Public Information Notice: IMF Executive Board Reviews the Policy on Debt Limits in Fund-Supported Programs
April 8, 2013
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.
April 8, 2013
On March 22, 2013, the Executive Board of the International Monetary Fund (IMF) reviewed the policy on debt limits in Fund-supported programs.
The Fund’s debt limits policy has been in place since the 1960s, and was last reformed in 2009. The primary focus of the reform was to adapt the policy to the changing circumstances of members, particularly in low-income countries (LICs).1 To ensure that Fund-supported programs continue to help LICs strike the appropriate balance between debt sustainability and borrowing space for productive investments that will support growth, the framework adopted in 2009 moved away from a single design for concessionality requirements toward a menu of options that took into account the diversity of members’ circumstances. Given its primary focus on LICs, the reform left the policy applying to the rest of the membership broadly unchanged.
As the debt limits policy applies to all Fund members, this review takes a comprehensive look at the way debt limits have been implemented in Fund-supported programs across the membership. It examines the experience with the policy and proposes possible reforms to strengthen it. This paper represents the first stage of the review and will be followed by a second paper with specific proposals.
Executive Board Assessment
Directors welcomed the opportunity to discuss this review of the policy on debt limits in Fund-supported programs.
Directors concurred that the 2009 reform had been a useful step to adjust the debt limits policy to the changing circumstances of members, particularly low-income countries (LICs), and to strengthen the link between the debt limits policy on the one hand and debt vulnerabilities and public financial management on the other. Most Directors also agreed that the review of its implementation suggests that further modifications to the policy are needed to reduce uneven outcomes and address the complexity and potential for distortions in investment and financing decisions raised by the current policy.
Most Directors concluded that establishing a unified debt limits framework by broadening the scope of the debt limits policy to encompass all borrowing, regardless of its terms, would provide stronger safeguards for debt sustainability without unduly constraining countries’ ability to secure adequate external financing to support their development agenda. However, because of concerns to protect the availability of concessional financing, a few Directors expressed the view that a stronger case needed to be made before the Fund moves away from the current framework. Many Directors concurred with the proposal to set the debt limits in nominal terms for all countries in order to facilitate monitoring, but a number of Directors were concerned that moving away from limits on non-concessional borrowing might lead to an accumulation of unsustainable debt. Many Directors noted that the discussion is preliminary and that specific changes to the policy will require further work and analysis.
Directors stressed the importance of preserving incentives for LICs to borrow on concessional terms and for their lenders to provide such financing whenever possible. Many Directors were of the view that the proposed indicative target on the average concessionality of new financing, together with the ceiling on aggregate borrowing, would satisfy this objective and welcomed the increased flexibility the proposed reform would grant to LICs in managing their borrowing policy. A number of Directors proposed that consideration be given to making average concessionality a binding performance criterion or to set the overall debt limit in present value terms. Some Directors reserved judgment on whether the proposed reform contains sufficient incentives to ensure that LICs receive favorable terms on their official financing until they have the opportunity to review the operational proposals to be developed by staff in the second stage of the review.
Most Directors agreed that no changes to the design of debt limits in Fund-supported programs in the General Resources Account (“GRA programs”) were needed. Directors welcomed staff’s proposal to develop additional guidance on the circumstances under which GRA programs would be expected to include a debt limit.
Many Directors saw merit in addressing issues related to public financial and debt management capacity directly in the structural component of a country’s program, rather than through the debt limits policy. However, a number of Directors urged that further staff work was needed to explain how country capacity could still maintain a central role in the application of debt limit policy. Noting the importance of the capacity dimension in countries’ ability to safely carry debt, a number of Directors stressed that measures aimed at building such capacity should figure prominently in technical assistance.
Most Directors saw merit in moving toward a single uniform discount rate that would address unwarranted fluctuations in concessionality calculations that have occurred since the Debt Sustainability Framework (DSF) for LICs was originally designed. They welcomed the greater stability and predictability in concessionality calculations that such a reform would bring, but a number of Directors emphasized that a strong link to market-determined rates should be maintained. Directors looked forward to the specific reform proposal on this issue to be put forward in a joint paper by staffs of the Fund and the World Bank in the coming weeks.
Directors encouraged staff to conduct outreach with key constituencies, including country authorities, lenders, and other development stakeholders to seek their input on the design of the final reform proposal. A number of Directors also encouraged staff to explore the impact of the reform on lending operations of other International Financial Institutions (IFIs). Given the importance of the proposed reform, a number of Directors suggested that a gradual approach and transitional arrangements be considered. Directors also urged staff to continue to collaborate closely with World Bank staff to reach an agreement on the reform of the discount rate in the DSF. Directors also emphasized the objective of maintaining to the extent possible, broad consistency between the Fund’s debt limit policy and the Bank’s non-concessional borrowing policy.
Directors asked staff to conduct further analysis and report back to the Board in an informal session before proceeding with a specific reform proposal.
1 For the purposes of this paper, the debt limits policy is used as a shorthand for the policy on debt limits in Fund-supported program.