen systems and processes that enhance responsible sovereign lending and borrowing to prevent further accumulation of unsustainable debt.

The 2015 Addis Ababa Action Agenda states that debtors and creditors must work together to prevent and resolve unsustainable debt situations and that the undersigning nations will work towards a global consensus on guidelines for debtor and creditor responsibilities in borrowing by and lending to sovereigns, building on existing initiatives. In the 2021 UN General Assembly`s Second Committees annual resolution on external debt sustainability and development, the member countries resolved to work towards attainment of this goal. In spite of these ambitions, little progress has been made in the past years.

This report aims at bringing the conversation forward by proposing a synthesis of existing frameworks that could form the basis of such a global consensus, building on existing initiatives, but with a specific focus on the role of private investors in sovereign debt instruments.

Part one of this report synthesizes existing frameworks and makes recommendations on best practices based on this synthesis. The second part of the report discusses operationalization and implementation of the recommended best practice. While several initiatives have been enacted to advance good practices in sovereign lending and borrowing, robust implementation of such efforts have been lacking by both public and private lenders, as well as some sovereign borrowers.

For instance, the UNCTAD Principles on Promoting Responsible Sovereign Lending and Borrowing and G20 Operational Guidelines for Sustainable Financing have seen limited implementation and systems for monitoring of compliance are weak. Additionally, public debt is governed by elusive legal rules and uncertain enforcement mechanisms. Creating a global consensus on principles for responsible sovereign lending and borrowing, and the subsequent operationalising of these principles, is essential in addressing debt vulnerabilities in developing countries and in ensuring responsible lending to sovereigns more broadly. The lack of clear, predictable and enforceable standards play a major role in the accumulation of unsustainable sovereign debt.