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The Joint Bank-Fund Debt Sustainability Framework for LICs. Paris, May 23, 2007 Martine Guerguil International Monetary Fund. Outline of the presentation. Why a specific framework is needed for low-income countries Description of the debt sustainability framework for low-income countries

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the joint bank fund debt sustainability framework for lics

The Joint Bank-Fund Debt Sustainability Framework for LICs

Paris, May 23, 2007

Martine Guerguil

International Monetary Fund

outline of the presentation
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
the debt sustainability framework
The Debt Sustainability Framework
  • 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
  • It helps countries in determining appropriate financing strategies to maintain/achieve debt sustainability
why a special framework is needed for low income countries
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
a growing need in the current environment
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
the joint bank fund dsf
The Joint Bank-Fund DSF
  • 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 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
  • The DSF is not the framework used in the context of the HIPC Initiative; it serves a different purpose.
three pillars
Three “Pillars”
  • Twenty-year projections of debt burden ratios under baseline and alternative scenarios
three pillars1
Three “Pillars”
  • Twenty-year projections of debt burden ratios under baseline and alternative scenarios
  • Risk ratings based on policy-dependent indicative debt-burden thresholds
slide12

Notes: Thresholds apply to public and publicly guaranteed (PPG) external debt, only. The Country Policy and Institutional Assessment (CPIA) assesses the quality of a country’s 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.

four debt distress risk ratings
Four debt distress risk ratings
  • Low risk of debt distress
  • Moderate risk of debt distress
  • High risk of debt distress
  • In debt distress
three pillars2
Three “Pillars”
  • Twenty-year projections of debt burden ratios under baseline and alternative scenarios
  • Risk ratings based on policy-dependent indicative debt-burden thresholds
  • Recommended borrowing strategy and possible financing responses from lenders
other dsf features
Other DSF Features
  • Conducted on an annual basis, which allows for corrections/adjustments
  • Two parallel exercises: for external debt and for domestic debt
  • Standardization facilitates cross-country comparisons, but does not prevent tailoring to country circumstances
main objectives
Main Objectives
  • 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
  • Provide information to potential creditors on debt sustainability prospects and risks so that they can modulate their financing accordingly
use of the dsf
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
use by borrowers
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
further use by creditors
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 www.imf.org/dsa