An Introduction World Bank – Elliot (Mick) Riordan MFM Debt Group GN-PBO Webinar April 6, 2016

What is Debt Sustainability? Relationship to IMF/WB policies The LIC-DSF: Key features Requirements: data / skill set

 Developing countries face significant challenges that are often difficult to reconcile: ■ Meet development objectives  need to invest  borrow  debt accumulation  potential for distress or crisis ■ Maintain debt at “sustainable” levels; avoid a debt crisis that can be very costly especially for vulnerable groups  Those challenges are always present but the current global situation may have exacerbated them ■ Economic circumstances remain highly volatile with new creditors appearing (not necessarily under concessional terms)

Debt Burden (developing countries) – 1998 Multilateral concerns regarding debt sustainability have supported large reductions in debt levels over time

Debt Burden (developing countries) – 2013 Multilateral concerns regarding debt sustainability have supported large reductions in debt levels over time

7 Choose to use the MAC DSA if the country has durable and substantial access to market financing.

 Close to 550 DSAs produced for 75 different LICs 2005: introduction of the Framework 2006 review: implications of debt relief under the Multilateral Debt Relief Initiative (MDRI) 2009 review: reforms of the Fund’s facilities for LICs 2012: comprehensive review of the Framework

 Concessionality of debt Lower interest rate Grace period Long maturity etc.  Long projection horizon  External risk rating PPG external debt PPG debt has been the largest part of debt in many LICs To capture long maturity and grace period of concessional loans and investment returns 20 years Favorable terms An explicit assessment of external debt distress

 Policy advice  Input to IMF debt limits policy and WB non- concessional borrowing policy By IMF and WB By creditors By borrowers Including IDA  Guidance on lending and grant-allocation decisions  Input to their medium-term debt management strategy

 DSA is only as good as the macroeconomic framework  Projections and assumptions must be  Realistic  Consistent with the policies of the country authorities  Consistent with each other LIC DSA template Projections & assumptions Macroeconomic framework Assessment of risks

IMF and WB :  At least once every calendar year  In specific situations  Request for IMF financing  Any modification to/or request for a waiver for non-compliance with a PC related to debt limits  Non-concessional borrowing beyond levels assessed in the most recent DSA Article IV consultation, program review/request Could result in more than one DSA in the same calendar year

Public domestic debt Public DSA External DSA External Risk Rating Assessment of the overall risk of debt distress

 DSA adopts a forward-looking perspective and thus involves medium-term or long-term projections of the relevant variables, whose mutual dependency is modeled in the underlying macro-fiscal-BOP framework  DSA usually focus on debt and debt service indicators, scaled by relevant measures of repayment capacity (e.g. GDP, exports, revenues), whose evolution over a certain projection horizon is calculated by the debt dynamics  Projections are always subject to uncertainty about the future  the ‘baseline, most likely scenario’ is complemented with alternative scenarios (generated by scenario analysis or stochastic simulations)

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Low Moderate High In debt distress Risk RatingThresholds 16

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 The objective of IMF’s DLP is to ensure debt sustainability over the medium-term while allowing adequate external financing  For LICs, a PC limiting PPG external borrowing is near universal and is informed by the assessment of a country’s risk of external debt distress in the LIC DSF under current DLP.

 World Bank’s IDA is designed to provide relief to the most indebted countries  Under the IDA’s grant allocation framework, eligibility is determined by the assessment of a country’s risk of external debt distress, assessed in the external DSA  Low risk: IDA loans  Moderate risk: eligible for a blend of IDA loan and grant  High: eligible for full IDA grant financing

REAL SECTOR Private consumption Government consumption Private investment Government investment Exports of goods and nonfactor services Imports of goods and nonfactor services National Accounts (local currency, flows) EXTERNAL SECTOR Balance of Payments (US Dollars, flows) CURRENT ACCOUNT Exports of goods and nonfactor services Imports of goods and nonfactor services Income (net) Current Transfers (net) Official Private CAPITAL AND FINANCIAL ACCOUNTS Capital account o/w Capital transfers Direct investment Medium/long-term capital (net) Private sector (o/w banks) Central Government Short-term capital (net) Private sector (o/w banks) Central Government Overall balance Reserves (Change in net foreign assets) GENERAL GOVERNMENT Fiscal Accounts (local currency, flows) Revenues Grants Expenditures Current Capital Overall balance Financing Domestic financing (net) Banking system Nonbanking sector External financing (net) MONETARY SECTOR Monetary Authorities (local currency, stocks) Net foreign assets Net domestic assets Net credit to government sector Credit to banks Other items (net) Reserve money Currency Banks reserves Deposit Money Banks (local currency, stocks) Net foreign assets Banks’ reserves Net domestic assets Net credit to government sector Credit to non-government sector Other items (net) Liabilities to monetary authority Private sector deposits

DSA Debt & Budget Balances Resources available to finance infrastructure and social spending, and promote economic development. Monitor compliance with rules/targets on spending Resources available to finance infrastructure and social spending, and promote economic development. Monitor compliance with rules/targets on spending Financial viability of debt-financed budget deficits. Monitor compliance with rules/targets on debt and borrowing Financial viability of debt-financed budget deficits. Monitor compliance with rules/targets on debt and borrowing Identification of adequate debt instruments to borrow, given their cost-risk profile. Absorption constraints imposed by market developments and investors’ appetite for government debt Identification of adequate debt instruments to borrow, given their cost-risk profile. Absorption constraints imposed by market developments and investors’ appetite for government debt MTDS Debt, Borrowing Requirements, Financing Options & Market Development MTFF Macro, Revenue & Spending Treasury & debt management departments Planning, fiscal policy & budgetary departments