Kathrin Berensmann Global Debt Dynamics Workshop, May 25, 2016, Brighton

1. The International Financial Institutions’ debt governance system for developing countries:What is new and what is missing? Kathrin Berensmann Global Debt Dynamics Workshop, May 25, 2016, Brighton

2. Outline ofpresentation: The Global Debt Governance system: The role of the IFIs’ Debt Governance Framework International Financial Institutions’ Debt Governance framework Comparison of the IMF’s and the IDA’s debt ceiling policies Conclusionsandpolicyrecommendations

3. 1. The Global Debt Governance system: The role of the IFIs’ Debt Governance framework Increasedvulnerabilitytonewoverindebtedness in developing countries Reasons: - completionofdebtrelief initiatives • exogenousshocks: global financialcrisesandrelateduseliquidity buffers have declined as a consequence of counter-cyclical policies • changing financial landscape for LICs • toensurelong-termdebtsustainability a reformof GDG-System isneeded

4. 1. The Global Debt Governance system: The role of the IFIs’ Debt Governance framework Global Debt Governance (GDG)-System = Set of supranational institutions, rules and laws with regard to international relations between creditors and debtors, be they private or official. GDG = one pillar of Global Economic Governance

5. Policy instruments of Global Debt Governance system Permanent mechanisms IFIs‘ Debt Governance Framework Principles for respons. Lending + Borrowing Debt Managem. LCBM Collective Action Clauses Ad hoc mechanisms HIPC MDRI Paris Club London Club Debt swaps Debt Moratorium 5

6. 1. The Global Debt Governance system: The role of the IFIs’ Debt Governance framework Problems associated with the role of the IFIs’ debt governance framework in the global debt governance system • Missing linkage of instruments of both frameworks • IFIs’ debt governance framework has a limited outreach of creditors

7. 2. International Financial Institutions’ debt governance framework IFIs‘ DebtGovernance Framework Monitoring + Assessment DebtPolicy Debt Sustainability Framework (DSF) Non Concessional Borrowing Policy Debt Sustainability Analysis (DSA) Debt Limits Policy Debt Management Source: owncompilation

8. 2. International Financial Institutions’ debt governance framework Debt Sustainability Framework (DSF): indicativedebtceilings (WB/IMF) Comparisonofdebtburdenindicatorsandindicativethresholds Debtburdenindicator > indicativethresholds => debtdistress Criteria: = debtquota + Country Policy Institutional Assessment (CPIA)-Index Assumptions: weakpolicies + institutions => moresevererepaymentproblems

9. 2. International Financial Institutions’ debt governance framework Interrelationship of the IFIs’ debt assessment and debt ceilings instruments Debt Sustainability Framework Debt Sustainability Analysis DSF: indicativedebtlimits – currentdebtsituation (DSA) Risk Ratings(lowrisk, moderate risk, highrisk, in debtdistress) Non-Concessional Borrowing Policy (IDA) Debt Limits Policy (IMF)

10. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies Instruments of the IFIs‘ debt governance framework are incomprehensive Comparison of the IMF‘s and IDA‘s debt ceiling policies Reasons for differences: institutional settings Problems (i) Implementation challenges (ii) Endanger debt sutainability

11. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies

12. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies Type ofdebt Main differencesbetweentheIMF‘sandIDA‘sdebtceilingpolicies 1. External non-concessional and concessional debt are treated differently 2. Domestic debt is treated differently 3. Aggregate versus loan by loan approach 4. Different degrees of conditionality IMF debt limits are valid if IDA country is taking part in an IMF programme =>IMF sets debt ceiling after consulting with Bank country teams => NCBP borrowing limits are aligned with IMF borrowing plans + debt limits

13. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies Reason for differences: different institutional settings Change of IDA allocation system in case a country shifts from low to moderate risk of debt distress

14. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies InterrelationshipofDebtSustainability Analysis und IDA allocation IDA Translation ofthe DSF riskratings in trafficlightsystem • Low risk: green – 100% credit • Moderate risk: yellow – 50% grant + 50% credit • High risk: red – 100% grant • In debtdistress (with 10-20% Discont) – • Shiftofriskratings • => implicationsforallocationof IDA ressources

15. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies

16. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies

17. 3. Comparison of the IMF’s and the IDA’s debt ceiling policies Different debt limits might be jusitfied Reason: differing institution specific circumstances and objectives Problems • Different rules for non-concessional and concessional borrowing might endanger long-term debt sustainability

18. 4. Conclusions and policy recommendations Further alignment of the IFIs’ debt government framework to effectively prevent and resolve sovereign debt crises. IMF Debt Limits Policy is more comprehensive => IDAs’ Non-Concessional Borrowing Policy should be better aligned with IMF’s Debt Limits Policy (i) IDA should incorporate concessional loans in its debt ceilings in more country cases (ii) IDA should also include domestic debt on a case-by-case basis

19. 4. Conclusions and policy recommendations Enhanced linkage of the IFIs’ debt governance framework and the global debt governance system • IFIs’ debt governance framework should not only be a stand alone instrument but be integrated in the global debt governance system. • The Principles on Responsible Sovereign Lending and Borrowing or a potential Sovereign Debt Restructuring Mechanism, for example, should also take into account the instruments of the IFIs’ debt governance framework. • And vice versa

20. Thank you! 20