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
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?