IMF Executive Board Discusses Modernizing Fiscal Policy Framework and Public Debt Sustainability AnalysisPublic Information Notice (PIN) No. 11/118
September 12, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On August 29, 2011, the Executive Board of the International Monetary Fund (IMF) discussed the report entitled Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis (DSA) prepared by IMF staff.
Large increases in public debt in a number of member countries have brought the sustainability of fiscal policy and public debt to the forefront of policy discussions. The recent worsening of the debt outlook in these economies reflects a number of factors, including a sharp deterioration of fiscal balances during the crisis and, in some cases, government intervention in support of the financial system. This deterioration is in addition to the long-term spending pressures related to population aging. These developments make it timely to modernize the Fund’s framework for assessing public debt sustainability in market access countries.
Executive Board Assessment
Executive Directors welcomed the opportunity to discuss modernizing the framework for fiscal policy and public debt sustainability analysis. They noted that the recent global crisis has highlighted the need for increased focus on public debt sustainability of market-access countries, especially advanced economies. Directors welcomed the clarification of the conceptual framework, including the distinction between fiscal policy sustainability and public debt sustainability. They generally supported the proposals for giving greater consideration to several elements such as the realism of baseline assumptions, the level of public debt as one of the triggers for further in-depth study, the analysis of fiscal risks, vulnerabilities associated with the debt profile, and the coverage of fiscal balance and public debt.
Directors generally supported a more risk-based approach to assessing debt sustainability for market-access countries, where the depth of the analysis would be commensurate with the extent of identified country-specific vulnerabilities. Nevertheless, they emphasized the need to maintain a reasonable degree of standardization to ensure evenhandedness and comparability across countries.
Directors underscored that the quality of the debt sustainability analysis depends greatly on the realism of the assumptions used in the baseline scenario. Assessing the realism of fiscal projections is especially important when significant fiscal adjustment is planned, in which case both country-specific information and cross-country experience should be taken into account. The “no policy change” and historical scenarios could be helpful in assessing the realism of baseline projections, although a few Directors noted the limitations of using historical information that may no longer be relevant.
Consistent with the proposal of conducting more in-depth analysis where its value seems greater, most Directors saw merit in the use of a reference point of 60 percent for the debt-to-GDP level as an important trigger, among others, for more stringent analysis of debt vulnerabilities. They called for flexibility and judgment, using a broader set of indicators in deciding whether to conduct more in-depth analysis. Indeed, Directors noted that the presence of other vulnerabilities stemming from the profile of debt or fiscal risks more generally could call for a more stringent analysis even for countries where debt is below the reference point. A few Directors called for clear guidelines to trigger a more in-depth analysis, while a few others emphasized the importance of relying on informed staff judgment.
Directors agreed that the coverage of fiscal balance and public debt should be broadened to include the general government. They saw merit in assessing pressures from age-related and health care spending, and, where available, net debt measures to complement gross debt analysis.
Directors underscored that contingent liabilities, particularly those arising from government financial intervention to support the private sector or obligations arising from off-balance-sheet public liabilities, can have a large impact on public debt when they materialize. Most Directors broadly supported the inclusion of contingent liabilities in the debt sustainability analysis, although a number of them cautioned about potential comparability and quantification issues and the need to be selective. A few other Directors did not support including contingent liabilities in the analysis. Directors noted that tools, such as the Financial Sector Assessment Program (FSAP), and indicators, such as banking sector credit, asset prices, and capital flows, could help inform the analysis of contingent liabilities.
Directors saw merit in enhancing the assessment of macroeconomic shocks. They agreed that stochastic simulation methods can improve the means for assessing the uncertainty surrounding baseline projections and that their use should be further encouraged for countries where adequate data are available. Directors supported a flexible implementation of this approach, and were of the view that alternative scenarios could be used more widely to analyze risks to the public debt outlook.
Directors called for greater consideration of the debt structure and liquidity indicators in the analysis, noting that debt vulnerabilities are associated not only with the level of debt but also with its profile. They agreed that indicative benchmarks for the indicators discussed in the report could add value. Directors also noted that the analysis should take into account additional country-specific factors, such as the capacity of the market to absorb debt.
Directors underscored that the assumptions used in the debt sustainability analysis need to be fully explained and the results carefully communicated to the public to avoid unwarranted market reactions. They also emphasized the importance of close interaction with country authorities in preparing debt sustainability analyses. A number of Directors called for an assessment of the resource implications of the staff proposals. Directors looked forward to the development of specific guidance, taking into account the useful suggestions for further refinements at today’s meeting, and effective implementation of the new framework.