By Andrea Shalal

WASHINGTON, (Reuters) – Sharply rising global energy and food prices as a result of the conflict in Ukraine have hit poor countries. Better mechanisms to deal with sovereign debt stress are needed to avoid defaults, said the IMF on Monday.

“The conflict in Ukraine poses risks to unprecedented levels in public borrowing, while the pandemic still is straining many governments’ budgets,” Vitor gaspar, Director of the International Monetary Fund’s Fiscal Affairs department and Ceyla Pavarbasioglu the IMF’s Strategy chief wrote in a blog.

“With rising sovereign debt risks and financial constraints at the heart of policy concerns,” a global collaborative approach is essential to achieve an orderly resolution of debt problem and prevent any unnecessary defaults.

Low-income countries were particularly affected by spikes in energy and food prices. They may require more grants or concessional financing. To reduce risk, countries should reform their debt management and transparency policies.

The authors estimated that 60% of the low-income countries are already or could be in debt distress. In major economies, rising interest rates can lead to higher spreads in countries that have weaker fundamentals. This could make it more expensive for these countries to borrow.

According to them, the credit crunch has been exacerbated due to declining overseas lending by China. They are also dealing with solvency issues in China’s real-estate sector, COVID-19 locksdowns, as well as problems with existing loans for developing countries.

The major economies’ actions were not sufficient, they claimed, noting that a stop in bilateral debt payments to the government was ended at the outbreak of the pandemic and that no restructurings have been done within the guidelines set out by the G-20 industrialized nations.

There were options for countries that are not eligible for debt relief, but they needed them.

Their words were: “Muddling will increase costs, risks to debtors, creditors, and, more broadly global stability, and prosperity.” The most adverse effects will ultimately be felt by the households who can least afford them.