Transcript of a Teleconference Call on IMF/World Bank Report on Applying the Debt Sustainability Framework for Low-Income Countries Post-Debt Relief

December 7, 2006

Washington, D.C., December 7, 2006

Adnan Mazarei, Assistant Director of IMF's Policy Development and Review Department
Martine Guerguil, Chief of Official Financing Division in the IMF's Policy Development and Review Department
Dana Weist, Sector Manager, Economic Policy, The World Bank

MS. BHATT: Good morning, everyone, and welcome to this conference call on the Joint IMF/World Bank Report on Applying the Debt Sustainability Framework for Low-Income Countries Post-Debt Relief. I am Gita Bhatt from the External Relations Department, and with me here is Mr. Adnan Mazarei who is the Assistant Director in the Policy Development and Review Department. We also have Ms. Martine Guerguil, Chief of the Official Financing Division in the Policy Development and Review Department as well. Also joining us a little later will be Ms. Dana Weist who is the Sector Manager, Economic Policy, with the World Bank.

We are releasing today the Public Information Notice which summarizes the recent IMF Executive Board discussion on debt sustainability together with a paper on this issue. This conference call and the paper are both embargoed until noon today.

I will now turn the floor over to Mr. Mazarei to make brief opening remarks, and then we will get your questions.

MR. MAZAREI: Good morning, ladies and gentlemen. Thank you for the chance to speak with you. I would like to clarify one thing if during the course of this conversation you hear sighs or expressions of pain from me, they have to do more with my back pain rather than shock at your questions or any of the comments we may be making on our side.

As you know, the Bank and the Fund set up a Debt Sustainability Framework several years ago to guide the assessment of debt buildup in low-income countries and to guide our operations. That Debt Sustainability Framework is rather suitable, but we felt that we needed to strengthen it to take into account some changes that have taken place recently in the financial environment facing the low-income countries.

First, there has been the Multilateral Debt Relief Initiative, the MDRI. The MDRI has lowered the debt burden of a good number of our member countries, it has made their debt more sustainable, and it has created some fiscal space for them to spend more on achievement of the Millennium Development Goals. But experience has taught us of course that the amounts and terms of this new borrowing should be carefully assessed and monitored to avoid wasting this new opportunity, and to avoid another round of debt problems.

Second, we have seen the rise of what we call the emerging donors, countries such as Brazil, China, and India, together with oil-producing countries, are becoming important sources of funds for low-income countries. The rise of new creditors and donors offers the potential for greater resources for development of the low-income countries. But at the same time, there are risks associated with this. We recognize that we have to overcome a coordination problem between low-income countries and creditors, and among creditors, to make sure that these new resources are not misused and that any debt accumulation by these low-income countries looking forward is prudent. This among other things requires better information sharing and coordination among creditors.

We have therefore strengthened our Debt Sustainability Framework to help us achieve a suitable mixture of various considerations, avoidance of debt distress, but at the same time allowing a suitable flow of resources to the low-income countries. We have upgraded our Debt Sustainability Framework in several regards. As you know, in many development countries, debt crises occur not because of only accumulation of debt, but because of shocks to growth and output. We therefore have strengthened the work we do on growth and growth projections. We have put in some alerts in the Debt Sustainability Framework about situations when debt buildup or growth assumptions are abnormally high, for example, much higher than in the previous years. This should be a reason to carefully assess the reasons behind growth and debt accumulation in looking forward in our case-by-case approach to debt accumulation to avoid increasing vulnerability.

Then we will assess the impact of possible nonconcessional finance. We believe to the extent possible, new debt by low-income countries should continue to be on a concessional basis, but we will consider nonconcessional debt on a case-by-case basis.

Looking forward, we hope that the framework will becoming a vehicle for better dissemination and coordination among various parties. It is critical that creditors use this tool as a device for better communication and coordination, and also for the framework to be used as a mechanism for coordination between creditors and borrowers. The Fund itself will be making an extra effort to make sure that the tool, the Debt Sustainability Framework, is used better by its staff in formulation of Fund programs and in our surveillance work. There are reasons we do believe we could be doing a better job in that area ourselves.

More importantly, we will look forward to work with the countries authorities to enable them to use this framework to design their own borrowing strategies, we will actively use the framework in our policy discussions with them, and we will develop in collaboration with other donors and international financial institutions a technical assistance program aimed at strengthening their capacity to use the framework on their own. We are aware that in many low-income countries these efforts may require some time to bear fruit, but we view this as an important element of our support to low-income countries going forward. Thank you very much.

QUESTION: Yes, I emphasize greatly with your back pain, and know that feeling, so I will try and keep it brief. I have two general questions initially. One, you talked about coordination amongst creditors. What efforts have you made and what positive signs have you received back Beijing, that the Chinese, for example, are willing to buy into this or participate in this at all? And if the signs have not been as encouraging as you would have liked, how do you overcome that problem?

Then my second question I guess which you have touched on, but if you would clarify, on conditionality. We have heard other development bankers recently suggesting that some of the conditions that are attached to lending to developing countries may have to be diluted in order not to be replaced as the lender of choice by creditors such as China. So if you could comment a bit on both of those things, that would be much appreciated.

MR. MAZAREI: If you will permit, I will start with your second question, and my colleague Ms. Guerguil will take then take up the first one. On conditionality, the work we do on the Debt Sustainability Framework is not calling for a change in our conditionality. Our conditionality, as you know, is aimed at reporting the authorities' programs in these countries and also to make sure that their programs succeed. With this renewed emphasis on avoiding debt accumulation of unsustainable debt, we will continue to use the conditionality that is available to us and country authorities including on the accumulation of debt, but these will be done with general flexibility and in a case-by-case approach that we need to. If you permit, Ms. Guerguil will answer your first question.

MS. GUERGUIL: On the coordination among creditors, as the paper notices something that is lacking now partly because there is a new universe of creditors that we are not used to, we have started reaching out to a number of these creditors, and that is certainly something that we intend to continue in the coming months. In fact, we are as we speak putting our plans together with our colleagues from the World Bank to discuss at a technical level with several of these creditors what we think is a very useful took to guide their lending decisions, basically this framework and the different enhancements that we have introduced with this paper. It is certainly an ongoing work that we hope will bear fruit in the coming years.

QUESTION: If I understand your response, you are saying that you are still in the process of putting together your strategy and approach for reaching out to creditors such as China, but specifically in the case of China, you have not had significant or meaningful communication from them on this issue that you have found encouraging, that you have yet to fully engage them on a technical level and still have not, if you like, heard back from them, to put it in simple terms?

MS. GUERGUIL: I am not sure that the presentation that you have is accurate. We are engaging and talking with them and we do not expect a formal response. As I say, it is more raising awareness, discussing technical aspects, it is not a kind of give-and-take approach. It is not a policy of the Fund and the Bank that has to be implemented. Each creditors take different lending decisions as different criterion and different objectives and we do not think that it would be appropriate to interfere with that.

What we think is that if you want some type of insufficient or asymmetric information and that many of these creditors may not have the appropriate information as to the macroeconomic situation of the borrowing country and the decisions that other creditors are taking. This is a situation that is very different from what is happening for other countries. The reason for that is that this is a new situation. We have new creditors, and in many ways we have new borrowers. These countries were not borrowing actively from export credit agencies before because they had already a very high level of debt and they had also a different macro situation, so we are adapting to those changes and we see our role as providing the tools and trying to share the information as a kind of a platform for sharing information among creditors.

MR. MAZAREI: If I may add on this issue, as you are aware, China has a seat at our board and of course at the World Bank they are present, and they aware of these discussions. But to be fair to them, they have become more engaging of international fora, and they are becoming more engaged in these discussions and—looking forward.

QUESTION: I was wondering how effective the framework can actually be without that information or transparency from all creditors including the new emerging ones. The other question I have is with these new so-called universe of potential creditors that you talk about, how much—or how much work will you have to change within the framework to bring in all the new aspects of lending for many of these countries? A third question is, many of the African ministers I talk to tell me that they do not even use this framework because of its complication, it is extremely complex. How much are you going to be doing to simplify that and make it easier?

MS. GUERGUIL: On the effectiveness, it is very clear and I think that the report tries to recognize, that the usefulness of the framework depends on the data and that is why we have embarked on an effort to convince creditors to share data if this data is not available through the traditional reporting mechanism, as well as the information that the borrowers have and can share. So data is certainly an important aspect.

The universe of creditors, what we have identified among the new creditors are export credit agencies, they are not new in the sense that they existed before, but they used to have a very limited engagement with low-income countries and are certainly more active now. As Adnan said before, there are what we call emerging creditors. Some of them have been there for some time, but again they have increased their exposure in those countries. The most commented about is China, but China is not alone. There are a number of other countries that have increased their lending significantly to low-income countries.

We do not have precise numbers, quantities or all the details on the format of the lending, but we do have some information because generally through our policy dialogue with borrowing countries, borrowing countries ask sometimes for our advice or clarification as to what will be the macroeconomic implication of some borrowing. So we have identified some novel forms and we think that we have adapted the framework in that respect and we think that the changes, the modifications we have introduced, will allow the framework to adopt to, for instance, the new role of private creditors, the new form of emerging lending. That we hope at least is the case. Obviously, it will crucial decision will be in the actual implementation. At the same time, the framework is flexible enough to adapt to different terms of borrowing.

On your last question, we hope that the framework is not too complex, but at the same time, what we recognize is that it may be difficult for some borrowing countries to use it now because they have relatively weak capacity and they have a limited amount of trained staff. It is a problem that is general for these African countries and not only in debt management. But it may be now more acute in the debt management area because of the sudden changes in the circumstances that in our view could have more urgency on this.

As Adnan said, part of our program is certainly together with the World Bank and together with other interested international agencies or donors is to put up a program of technical assistance to be able to help those countries use the framework on their own. As I said, this is the ultimate objective of the exercise, that these countries can take their own borrowing decisions in a well-informed way so that the increased resources that are now available can be used effectively to help these countries and raise the living standards of their population. So that is really the purpose, and we are aware that we have a lot to do in this, but we are certainly working on that.

My colleague from the World Bank has joined us, and I think she may have something to add on this specific area.

MS. WEIST: Thank you, Martine. Sorry for the delay. I wanted to follow-up on Martine's point and note that we have offered a series of technical workshops for government officials in Africa and other regions on the Debt Sustainability Framework. As Martine noted, there is a clear need for more of this work and we recognize that, but the workshops are very much designed to allow countries to understand their own context, to apply the framework, and the tools to build up their own capacity to be able to apply it.

MR. MAZAREI: On our side we are very, very thankful. As you have noted yourself, the success of this effort is based on the quality and the amount of data we have and to the extent that various parties, especially the member countries themselves, become more comfortable, and on that road we hope Bank and Fund staff hope to be of service. This is not a done deal. This is going to be a product and a framework that is going to be modified in light of experience and we look forward to the important comments of the various parties. Thank you very kindly.


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