IMF Policies to Help Low-Income Countries Restore and Maintain Debt Sustainability Review Session on Chapter V of the Monterrey Consensus March 10, 2008 Martine Guerguil, IMF

Outline Restoring sustainability. Quick overview of advances under the HIPC and MDR Initiatives since Monterrey Maintaining sustainability. Quick overview of IMF support to low-income countries in the design of sound borrowing policies

Part I Restoring Sustainability

HIPC Initiative and MDRI Original HIPC Initiative launched in 1996 to reduce debt burdens of eligible countries to sustainable levels Enhanced in 1999 to provide deeper debt relief Equitable burden sharing: all creditors, including commercial ones, are expected to participate Further steps taken to accelerate and facilitate access to debt relief, most recently for HIPCs with protracted official arrears MDRI introduced in 2005 to complete debt relief and provide more resources to foster development

Implementation to Date (I) 32 countries are past the decision point, of which 23 countries past the completion point Most have reached these stages since Monterrey 9 countries still have to initiate the process

Implementation to Date (II) Post-Completion-Point Countries (23) BeninHondurasRwanda BoliviaMadagascarSão Tomé & Príncipe Burkina FasoMalawiSenegal CameroonMaliSierra Leone EthiopiaMauritaniaTanzania The GambiaMozambiqueUganda GhanaNicaraguaZambia GuyanaNiger Interim Countries (Between Decision and Completion Point) (9) AfghanistanChadGuinea BurundiRepublic of CongoGuinea-Bissau Central African RepublicDemocratic Republic of the CongoHaiti Pre-Decision-Point Countries (9) ComorosKyrgyz RepublicSomalia Côte d’IvoireLiberiaSudan EritreaNepalTogo Countries in bold have reached their completion or decision point since Monterrey

Debt Burdens Have Been Substantially Reduced...

Making Room for Poverty- Reducing Spending

Challenges in Implementation The political, security and economic situation of remaining HIPCs is challenging Most of them have experienced conflicts A number have arrears to multilateral institutions, which need to be cleared and raise financing issues The debt relief framework is used with maximum flexibility to address these challenges More resources are needed to fully finance the Initiatives

Increasing the participation of non-Paris Club (NPC) creditors While all Paris Club creditors provide full HIPC relief (and even beyond), only a few NPC bilateral creditors do Most provide only partial or no relief Efforts to raise awareness and encourage them to deliver their share of relief Information on IMF website Good offices and technical assistance

Aggressively Litigating Creditors A small but highly visible group of creditors to HIPCs As of mid-2007, 11 HIPCs targeted by 44 lawsuits. 24 judgments so far awarding about $1 billion The international response to litigation is constrained Participation in HIPC Initiative is voluntary Little can be done without infringing contractual rights Stepped-up efforts within these constraints Moral suasion DRF-supported buybacks Building debt management capacity Legal support (donor-funded) can help if provided early

Part II Maintaining Sustainability

Debt relief frees up resources, but more resources are needed to meet the MDGs A new financial environment ODA is often falling short of commitments Emergence of a more diverse group of lenders, both public and private A new policy challenge Investment opportunities are large But additional lending, if in excessive volume or on unfavorable terms, could contribute to the re- emergence of debt vulnerabilities

IMF policies and tools The debt sustainability framework (DSF) Country-specific policy advice Technical assistance in the area of debt management

The Debt Sustainability Framework (DSF) Developed by the IMF in 2002 A tool to: Examine the sources and extent of debt-related vulnerabilities under alternative borrowing scenarios Guide new borrowing decisions to match financing with ability to repay debt Design preventive policies to avoid debt payment problems Undertaken annually in the context of Article IV consultations

The Debt Sustainability Framework for Low-Income Countries (LIC DSF) Developed jointly by the World Bank in 2005 Acknowledges the specificities of low-income countries’ debt Higher vulnerability to shocks Weaker institutional settings Joint debtor-creditor responsibility for outcomes A tool to improve IFIs’ policy advice and guide their provision of needed technical assistance The DSF will be effective in preventing new crises only if it is used actively by both creditors and borrowers

Support to Borrowers Medium-term debt strategies (MTDSs) To meet government's financing needs at the lowest possible cost consistent with a prudent degree of risk Stepped-up capacity building program in debt management Concessional finance remains the most appropriate form of finance for LICs, even after debt relief Many LICs remain susceptible to shocks, and have limited capacity to manage debt MDG-related expenditures generally do not generate the cash flows necessary to service nonconcessional debt Access to nonconcessional finance should be cautious and gradual

Outreach to Creditors Information sharing DSAs produced annually on more than 60 LICs A unique source of information and analyses on LICs’ debts Most DSAs are published and can be found on a dedicated webpage: Awareness raising Enhanced cooperation is needed to avoid negative outcomes Some multilaterals already use DSA results in their lending decisions (AfDB, AsDB, IFAD) Development of sustainable lending principles OECD Export Credit Group

Thank you for your attention Further information at: Questions or queries? Lending