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Debt Limits in IMF-Supported Programs

This document discusses the objectives and potential reforms of the policy on debt limits in IMF-supported programs. It highlights the need to introduce greater flexibility in order to meet the diverse needs of low-income countries while maintaining a sustainable debt position. The document also addresses the importance of maintaining donor incentives to provide concessional financing. The proposed reforms aim to align debt limits with debt sustainability analyses and improve the overall effectiveness of financing in low-income countries.

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Debt Limits in IMF-Supported Programs

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  1. Debt Limits in IMF-Supported Programs Annual MDB Meeting on Debt Issues Dominique Desruelle Washington, DC July 8, 2009

  2. Outline • Objectives of the policy on debt limits in Fund-supported programs • Why review the policy at this time? • How to introduce greater flexibility? • Maintaining donor incentives to provide concessional financing

  3. Policy Objectives • Helping low-income countries meet their development objectives, while maintaining a sustainable debt position • How has this been done so far? • Promoting recourse to concessional external resources, with exceptions made on a case-by-case basis • Fostering use of debt sustainability analyses (DSAs) to help guide borrowing and lending decisions

  4. Why a Review Now? • The world has changed; LICs are more diverse than before • Is a single design for concessionality requirements still appropriate? • A number of LICs view current policy as too rigid, preventing the financing of some critical projects • Need to link better the design of debt limits with the results of DSAs

  5. Main Tenets of the Review • Continued preference for concessional financing • Debt vulnerabilities remain high; the ongoing financial crisis will not help • Room for more flexibility in limits on non-concessional borrowing

  6. How to Apply Flexibility? • Taking account of two aspects of LIC diversity • The extent of debt vulnerabilities, as assessed in debt sustainability analyses • Macroeconomic and public financial management capacity

  7. A Menu of Options

  8. Benefits of the Proposed Reform • Three of these four options would provide more flexibility than current practice • Exception: countries with high debt vulnerabilities and lower management capacity • Over time, an increasing number of LICs would be expected to move to the more flexible approaches as capacity improves and debt vulnerabilities recede

  9. Measuring capacity • Macroeconomic and public financial management capacity encompasses a range of dimensions from policy design to implementation • To ensure a uniform treatment of countries, a two-step process is envisaged • Pre-identify stronger-capacity countries based on quantitative indicators • Use all relevant information for a final assessment

  10. Measuring capacity (II) • Two sets of indicators seem particularly relevant: • Components of the CPIA: Fiscal policy, debt policy, quality of budgetary and financial management, quality of public administration, transparency and accountability in the public sector • PEFA: The framework measures performance of a country’s public financial management • Complementary sources of information include: • Fiscal ROSCs, Debt Management Performance Assessment (DeMPA), Project Performance Assessments (PPA), and self-assessments under the HIPC Capacity Building Program (CBP) • Views on relevant recent macroeconomic developments or ongoing capacity-building reforms (e.g., in the context of MTDS technical assistance)

  11. Maintaining donor incentives • Some donors may have concerns about greater flexibility • Flexibility could be used unwisely • Own efforts to provide highly concessional financing could ultimately benefit a less concessional donor/creditor rather than the recipient country • These concerns should be mitigated by the following considerations • Risk of excessive borrowing addressed through the tight link to DSAs • Scope for nonconcessional borrowing limited by targets on the present value of new borrowing (or average grant element) • “Cross subsidization” already arises under the current approach • More flexible options would be available only to stronger-capacity countries • Concessional resources remain the most appropriate mode of financing for most activities in LICs.More such resources are needed, including to address the implications of the ongoing financial crisis

  12. To Wrap Up • Objective: Helping LICs meet development needs while maintaining a sustainable debt position • Continued preference for concessional financing for LICs. More concessional resources are needed. • Possibility to introduce more flexibility on non-concessional financing in Fund-supported programs to take better account of the diversity of LICs • Key dimensions for flexibility: Extent of debt vulnerabilities; macroeconomic and public financial management capacity • Closer link to debt sustainability analyses in setting country-specific debt limits • Timeline: Discussion by the IMF Executive Board in late summer

  13. Thank you

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