The Joint Bank-Fund Debt Sustainability Framework for LICs

1. The Joint Bank-Fund Debt Sustainability Framework for LICs Paris, May 23, 2007 Martine Guerguil International Monetary Fund

2. Outline of the presentation • Why a specific framework is needed for low-income countries • Description of the debt sustainability framework for low-income countries • Use of the framework and challenges

3. The Debt Sustainability Framework • Developed by the IMF in 2002 in the context of surveillance, to better monitor debt issues in emerging markets • The DSF is intended to serve as an “early warning system” of potential risks of debt distress so that preventive action can be taken in time • It helps countries in determining appropriate financing strategies to maintain/achieve debt sustainability

4. Why a special framework is needed for low-income countries • Their debt has special features • A large part is granted on concessional terms • Longer maturities than emerging market debt • Their economies have special features • They are more vulnerable to exogenous shocks • Higher incidence of natural disasters, terms of trade shocks, conflicts • Higher impact of shocks on their economies • They have more limited institutional capacities • Information on their macroeconomic and debt situation is scarce, segmented

5. A growing need in the current environment • LICs have larger borrowing opportunities: • Debt relief for the most indebted • Scaling up prospects from traditional creditors • The emergence of new private and official creditors • These changes provide opportunities for faster output and income growth... • … But they need to be managed in order to avoid too rapid a build-up of debt

6. The Joint Bank-Fund DSF • The Bank and Fund have jointly developed – and recently strengthened – an instrument to analyze debt challenges in LICs: • The Debt Sustainability Framework for Low-Income Countries (DSF) • It takes a long-term perspective (20-year forecasts) and uses NPV terms to account for the specificities of LIC debt • It explicitly links the risk of debt distress to the size of the debt burden, the type of exogenous shocks, and the quality of policies and institutions • It generates a debt distress risk rating for each LIC • The DSF is not the framework used in the context of the HIPC Initiative; it serves a different purpose.

7. Three “Pillars” • Twenty-year projections of debt burden ratios under baseline and alternative scenarios

11. Three “Pillars” • Twenty-year projections of debt burden ratios under baseline and alternative scenarios • Risk ratings based on policy-dependent indicative debt-burden thresholds

12. Notes: Thresholds apply to public and publicly guaranteed (PPG) external debt, only. The Country Policy and Institutional Assessment (CPIA) assesses the quality of a country’s 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.

14. Four debt distress risk ratings • Low risk of debt distress • Moderate risk of debt distress • High risk of debt distress • In debt distress

15. 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

16. Other DSF Features • Conducted on an annual basis, which allows for corrections/adjustments • Two parallel exercises: for external debt and for domestic debt • Standardization facilitates cross-country comparisons, but does not prevent tailoring to country circumstances

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

18. Use of the DSF • The DSF has already had an impact on Bank and Fund policies • IDA financing terms • 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

19. Use by Borrowers • Design appropriate financing strategies = a debt path that matches financing with ability to repay • A key element for broader policy design • Near term: determine the fiscal stance and appropriate financing terms • Medium term: implement preventive action to reduce the risk of future debt distress • A tool for discussions with creditors on the size and terms of financing • Identification of technical assistance needs in the area of debt management

20. Further Use by Creditors • The IMF and the World Bank are stepping 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 • LICs remain and will remain for some time dependent on official assistance • Debt relief has not eliminated their main sources of vulnerability • DSAs can be a useful input for “sustainable” lending decisions • Published DSAs can be found at www.imf.org/dsa