IMF Executive Board Reviews the Joint IMF-World Bank Debt Sustainability Framework for Low-Income CountriesPublic Information Notice (PIN) No. 12/17
February 23, 2012
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 February 15, 2012, the Executive Board of the International Monetary Fund (IMF) reviewed the joint IMF-World Bank debt sustainability framework (DSF) for low-income countries (LICs).
The DSF was introduced in 2005 with the objectives of guiding LICs’ borrowing decisions and creditors’ lending decisions, in a manner consistent with both progress toward LICs’ development goals and long-term debt sustainability; improving assessments and policy advice on debt issues; and helping detect potential crises early so that preventative action can be taken. The framework was previously reviewed in 2006 and 2009. The 2006 review assessed the initial experience with the framework and examined the implications of debt relief under the Multilateral Debt Relief Initiative. The 2009 review, which came in the wake of wide-ranging reforms of the IMF’s financial facilities for LICs, focused on options to enhance the flexibility of the DSF.
The current review takes a comprehensive look at all aspects of the DSF to see whether the framework remains adequate in light of changing circumstance in LICs. The review discusses the DSF’s performance to date, presents the results of analytical work by IMF and World Bank staff, and proposes a number of options for improving the framework.
Executive Board Assessment
Executive Directors welcomed the timely review of the LIC DSF. They welcomed the use of the framework by country authorities in their borrowing decisions, and by a growing community of donors and lenders to help inform financing decisions. Directors noted that experience with the DSF to date suggests that it has performed relatively well and fulfilled its main objectives. They agreed nevertheless that some modest improvements are necessary in light of changing circumstances in LICs, to ensure that the framework remains robust and relevant. In doing so, Directors underscored the importance of maintaining cross-country comparability while also assessing country-specific circumstances adequately and evenhandedly. They also considered the framework as a critical tool for ensuring that LICs have access to the resources necessary to meet their development goals while preserving long-term debt sustainability.
Most Directors agreed that the indicative policy-dependent thresholds used in the framework remain broadly valid. While most supported lowering thresholds for debt service to revenue, a number of Directors cautioned that the more conservative thresholds could unduly constrain LICs’ borrowing decisions. Many Directors endorsed a downward revision to the current export-based thresholds for countries with large remittance flows, to adjust for the inclusion of such flows in calculating a country’s repayment capacity. However, some viewed such a downward revision as representing an unnecessary tightening of the framework, while some others were skeptical about including remittances explicitly in the DSF, pointing to the limited availability and volatility of data. Directors emphasized the need to exercise judgment when considering cases where remittances should be included, and when interpreting breaches of external debt thresholds more broadly. They endorsed the proposal to maintain all other thresholds at their current values, and recommended that revisions to the framework be explained to country authorities and communicated carefully to the public.
Noting the growing role of domestic debt in some LICs, Directors generally saw scope for strengthening the analysis of total public debt and fiscal vulnerabilities, including from contingent liabilities, along the lines of the recommendations made in the staff paper on Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis. Most Directors supported the proposed benchmarks for total public debt to help determine when to conduct deeper analysis, including in the discussions with country authorities, while cautioning that such benchmarks should not be used mechanically. A few Directors noted that the lack of comprehensive and reliable data on domestic debt makes it difficult to derive benchmarks that could be used across LICs.
Most Directors considered that introducing an additional risk rating would usefully complement the assessment of external public debt, in cases where there are significant vulnerabilities related to domestic public debt or private external debt. The additional risk rating would inform the macroeconomic and structural policy dialogue with country authorities, while the assessment of the risk of external debt distress would continue to inform the financing decisions of the International Development Association. Some other Directors were not convinced of the need for the additional risk rating, on grounds of data limitations and the risk of weakening LICs’ ability to attract foreign capital.
Directors agreed that country-specific information should be taken into account more systematically when assessing the risk of debt distress. They broadly supported more consistent use of judgment in this regard, although a few saw merit in calibrating country-specific thresholds. Directors welcomed the plan to develop clearer guidance for staff, and supported analytical work on alternative approaches to complement the current methodology.
Directors recognized the benefits of public investment for growth and development, which could extend beyond national boundaries. They stressed therefore that understanding the linkages between debt-financed investment and growth, including the positive externalities of regional projects, is critical to the quality of debt sustainability analyses (DSAs). Directors generally welcomed ongoing efforts by staff to develop models and analytical tools to strengthen the treatment of investment-growth linkages in DSAs. A number of Directors urged a cautious approach to this issue, including by using conservative assumptions, accounting for all the costs associated with the investments, and paying due regard to countries’ absorptive capacity.
Directors saw merit in improving the assessment of dynamic linkages among macroeconomic variables. They endorsed the proposed methodological refinements of stress tests, on an experimental basis, to enrich the analysis while not having a formal role in determining the risk rating.
Directors generally welcomed efforts to simplify the DSA template, which would allow country authorities to produce their own DSAs more easily, gradually building up their capacity and enhancing the policy dialogue on debt issues. They also supported the proposal to produce full joint DSAs every three years, with lighter updates in the interim years, while maintaining the flexibility to prepare full DSAs if warranted by circumstances, including those prompting a request for use of Fund resources. Directors underscored the importance of ensuring that these changes do not undermine the quality of DSAs.