The Joint BankFund Debt Sustainability Framework for LowIncome Countries

1
The Joint Bank-Fund Debt Sustainability Framework
for Low-Income Countries

• London, September 4, 2007
• Martine Guerguil
  Mark Thomas
• IMF
  The World Bank

2
Outline of the presentation

• What is the debt sustainability framework for
  low-income countries?
• How can it be used?
• Challenges and possible next steps

3
What is the Debt Sustainability Framework?

• An analytical framework to assess potential
  debt-related vulnerabilities
• An operational tool that helps design a borrowing
  path that is consistent with
• the global financing context
• a countrys development plans
• its existing vulnerabilities

4
Analytical underpinnings

• A framework that takes into account the
  characteristics of low-income countries
  economies and their debt
• A long-term perspective (20-year forecasts)
• Present Value (PV) terms to account for different
  levels of concessionality
• Explicitly linking the risk of debt distress to
• the size of the debt burden
• exogenous shocks
• the quality of policies and institutions
• The DSF is not the framework used for the HIPC
  Initiative it serves a different purpose
• Forward-looking risk assessment rather than
  retrospective debt relief calculation

5
How does the LIC DSF work?Three Pillars

• Twenty-year projections of debt burden ratios
• Under a baseline scenario
• Under alternative scenarios

6
Pillar 1 projections
7
Projections
8
Projections
9
Three Pillars

• Twenty-year projections of debt burden ratios
  under baseline and alternative scenarios
• Country risk ratings based on policy-dependent
  indicative debt-burden thresholds

10
Pillar 2 the thresholds
Notes Thresholds apply to public and publicly
guaranteed (PPG) external debt, only. The Country
Policy and Institutional Assessment (CPIA)
assesses the quality of a countrys present
policy and institutional framework. Quality
means how conducive that framework is to
fostering sustainable, poverty-reducing growth
and the effective use of development assistance.
11
Thresholds
12
Pillar 2 4 debt-distress risk ratings

• Low risk of debt distress
• Moderate risk of debt distress
• High risk of debt distress
• In debt distress

13
Three Pillars

• Twenty-year projections of debt burden ratios
  under baseline and alternative scenarios
• Risk ratings based on policy-dependent indicative
  debt-burden thresholds
• Recommended borrowing strategy and possible
  financing responses from lenders

14
Main features of the DSF

• Conducted annually
• Allows for corrections/adjustments
• Allows evaluation of earlier projections
• Two parallel exercises for external debt and for
  total public debt (inc. domestic)
• Standardization facilitates cross-country
  comparisons, but does not prevent tailoring to
  country circumstances

15
Main uses of the DSF

• Improve World Bank and IMF analysis and policy
  advice in areas relating to debt sustainability
  and guide provision of technical assistance
• Support LICs in achieving development objectives
  while maintaining sustainable debt
• Provide information to creditors on debt
  sustainability prospects and risks, so that they
  can modulate their financing accordingly

16
Some common misunderstandings

• The DSF is imposed on borrowers by creditors
• NO, it is an analytical tool that can help both
  make more informed decisions
• The DSF thresholds are debt ceilings
• NO, but they do indicate levels at which
  countries run the risk of future repayment
  difficulties, based on experience
• The DSF does not take into account the financing
  needs for the MDGs
• A DSA helps assess risks. When used alongside a
  needs assessment, it can help design financing
  strategies to meet those needs without
  jeopardizing economic stability

17
Use of the DSF so far

• The DSF has already had an impact on Bank and
  Fund policies
• IDA financing terms (access to grants is
  determined only by debt distress risk)
• IMF policy advice and program design
• However, the DSF will be effective only if both
  other creditors and borrowing countries use it
  for their own purposes

18
Further use by creditors

• The IMF and the World Bank have stepped up
  outreach to major creditor groups
• MDBs
• Traditional bilateral creditors
• Export credit agencies
• Emerging creditors
• The objective is to encourage creditors to
  acknowledge the different nature of lending and
  debt sustainability risks in LICs and to use DSAs
  as input for sustainable lending decisions
• Published DSAs can be found at www.imf.org/dsa
  and at www.worldbank.org/debt

19
Use by borrowers

• DSA should be a core part of the macro/fiscal
  planning function
• The starting point for an appropriate debt
  management strategy
• Links between given policies and actual borrowing
  and debt management decisions
• Help set the parameters within which the debt
  manager must develop and execute debt management
  strategy
• A tool for discussions with creditors on the
  volume and terms of new financing
• An aid in identifying technical assistance needs
  in related areas (e.g., debt recording, macro
  forecasting, debt management)

20
Steps to promote borrowers useof the DSF

• DSAs required in the context of Article IV
  consultations
• Staff to foster higher involvement of country
  authorities in the preparation and discussion of
  DSAs
• Outreach to raise awareness of debt
  sustainability risks and concerns
• Stepped-up training efforts
• Regional workshops
• 4 to date
• Planned follow-up

21
Lessons from training workshops

• A coherent macro/fiscal framework is a
  precondition for running a meaningful DSA
• The macro/fiscal framework is set outside of the
  DSF
• The DSA assesses the debt-related risks of a
  given framework and how to mitigate these risks
• Projections must be realistic
• Scenarios that are too optimistic/pessimistic
  will under/overestimate the risks
• Critical linkages
• Investment/growth
• Impact of policy changes (e.g., on fiscal
  revenue)
• DSA outcomes must be assessed critically
• Outcomes are sensitive to the accuracy of
  historical data
• Standardized tests may not be meaningful for a
  given country (e.g., structural breaks)

22
Factors limiting borrowers useof the DSF

• Limited capacity in key supporting areas
• Data recording and monitoring
• Macroeconomic and financing forecasting
• Institutional context
• Limited coordination between debt, BOP and fiscal
  operations

23
Possible next steps

• More capacity building?
• In the DSF itself
• As well as in related areas (debt reporting,
  macroeconomic forecasting, institutional
  development and debt management strategy)
• Better coordinated capacity building?
• Better coordination of delivery across functional
  areas of government economic policy-making
• As well as across providers of TA/capacity
  building
• More focused dissemination?
• Raising high-level awareness to ensure political
  buy-in
• Train-the-trainers programs to broaden coverage

24
Thank You

• For further information
• mguerguil_at_imf.org
• mthomas1_at_worldbank.org