Application of the Bank-Fund Debt Sustainability Framework

1. Application of the Bank-Fund Debt Sustainability Framework MDB Meeting on Debt Issues July 11, 2007 Hervé Joly, IMF

2. Outline • Recent changes in applying the DSF • Raising awareness of debt sustainability risks: • With borrowers • With creditors • Current challenges

3. Recent Assessment (April and November 2006) • DSF has now been in use for about 2 years • Boards reviewed use of DSF in April 2006 and viewed it as broadly appropriate but asked for a deeper analysis of MDRI implications and other issues: • Apparent borrowing space • Changes in the lender landscape • Treatment of domestic debt • Proposed changes approved by Boards in end-2006 and implemented since

4. Main Changes to DSF Application • Pace of New Borrowing • Using more systematically the precautionary features of the DSF. • Building more realistic macroeconomic scenarios • Additional precautionary features (5% “caution flag”) • Domestic Debt • Domestic debt matters for risk of debt distress... • ...but can’t be easily integrated into thresholds • Public sector DSA requirement • Possibility of “splitting the risk rating” • Private Creditors • Use of additional liquidity indicators as needed • Methodology • Use of a three-year moving average of the CPIA

5. Improving Dissemination of DSAs • Effectiveness of DSF depends on broader information sharing by debtors and creditors • Dedicated webpages on DSAs http://www.imf.org/dsahttp://www.worldbank.org/debt • Boards requested that staffs increase outreach to debtors and creditors.

6. Broader Use by Borrowers (I) • Active dialogue with borrowers. • Ultimate purpose of DSF is to enable borrowers to design appropriate financing strategies, i.e., a debt path that is sustainable while consistent with development plans and poverty reduction strategy • DSA key element for discussion of fiscal stance and determination of appropriate financing terms • DSA tool to obtain appropriate terms on new finance

7. Broader Use by Borrowers (II) • Recognized need for stronger capacity building in the debt management area • Need to ensure better coordination of existing providers and initiatives • Boards have agreed to step up assistance. This will start with a pilot covering 4-6 countries a year. The situation will be reassessed in 18 months.

8. Outreach to Creditors • IMF/WB have stepped up outreach to major creditor groups to raise their awareness of debt sustainability risks • MDBs • Traditional bilateral creditors • Export Credit Agencies • Non-OECD creditors • Some creditor groups are considering developing principles for sustainable lending

9. Emerging Issues (I) • Non-OECD creditors: A diverse universe • Some raise specific challenges: • Expanding fast • Not members of traditional creditor fora • Limited information • Risk of overlap • May lend on nonconcessional terms • May not use conditionality

10. Emerging Issues (II) • These creditors are difficult to approach: • May see DSF as an instrument of traditional creditors meant to constrain them • Blame traditional creditors for not living up to their aid scaling-up commitments • How do MDBs perceive non-OECD creditors? Do they collaborate with them? Do they have views on how they should be approached?

11. Emerging Issues (III) • Concessional finance remains the most appropriate form of financing for LICs. • Although debt levels are much lower in many LICs post debt relief, they remain poor, highly susceptible to shocks, and with limited debt management capacity. • Debt relief has reduced the capacity of some creditors/donors to provide concessional finance • How do MDBs approach this problem?