Challenges for keeping debt at sustainable levels. Juan Carlos Vilanova Pardo Development Finance International  World Bank Forum Vienna, May 23, 2017.

Outline Measuring debt sustainability - main issues. Tool Technical Capacity Usage Main challenges for maintaining debt at sustainable levels. Africa DFI study on productive spending

Measuring debt sustainability Issues: Overall improvement overall Taxing on staff to prepare improve capacity – DMF – Macroeconomic modelling that goes with it. Accuracy of projections Ownership of product Used to guide fiscal decisions? Country experiences: In West Africa already part of budget process – establishing debt ceilings, but ….. ….Some countries still behind or missing the point -4 DSAs – Objective of DSA Part of overall fiscal risk policy – to include CL etc Domestic debt - becoming increasingly important New total debt thresholds – liquidity indicators

African perspective Domestic savings remain constant Increase need to access external savings

Measuring debt sustainability LICs have stressed that most important burden for them is service on total public debt, because it a) crowds out other development spending and b) is best early warning of arrears/need for restructuring Total public debt service/revenue has been rising rapidly in recent years – accelerated by recent commodity price fall Welcome new focus in DMF II on LIC-DSF training, National teams mandated to test impact of financing choices over the long term. And on new changes in methodology

African perspective Population growth will be a major driver of Africa’s demand for public expenditures and domestic investment over the next two decades. (4% and 6% per year). Urban populations from about 36% of the total population in 2010 to 50% in 2030 and 60% in 2050 Social and Infrastructure spending increasing. Expected financing needs until 2030 around 141 billion a year. Challenge: how to secure financing and remain sustainable. Source: “The European Union, Africa and new donors.”

African perspective Lower ODA flows to SSA And donors moving away from Programme assistance Lower flexibility for Governments

What are the challenges? Seeing a dramatic fall in grants Countries developing domestic debt market with high interest costs Rise in non-traditional donors has made available sources of financing Less conditionality Generally more expensive than highly concessional financing

SOLUTIONS – BEYOND THE DSF Measures to reduce the cost of funding: Risk guarantees by MDBs for external bonds (for high-return investments, green bonds? More creative solutions in bond issuance – eg sukuks/diaspora bonds generally have considerably lower costs than others Much tougher negotiations with external commercial sources of financing

MEASURES BEYOND DSF (DEBT) Regional approach - Increase efficiency : ‘Overall, full integration and unlimited trade in power would save US$1.24 trillion over the 2011–40 period—US$42 billion each year and fully 23% of the cost of the continent’s electricity’ (African Union PIDA 2011, 23). Developing a resource mobilization strategy- More proactive, securing the right financing. More Proactive DMO’s Assessing external creditors terms and conditions Tapping different sources of financing Need improvement in speed/scale of international concessional finance and domestic tax revenues

MEASURES BEYOND DSF (DEBT) Measures to reduce the cost of funding for long term sustainability: Full risk guarantees for external bonds to mobilise funds at near-MDB interest rates, + gradual payment schedules Much tougher negotiations with external commercial funders eg PPPs to reduce revenue costs/CLs ? Graduation not measured by GDP indicator but on achieving SDG

SOLUTIONS - PRODUCTIVE SPENDING DFI covered this in detail last year in Lusaka (see DMF website or study available at www.development-finance.org) Major study for DFID looking at how to ensure debts stay sustainable by spending the money on the most “productive” projects (across all sectors) SDGs will require public spending to double even if much infrastructure is done by private sector, and Countries are now implementing large “growth-promoting” projects – so that one bad project or financing decision can have a major impact on debt sustainability For guarantees. Delays in implementation can cause revenues be delayed making companies unable to meet repayment schedule and Major conclusions: Need far more analysis of micro/ macreoconomic costs and benefits of projects, incorporating potential project delays and cost overruns.

PRODUCTIVE EXPENDITURE: FINDINGS 1. Conduct analysis of growth/poverty/inequality impact of key projects/sector programmes using IMF/WB models Countries were not simulating scenarios of impact of funding the SDGs with different financing sources, to define long-term policy More transparency/accountability to parliaments. Up front detailed discussion of big projects as part of development agenda before decisions are made Need to “match” levels of returns on projects to cost of funds to make “net” returns as high as possible, and NOT borrow if cannot find funds whose cost are justified by the returns. Establish a risk management framework. Need to plan ahead for regular “shocks” (economic or natural disasters) or will be forced to borrow Need NOT to borrow expensive debt with spending plans still in the making – which usually means it goes to fill budget deficits or try to win elections. Reinforce capacity-building in these areas – much scope also for South-South learning

Summary DSF tool becoming increasingly used but more progress is needed in improving accuracy and ownership. DMF II training welcomed African countries in need for massive funding at times when concessional financing and programme aid is dropping Development of domestic debt markets and need to be more pro-active in designing resource mobilization strategy ( need to secure financing and to keep cost at manageable levels) Regional projects DFI Study: SDGs will require public spending to double. Countries are now implementing large “growth-promoting” projects – so that one bad project or financing decision can have a major impact on debt sustainability More transparency/accountability to parliaments Establish a risk management framework