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 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 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 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 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 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 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 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. The DSF is not the framework used in the context of the HIPC Initiative; it serves a different purpose.

7 Three Pillars 1. Twenty-year projections of debt burden ratios under baseline and alternative scenarios

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11 Three Pillars 1. Twenty-year projections of debt burden ratios under baseline and alternative scenarios 2. 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 countrys 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. Institutional strength and quality of policies WeakCPIA<3.25Medium3.25<CPIA<3.75StrongCPIA>3.75 NPV of debt-to-GDP NPV of debt-to-exports NPV of debt-to-revenue Debt service-to-exports Debt service-to-revenue

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

15 Three Pillars 1. Twenty-year projections of debt burden ratios under baseline and alternative scenarios 2. Risk ratings based on policy-dependent indicative debt-burden thresholds 3. Recommended borrowing strategy and possible financing responses from lenders

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