## Making Debt Work for Development and Macroeconomic Stability

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### Immediate urgency: rising debt risks and systemic effects
- Total gross global debt rose by 28 percentage points of GDP in 2020 — "the largest single-year increase since World War II."
- Global public debt ratio jumped to a record 99 percent of GDP in 2020.
- In 2020, total global debt reached 256 percent of GDP; EMDE debt reached 198 percent of GDP (IMF Global Debt Database).
- Government debt in EMDEs climbed to 64 percent of GDP (259 percent of government revenues) in 2020.
- Private EMDE debt reached a record 135 percent of GDP (77 percent of GDP in EMDEs excluding China).
- In LICs, government debt rose by 9 percentage points and external debt reached 39 percent of GDP by end-2020.
- 60 percent of DSSI-eligible countries are assessed at high risk of debt distress or are already in debt distress.
- Consequences highlighted:
  - Bigger debt servicing burdens reduce fiscal space for development and stabilization.
  - Over-indebtedness increases crisis risk via "debt overhang,” “fiscal space,” and “crowding out.”
  - For IDA countries, government interest outlays in 2018 were twice as high as health spending; education outlays remained flat over the past decade.

### Changes in debt composition and vulnerabilities
- EMDE external debt rose to 31 percent of GDP by end-2020, 7 percentage points higher than in 2010.
- Domestic debt in EMDEs rose to 174 percent of GDP.
- Debt held by non-residents accounted for 42 percent of EMDE government debt in 2020; debt denominated in foreign currency accounted for 49 percent.
- In a quarter of EMDEs, foreign currency-denominated corporate debt exceeded 20 percent of GDP.
- The corporate debt to GDP ratio rose to 98 percent of GDP globally by 2020; household debt rose to 58 percent of GDP.
- The non-concessional component of LIC debt was 50 percent of public and publicly guaranteed external debt at end-2020.
- Creditor composition became more heterogeneous:
  - In 70 EMDEs, most official bilateral debt is owed to non-Paris Club creditors.
  - China is the largest official bilateral creditor for 42 of the 68 DSSI-eligible countries with available IDS data.
- Proliferation of debt-like instruments, commodity-based lending, and opaque SOE financials can obscure total government debt levels.
- Pandemic-era private debt forbearance schemes complicate assessment of bank balance-sheet health.

### Policy responses, fiscal risks, and macroeconomic implications
- Global policy measures in response to COVID-19:
  - Above-the-line budget measures reached 10.2 percent of GDP since January 2020.
  - Below-the-line (off-budget) support amounted to 6.2 percent of GDP since January 2020.
- Policy responses led to "the largest fiscal risk accumulation since the Second World War."
- High public debt constrains fiscal policy when needed to address new crises or challenges.
- Unsustainable private sector debt, especially in EMDEs, risks derailing recovery due to interconnections across households, firms, financial, and public sectors.
- The Russia-Ukraine war is likely to exacerbate vulnerabilities via tighter global financial conditions, higher inflation, lower growth, and higher stress on public finances.

### Roles and actions of the IMF and the World Bank Group (WBG)
- Objectives of IMF and WBG actions:
  - Create fiscal space for priority public spending and build crisis resilience.
  - Build policy frameworks and institutions to preserve fiscal space.
  - Broaden access to credit and develop domestic debt and capital markets.
  - Support debt management, debt sustainability assessments, and debt restructuring arrangements.
  - Prioritize debt transparency across initiatives.
- WBG instruments and roles:
  - IFC and MIGA support long-term finance, including guarantees, investment projects, debt and non-debt financing for firms, and distressed asset management for financial institutions.
  - WBG works with local financial institutions and the private sector to provide appropriate financing including non-debt finance such as equity and venture capital.
- IMF roles:
  - Support stabilization and policy reforms; provide policy advice, financial support, and technical assistance related to growth, stability, and financial sector capacity building.
- Joint actions:
  - Provide technical assistance on resolving private debt and support the design and implementation of debt relief via the Paris Club and the G20.
  - Advocate for more efficient resolution of public debt through initiatives such as the G20 Common Framework (CF).

### Key proposed priorities and institutional reforms
- Strengthen multilateral frameworks for debt restructuring and development finance simultaneously.
- Immediate priorities to make the G20 Common Framework deliver:
  - Clarify timelines and processes for restructuring.
  - Provide a debt service suspension during restructuring negotiations.
  - Clarify implementation of comparability of treatment (CoT).
  - Expand coordinated debt treatments to highly indebted countries beyond DSSI eligibility.
- Support country capacity-building through:
  - Improved fiscal policy, public investment programs, and debt management frameworks.
  - Reduction of resolution costs for private and public debt.
  - Development of domestic debt and capital markets to increase access to long-term finance.
  - Strengthening debt transparency and debt resolution mechanisms.
- Facilitate enduring debt solutions for EMDEs facing protracted economic scarring.

### Debt: role, costs, benefits, and conditionalities for sustainability
- Role and dual nature:
  - Public debt facilitates consumption smoothing, counter-cyclical fiscal policy, and investment when taxation capacity is limited.
  - Firms require short-term credit for operations and long-term debt for investment; debt-financed investment can boost private sector dynamism.
  - Over-reliance on debt increases susceptibility to roll-over difficulties, abrupt market changes, and can weigh on private investment.
- Box 1 — Costs and benefits (key findings):
  - Benefits:
    - Enables investment in infrastructure and social sectors when taxation capacity is limited.
    - Supports tax smoothing and counter-cyclical fiscal policies, reducing output volatility.
    - Shifts taxation away from current generations for long-gestation projects.
    - Deep domestic debt markets provide a sovereign yield curve, facilitate broader capital markets, and allow governments to finance at longer maturities, reducing rollover and external debt service risks from currency depreciation.
  - Costs and risks:
    - Debt overhangs can reduce debt sustainability and increase risk of fiscal or financial crises.
    - Elevated debt increases susceptibility to financial crises; shocks can cause risk premia to rise suddenly and cascade into sovereign, currency, or banking crises.
    - High debt can increase the cost of capital and crowd out private borrowing.
    - More leveraged firms tend to invest less and may avoid higher-return but delayed investments such as research and development.
    - Interest spending by EMDE governments rose steadily since 2010 to 2 percent of GDP in 2020, despite interest rates being below growth rates in 69 percent of EMDEs on average during the 2010s.
    - Countries with high debt tend to have higher interest-rate growth differentials that deteriorate faster in times of financial stress.
  - Conditionalities for sustainability:
    - Elevated debt may be more sustainable when denominated in local currency, at longer maturities, and when private debt repayment profiles match reliable cash flows.
    - Developing stronger domestic government debt markets in EMDEs is key for growth and resilience.

### Recent trends, drivers, and risks (selected evidence)
- Debt-to-income ratios fall only when growth outweighs both debt costs and new borrowing; this has not happened on aggregate in EMDEs since 2010.
- Debt can increase due to widening primary deficits, stock-flow adjustments (e.g., bailouts, exchange rate changes), or interest rates rising further above growth rates.
- For low-income countries, debt increases during the global financial crisis and in 2020 were driven mainly by valuation adjustments.
- Pre-pandemic decade: debt build-up in EMDEs was not accompanied by quicker growth; government capital stock-to-GDP ratio in 2017 was estimated to be below its 1992 level in advanced economies, EMDEs excluding China, and LICs.
- Over the next few years (context described):
  - Macroeconomic risks from high debt burdens and uncertainty from the Russia-Ukraine war are likely to rise.
  - Main global impacts from the conflict include flight to quality, higher commodity prices, and increasing inflationary pressures.
  - Global interest rates are expected to rise starting in 2022, increasing probability of large capital outflows and currency depreciation in EMDEs.
  - Growth in the United States and China could slow, weakening demand for EMDE exports.
  - Recent firming of commodity prices could ameliorate risks for commodity exporters but coincide with tighter financial conditions and large EMDE debt redemptions coming due.
- Human capital and investment needs:
  - The pandemic degraded human capital; an additional 10 percentage points of 10-year-olds in EMDEs may now be unable to read at age-appropriate levels.
  - IMF (2021b) estimates low-income countries need US$200 billion up to 2025 to respond to the pandemic and an additional US$250 billion to accelerate income convergence with advanced economies.

### IMF and WBG engagement modes and instruments
- Three major modes:
  - Supporting debt sustainability and robust fiscal and public debt management frameworks.
  - Facilitating access to finance, including for the private sector.
  - Supporting debt resolution when needed.
- IMF instruments and actions:
  - Surveillance, debt sustainability assessments, IMF-supported programs, and policy advice.
  - General SDR allocation: In August 2021, the IMF approved a general allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion.
  - IMF Debt Limit Policy (DLP) reform (November 2020) provides more financing flexibility, requires debt data disclosure upfront in program cases, and mandates a debt holder profile table in all program documents.
    - Of 18 program requests and reviews approved so far, all staff reports included information on the debt holder profile with 11 out of 18 countries already meeting all data requirements.
- WBG instruments and actions:
  - Advisory services, analytics, Debt Management Performance Assessments, Development Policy Financing (DPF), investment and PforR projects, and innovative financial products.
  - IDA’s SDFP adopted in 2020: 55 countries at moderate, high risk of debt distress or in debt distress agreed to implement performance and policy actions (PPAs); 58 countries are doing so in FY22.
    - IDA19 grant financing reached US$17.2 billion as of end-February 2022, or 35 percent of total IDA19 financing.
  - WBG is the biggest multilateral funder of climate investments in developing countries; WBG introduced climate-related PIMA modules (C-PIMA).
- Joint facilities and TA:
  - Joint World Bank-IMF Debt Management Facility (DMF) provides TA and advisory services to IDA countries; DMF prepared a Crisis-Response Framework and scaled up virtual training and MOOCs in FY21.
  - Government Debt and Risk Management Program (GDRM) provides customized TA to middle-income countries.

### Policies encouraging sustainable borrowing and lending
- WBG Sustainable Development Finance Policy (SDFP) and IMF Debt Limit Policy (DLP):
  - Encourage sustainable borrowing and lending; binding in the context of lending arrangements and rely on adequate debt information and analytical tools.
  - Incentivize countries to improve debt management capacity and serve as reference frameworks for other creditors and institutions.
- Implementation examples and outcomes:
  - Between end-2019 and end-2020, an increase of 20 percentage points occurred in the share of IDA countries that make debt data available in line with best practices.
  - Of IDA-only countries at high risk or in debt distress, allocations are delivered on grant terms (100 percent) under the IDA financing framework and LIC DSF; moderate risk: 50 percent grant/50 percent loan; low risk: 100 percent credits.
  - Unsatisfactory implementation of PPAs for two consecutive years results in loss of set-aside amount and potential hardening of IDA financing terms.

### TA to strengthen debt management and preparedness
- TA areas: revisions of debt strategies and annual borrowing plans, reform of domestic market auctions, review of operational risk management, investor communication, and cash flow forecasting and management.
- Coverage and outcomes:
  - One in four countries with a World Bank DPF had at least one prior action supporting improvements in debt management policies and institutions in 2020-21.
  - Half of IDA countries had DPFs with debt management-related prior actions.
  - About one in five IMF-supported programs in recent years have had structural benchmarks tied to the improvement of debt management capacity.
  - IMF delivers TA through regional debt management advisors in Regional Capacity Development Centers in the Caribbean, Pacific Islands, and West and Central Africa.
  - Example: Mongolia and Benin successfully swapped short-term debt into longer-term debt in 2020, significantly reducing roll-over pressures.

### Fiscal risk identification, disclosure, and public sector balance sheet work
- Tools and activity:
  - World Bank’s Fiscal Risk Toolkit and IMF's Fiscal Risk Assessments and Fiscal Transparency Evaluations (FTEs).
  - IMF’s expanded Fiscal Risk Toolkit released in November 2021.
  - IMF expanding the Public Sector Balance Sheet Database using the Government Finance Statistics Manual 2014 framework.
- Coverage and targets:
  - IMF Fiscal Affairs Department and Regional Capacity Development Centers had nearly 100 fiscal risk capacity development activities for more than 50 member countries in 2021.
  - Fiscal risk assessment tools applied in around 40 countries over the past two years.
  - Fiscal risk assessments included in 35 Fiscal Transparency Evaluations completed since 2014.
  - World Bank rolled out revised Fiscal Risk Framework with 22 TA activities and 7 activities on the WBG Integrated State-Owned Enterprises Framework (iSOEF).
  - Public Sector Balance Sheet Database rollout target: cover 50 countries by July 2022, up from 38 in 2018; time series data available for 25 countries compared with 17 in 2018.
- Data and disclosure recommendations:
  - Regular reporting of contingent liabilities (including PPPs and domestic arrears) as memorandum items to debt statistics and in fiscal risk statements.
  - Data on debt redemption profiles and refinancing costs recommended.

### Public investment management (PIM) and project selection
- Objective: reserve limited resources for investments with the highest returns and manage trade-offs between scaling up public investment and containing debt vulnerabilities.
- WBG and IMF instruments:
  - WBG PIM diagnostic framework applied in more than 70 countries since 2008.
  - IMF Public Investment Management Assessment (PIMA) conducted in over 70 countries as of 2021.
  - New climate-PIMA (C-PIMA) module introduced in December 2021; five C-PIMAs conducted (Anguilla, Costa Rica, Croatia, Nepal, and the United Kingdom); two additional C-PIMAs underway (Argentina and Haiti).
  - PPP Fiscal Risk Assessment Model (PFRAM) launched in April 2016 to assess fiscal costs and risks from PPPs.

### Access to long-term finance and domestic debt market development
- Support coverage:
  - WBG support for domestic debt market development reached over 50 low- and middle-income countries in the last five years through advisory support, training, operations-related work, and programs including DMF, GDRM, and J-CAP.
  - J-CAP mobilizes domestic and international private capital to invest in strategic sectors and provide longer-term local currency funding.
  - WBG guarantee programs (PRGs and PCGs) help mobilize private capital.
  - IMF supports development of local currency government bond markets through training and TA.
  - MIGA and IFC catalyze FDI and play roles in PPPs, corporate equity investments, and private equity and venture capital funds.
- Joint framework:
  - New joint WB-IMF framework for local currency bond market development launched in March 2021 identifies six building blocks: (i) money market, (ii) primary market, (iii) investor base, (iv) secondary market, (v) financial market infrastructure, and (vi) legal and regulatory framework.

### MIGA and IFC instruments to support long-term finance
- MIGA:
  - Supports access to long-term finance through credit guarantees such as non-honoring of financial obligations (NHFO) for debt issued by eligible sovereigns; NHFO supports tenors as long as 20 years.
- IFC:
  - Encourages long-term finance through risk-sharing and capital relief transactions, directs proceeds to MSMEs, rural and agribusiness borrowers, and women-owned firms, and invests in corporate equity and private equity/venture capital funds.

### Debt resolution, crisis prevention, and restructuring support
- Historical contributions:
  - WBG and IMF led the HIPC Initiative and MDRI; under HIPC/MDRI, WBG provided US$50.9 billion and IMF provided US$7.4 billion of debt relief to 38 countries as of end-2021.
  - IDA-administered Debt Reduction Facility (DRF) helped extinguish US$10.3 billion of external commercial debt owed by 21 countries.
- Pandemic-era relief:
  - DSSI (April 2020–December 2021) temporarily suspended US$12.9 billion of 48 countries’ debt service payments.
    - DSSI provided liquidity support estimated to average about 0.5 percent of GDP in 2020 for participating countries.
    - Debt service suspended in 2020-21 will add to the debt service of those countries starting in 2022.
  - IMF Catastrophe Containment and Relief Trust (CCRT) provided debt service relief to the IMF for 31 poorest countries covering debt service falling due between April 2020 and April 2022; total debt service relief for five tranches amounted to about US$1 billion.
  - WBG began publishing external public debt and debt service data by creditor on its International Debt Statistics (IDS) website in the context of the DSSI.

### Domestic private sector debt resolution and insolvency
- Scale and problems:
  - On average, less than 30 cents on the dollar is recovered by secured creditors in private sector insolvencies in EMDEs, compared to 70 cents on the dollar in OECD high-income countries.
  - Causes: weaknesses in insolvency systems, lack of workable options to preserve viable enterprises, inefficient processes, costly and slow debt recovery and restructuring, and inadequate courts and insolvency administrators.
- Institutional support:
  - WBG provides TA, lending, advisory services, and development of ADR systems.
  - IMF provides policy and technical assistance and analytical work during surveillance, programs, and capacity development.

### IFC support for private debt resolution and distressed assets
- IFC activities:
  - Invests in distressed bank assets and helps establish secondary markets for nonperforming loans, supports debt restructuring for individual and corporate borrowers (mostly retail bank credit), and helps create markets for distressed asset resolution.
- Preconditions for success:
  - Regulatory changes, supportive tax treatment, stronger supervisory pressures, and insolvency regimes enabling banks to write down distressed assets sufficiently.

### WBG participation in global standard-setting for private debt resolution
- Roles and activities:
  - WBG is designated co-standard setter for efficient private debt resolution and convenes a global task force to issue principles for modern insolvency systems.
  - TA spans legislative support, institutional development, NPL resolution, and stakeholder capacity building.
  - Collaborates with IAIR and INSOL International on initiatives including the Africa Roundtable and the Forum for Asian Insolvency Reform (FAIR).

### IMF–WBG collaboration on standards, data, and debt-risk frameworks
- Joint and complementary work:
  - Joint LIC DSAs for 66 countries eligible for IDA financing.
  - IMF to commence rollout of the Sovereign Risk and Debt Sustainability Framework for market access countries (SRDSF) after March 2022 to:
    - provide more comprehensive and consistent debt coverage;
    - enhance debt transparency;
    - provide clearer signals of sovereign debt risks based on improved analytical methods;
    - offer new risk assessments at three horizons (short, medium, and long term).
  - World Bank’s IDS and IMF’s Global Debt Database provide debt information; both support IIF and OECD efforts to build a commercial creditor database for LICs.

### Strengthening fiscal policy, debt transparency, and debt management — findings and recommendations
- Priorities for countries without immediate refinancing risks:
  - Strengthen fiscal policy, public investment management, and debt transparency and management frameworks.
  - Develop credible medium-term fiscal frameworks to reduce debt vulnerabilities and borrowing costs.
  - Incorporate climate considerations and diversify funding sources.
  - Improve efficiency of public investment and promote access to long-term debt and equity finance for firms and households.
- Policy recommendations:
  - Governments should credibly commit to reduce deficits to improve creditors’ confidence and reduce borrowing costs.
  - Reallocate spending to growth-enhancing uses: education, health, social transfers, and climate-smart infrastructure; remove large, regressive energy subsidies.
  - Broaden revenue bases by removing tax exemptions and strengthening tax administration, considering distributional effects and growth impacts.
  - Foster private sector-led growth through reforms to improve business climate, attract FDI, and link to global value chains.

### Debt transparency: findings and recommended reforms
- Observations:
  - Diversified creditor bases in LICs have not been matched by capacity or frameworks for public debt management, causing mis- or under-reporting.
  - Confidentiality clauses exacerbate opacity; no African country with outstanding collateralized debt publicly discloses collateral details (Mihalyi et al. 2022).
  - Insufficient transparency can lead to inappropriate pricing of risk, inadequate capital allocation, and lengthened restructuring negotiations.
- Recommended borrower reforms:
  - Adopt legal framework for public debt management that: (i) clearly defines public debt and coverage; (ii) specifies borrowing authority and debt authorization cycle; (iii) clarifies institutional arrangements for issuance, management, recording and reporting; (iv) discloses national debt strategies and borrowing; (v) includes reporting, audit and accountability requirements; and (vi) regulates consequences of non-compliance, including contingent liabilities.
  - Build debt management capacity with skilled staff and modern IT systems for debt recording and management.
- Creditor responsibilities and good practices:
  - Creditor reporting to enhance transparency and reconcile public debt data; G20 Operational Guidelines for Sustainable Financing emphasize official bilateral creditor information sharing (guideline 2).
  - IMF-WB Diagnostic Tool identifies strong practice as publishing loan-by-loan information by creditors, including terms, on a single website with regular updates and using public templates while refraining from confidentiality clauses.
- Implementation progress:
  - IMF and WBG support for debt transparency integrated into policies and operations; in 40 percent of IDA countries, there has been a broad improvement in the quality of data dissemination practices compared to one year ago.
  - World Bank plans to extend IDS coverage to include domestic debt and non-traditional debt instruments (e.g., resource-backed loans, central bank deposits, and others).

### Improving debt and insolvency resolution: priorities and tools
- Policy goals:
  - Update insolvency and restructuring regimes to provide restructuring options for viable firms and swift liquidation of unviable firms.
  - Ensure regulators have legal tools and institutional capacity to manage a sharp rise in insolvencies in line with international best practices.
- Tailored country support:
  - Focus on legislative frameworks, institution building, stakeholder groups, and technology/data solutions with cybersecurity and data regulation safeguards.
  - WBG to leverage role among insolvency law standard setters to promote reforms.
- Banking sector and supervisory priorities:
  - Assist regulators to resolve bank balance sheet risks accumulated during the pandemic.
  - Restore compliance with international standards and reverse measures that unduly delay NPL recognition.
  - Promptly identify affected institutions, ensure adequate risk management, and impose time-bound actions to reduce NPLs.
  - IMF-WB FSAPs and financial sector diagnostics to assess supervisory arrangements, frame priority reforms, and develop capacity.
  - Improve bank resolution and crisis management frameworks to minimize taxpayers’ costs and preserve financial stability.
  - Support regulatory and supervisory frameworks to facilitate innovation in microfinance while strengthening financial stability and addressing cybersecurity risks.
- G20 Common Framework (CF) support:
  - CF brings together Paris Club and non-Paris Club official bilateral creditors; implementation progress has been slow and improvements are needed.
  - IMF and WBG will continue technical support, outreach, and analytical work to improve CF implementation, build confidence, and clarify CoT implementation to ensure fair burden sharing.
  - Four priorities to strengthen CF implementation: quicker and time-bound processes; debt service standstill; clarity on enforcement/evaluation of CoT; expansion to non-DSSI eligible countries with debt vulnerabilities.

### Box 4 — Options for Strengthening the Common Framework (lessons, challenges, proposals)
- Lessons from past coordinated frameworks:
  - Paris Club since 1956 provided 477 debt treatments and standards for official bilateral creditors.
  - Brady Plan (1989), HIPC Initiative (1996), and MDRI (2005) helped resolve sovereign debt overhangs and enabled recipient countries to increase poverty-reducing expenditures.
  - Past restructurings often began with rescheduling and shifted to outright reductions once solvency problems were clear.
  - Comprehensive restructurings outside coordinated frameworks before the pandemic were protracted, incomplete, and non-transparent.
- Current CF implementation challenges:
  - Since endorsement in November 2020, pace of CF implementation has been slow.
  - Three countries have requested CF treatments: Chad, Ethiopia, and Zambia.
  - No debt treatment finalized for these applicants more than one year after initial requests.
  - Delays reflect coordination issues among creditors and within creditor-country institutions; expiration of DSSI at end-2021 increases financing pressures.
- IMF and WBG staff proposals to speed and strengthen the CF:
  1. Greater clarity on steps and timelines:
     - Creditors’ Committee formation within 4-6 weeks after debtor request and financing assurances within three months of reaching a staff-level agreement (SLA) with IMF staff.
  2. Introduction of a debt service suspension (standstill) for negotiation duration:
     - Standstill provided by official creditors on request of the debtor country once SLA reached and until actual debt treatment; no penalty interest.
     - Payments from non-participating creditors during the standstill should be fully accounted for in CF CoT assessment.
  3. Clarify parameters and processes for CoT and enforcement rules beyond current CF parameters.
  4. Expand coordinated debt treatments to highly indebted non-DSSI eligible countries, including some LMICs and small island states.
- Improvements to market-based approach and private creditor treatment:
  - Encourage enhanced collective action clauses in international sovereign bonds.
  - Support G7 private sector working group on majority voting provisions for modifying payment terms in syndicated loan agreements.
  - Report on benefits of trust structures in foreign law-governed bond offerings and encourage sub-sovereign use of enhanced collective action clauses.
- Conclusions:
  - Many EMDEs face large financing needs amid elevated debt and urgent spending priorities.
  - Restoring human and physical capital requires sustained policy intervention, large investment for SDGs, strengthened fiscal and debt management, greater transparency, efficient bankruptcy frameworks, and deeper financial markets.
  - Timely and coordinated debt restructuring, including CF improvements, is needed where necessary.
  - IMF-WBG multipronged approach—policy advice, lending, TA, and close collaboration with IFC and MIGA—remains central to achieving lasting debt sustainability and pandemic recovery.

### Quantitative and analytical evidence summarized (selected key statistics)
- 2020 single-year debt increase: 28 percentage points of GDP.
- Total global debt in 2020: 256 percent of GDP.
- EMDE debt in 2020: 198 percent of GDP.
- Private EMDE debt in 2020: 135 percent of GDP (77 percent excluding China).
- EMDE government debt in 2020: 64 percent of GDP (259 percent of government revenues).
- External debt of EMDEs in 2020: 31 percent of GDP.
- Domestic debt in EMDEs in 2020: 174 percent of GDP.
- Non-concessional component of LIC external debt at end-2020: 50 percent.
- Above-the-line COVID-19 fiscal measures since January 2020: 10.2 percent of GDP.
- Below-the-line COVID-19 support since January 2020: 6.2 percent of GDP.
- Share of EMDE government debt held by non-residents in 2020: 42 percent.
- Share of EMDE government debt denominated in foreign currency in 2020: 49 percent.
- Number of DSSI-eligible countries where China is the largest official bilateral creditor (with available IDS data): 42 of 68.
- Interest spending by EMDE governments rose to 2 percent of GDP in 2020; interest rates were below growth rates in 69 percent of EMDEs on average during the 2010s.
- DSSI suspended US$12.9 billion of debt service for 48 countries between initiation and expiration in December 2021; estimated liquidity support averaged about 0.5 percent of GDP in 2020.
- CCRT debt service relief total for five tranches: about US$1 billion.
- IMF general SDR allocation approved August 2021: US$650 billion.
- IDA19 grant financing as of end-February 2022: US$17.2 billion (35 percent of total IDA19 financing).
- Public Sector Balance Sheet Database rollout target: cover 50 countries by July 2022, up from 38 in 2018; time series data for 25 countries compared with 17 in 2018.
- Recovery rates in private sector insolvencies: less than 30 cents on the dollar in EMDEs versus 70 cents on the dollar in OECD high-income countries.

_Source: ppea2022019 - Making Debt Work for Development and Macroeconomic Stability; Box 1; Box 3; Box 4; sections 12, 24, and 35._

### References .............................................................................................................

### Making Debt Work for Development and Macroeconomic Stability

### Immediate urgency: rising debt risks and systemic effects
- Total gross global debt rose by 28 percentage points of GDP in 2020 — "the largest single-year increase since World War II."
- Global public debt ratio jumped to a record 99 percent of GDP in 2020.
- In 2020, total global debt reached 256 percent of GDP; EMDE debt reached 198 percent of GDP (IMF Global Debt Database).
- Government debt in EMDEs climbed to 64 percent of GDP (259 percent of government revenues) in 2020.
- Private EMDE debt reached a record 135 percent of GDP (77 percent of GDP in EMDEs excluding China).
- In LICs, government debt rose by 9 percentage points and external debt reached 39 percent of GDP by end-2020.
- 60 percent of DSSI-eligible countries are assessed at high risk of debt distress or are already in debt distress.
- Consequences highlighted:
  - Bigger debt servicing burdens reduce fiscal space for development and stabilization.
  - Over-indebtedness increases crisis risk via "debt overhang,” “fiscal space,” and “crowding out.”
  - For IDA countries, government interest outlays in 2018 were twice as high as health spending; education outlays remained flat over the past decade.

### Changes in debt composition and vulnerabilities
- EMDE external debt rose to 31 percent of GDP by end-2020, 7 percentage points higher than in 2010.
- Domestic debt in EMDEs rose to 174 percent of GDP.
- Debt held by non-residents accounted for 42 percent of EMDE government debt in 2020; debt denominated in foreign currency accounted for 49 percent.
- In a quarter of EMDEs, foreign currency-denominated corporate debt exceeded 20 percent of GDP.
- The corporate debt to GDP ratio rose to 98 percent of GDP globally by 2020; household debt rose to 58 percent of GDP.
- The non-concessional component of LIC debt was 50 percent of public and publicly guaranteed external debt at end-2020.
- Creditor composition became more heterogeneous:
  - In 70 EMDEs, most official bilateral debt is owed to non-Paris Club creditors.
  - China is the largest official bilateral creditor for 42 of the 68 DSSI-eligible countries with available IDS data.
- Proliferation of debt-like instruments, commodity-based lending, and opaque SOE financials can obscure total government debt levels.
- Pandemic-era private debt forbearance schemes complicate assessment of bank balance-sheet health.

### Policy responses, fiscal risks, and macroeconomic implications
- Global policy measures in response to COVID-19:
  - Above-the-line budget measures reached 10.2 percent of GDP since January 2020.
  - Below-the-line (off-budget) support amounted to 6.2 percent of GDP since January 2020.
- Policy responses led to "the largest fiscal risk accumulation since the Second World War."
- High public debt constrains fiscal policy when needed to address new crises or challenges.
- Unsustainable private sector debt, especially in EMDEs, risks derailing recovery due to interconnections across households, firms, financial, and public sectors.
- The Russia-Ukraine war is likely to exacerbate vulnerabilities via tighter global financial conditions, higher inflation, lower growth, and higher stress on public finances.

### Roles and actions of the IMF and the World Bank Group (WBG)
- IMF and WBG will strengthen financing, policy, and analytical work to:
  - Create fiscal space for priority public spending and build crisis resilience.
  - Build policy frameworks and institutions to preserve fiscal space.
  - Broaden access to credit and develop domestic debt and capital markets.
  - Support debt management, debt sustainability assessments, and debt restructuring arrangements.
  - Prioritize debt transparency across initiatives.
- WBG instruments and roles:
  - IFC and MIGA support long-term finance, including guarantees, investment projects, debt and non-debt financing for firms, and distressed asset management for financial institutions.
  - WBG works with local financial institutions and the private sector to provide appropriate financing including non-debt finance such as equity and venture capital.
- IMF roles:
  - Support stabilization and policy reforms; provide policy advice, financial support, and technical assistance related to growth, stability, and financial sector capacity building.
- Both institutions:
  - Provide technical assistance on resolving private debt and support the design and implementation of debt relief via the Paris Club and the G20.
  - Advocate for more efficient resolution of public debt through initiatives such as the G20 Common Framework (CF).

### Key proposed priorities and institutional reforms
- Strengthen multilateral frameworks for debt restructuring and development finance simultaneously.
- Immediate priorities to make the G20 Common Framework deliver:
  - Clarify timelines and processes for restructuring.
  - Provide a debt service suspension during restructuring negotiations.
  - Clarify implementation of comparability of treatment (CoT).
  - Expand coordinated debt treatments to highly indebted countries beyond DSSI eligibility.
- Support country capacity-building through:
  - Improved fiscal policy, public investment programs, and debt management frameworks.
  - Reduction of resolution costs for private and public debt.
  - Development of domestic debt and capital markets to increase access to long-term finance.
  - Strengthening debt transparency and debt resolution mechanisms.
- Facilitate enduring debt solutions for EMDEs facing protracted economic scarring.

### Quantitative and analytical evidence highlighted
- 2020 single-year debt increase: 28 percentage points of GDP.
- Total global debt in 2020: 256 percent of GDP.
- EMDE debt in 2020: 198 percent of GDP.
- Private EMDE debt in 2020: 135 percent of GDP (77 percent excluding China).
- EMDE government debt in 2020: 64 percent of GDP (259 percent of government revenues).
- External debt of EMDEs in 2020: 31 percent of GDP.
- Domestic debt in EMDEs in 2020: 174 percent of GDP.
- Non-concessional component of LIC external debt at end-2020: 50 percent.
- Above-the-line COVID-19 fiscal measures since January 2020: 10.2 percent of GDP.
- Below-the-line COVID-19 support since January 2020: 6.2 percent of GDP.
- Share of EMDE government debt held by non-residents in 2020: 42 percent.
- Share of EMDE government debt denominated in foreign currency in 2020: 49 percent.
- Number of DSSI-eligible countries where China is the largest official bilateral creditor (with available IDS data): 42 of 68.

*Source: ppea2022019 - References (Making Debt Work for Development and Macroeconomic Stability).*

### 12. Debt is not good or bad on its own. It can support growth and its costs and benefits depend

### 12. Debt is not good or bad on its own. It can support growth and its costs and benefits depend

### Role and dual nature of debt
- Public debt facilitates consumption smoothing and counter-cyclical fiscal policy, and enables greater investment.
- Prudent use of debt can support growth take-offs by financing infrastructure and social sectors when taxation capacity is limited or printing money would compromise macroeconomic stability.
- Debt permits tax smoothing and aligns benefits and costs of long-gestation projects across generations.
- Companies need short-term credit for operations (trade finance, working capital, supply chain finance) and long-term debt for investments in plant, equipment, and technology.
- Debt-financed investment in export capacity and technology can boost private sector dynamism.
- Over-reliance on public or private debt increases susceptibility to roll-over difficulties, abrupt market changes, constrains fiscal policy, and can weigh on private investment.

### Box 1 — Costs and benefits of debt (key findings)
- Benefits:
  - Enables investment in infrastructure and social sectors when taxation capacity is limited.
  - Supports tax smoothing and counter-cyclical fiscal policies, reducing output volatility.
  - Shifts taxation away from current generations for long-gestation projects.
  - Deep domestic debt markets provide a sovereign yield curve to price risk and facilitate broader capital markets, increasing availability and lowering the cost of long-term capital.
  - Deep domestic markets allow governments to finance at longer maturities, reducing rollover and external debt service risks from currency depreciation.
- Costs and risks:
  - Debt overhangs can reduce debt sustainability and increase the risk of fiscal or financial crises.
  - Elevated debt levels increase susceptibility to financial crises, including sovereign debt crises; shocks can cause risk premia to rise suddenly and cascade into sovereign, currency, or banking crises.
  - High debt can increase the cost of capital, crowd out private borrowing—especially with underdeveloped banking sectors—and siphon resources away from productive uses.
  - More leveraged firms tend to invest less and may avoid higher-return but delayed investments such as research and development.
  - Interest spending by EMDE governments rose steadily since 2010 to 2 percent of GDP in 2020, despite interest rates being below growth rates in 69 percent of EMDEs on average during the 2010s.
  - Countries with high debt tend to have higher interest-rate growth differentials that deteriorate faster in times of financial stress.
- Conditionalities for sustainability:
  - Elevated debt may be more sustainable when denominated in local currency and at longer maturities, and when private debt repayment profiles match reliable cash flows.
  - Developing stronger domestic government debt markets in EMDEs is key for growth and resilience.

### Recent trends, drivers, and risks
- Debt-to-income ratios fall only when growth outweighs both debt costs and new borrowing; this has not happened on aggregate in EMDEs since 2010.
- Debt can increase due to widening primary deficits, stock-flow adjustments (e.g., bailouts, exchange rate changes), or interest rates rising further above growth rates.
- For low-income countries, debt increases during the global financial crisis and in 2020 were driven mainly by valuation adjustments.
- Pre-pandemic decade: debt build-up in EMDEs was not accompanied by quicker growth; government capital stock-to-GDP ratio in 2017 was estimated to be below its 1992 level in advanced economies, EMDEs excluding China, and LICs.
- Over the next few years (context described):
  - Macroeconomic risks from high debt burdens and uncertainty from the Russia-Ukraine war are likely to rise.
  - Main global impacts from the conflict include flight to quality, higher commodity prices, and increasing inflationary pressures.
  - Global interest rates are expected to rise starting in 2022, increasing probability of large capital outflows and currency depreciation in EMDEs.
  - Growth in the United States and China could slow, weakening demand for EMDE exports.
  - Recent firming of commodity prices could ameliorate risks for commodity exporters but coincide with tighter financial conditions and large EMDE debt redemptions coming due.
- Human capital and investment needs:
  - The pandemic degraded human capital; an additional 10 percentage points of 10-year-olds in EMDEs may now be unable to read at age-appropriate levels.
  - IMF (2021b) estimates low-income countries need US$200 billion up to 2025 to respond to the pandemic and an additional US$250 billion to accelerate income convergence with advanced economies.

### How the IMF and WBG help: modes of engagement
- Three major modes:
  - Supporting debt sustainability and robust fiscal and public debt management frameworks.
  - Facilitating access to finance, including for the private sector.
  - Supporting debt resolution when needed.
- Effective frameworks and deep domestic markets can prevent unsustainable debt, reduce elevated debt, and help governments and firms contract debt on terms matching risk profiles.
- Efficient debt resolution for private and government debt can remove debt overhangs and support investment and growth.

### IMF and WBG instruments, programs, and initiatives
- IMF surveillance: assessments of debt sustainability, fiscal policy, exchange rate policies, and structural reforms to promote stability and debt sustainability.
- IMF-supported programs: resolve balance of payments problems and support sustained, inclusive, resilient growth via reforms and financing.
- IMF general SDR allocation: In August 2021, the IMF approved a general allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion.
- WBG advisory services and analytics: design and implement better policies; Debt Management Performance Assessments help tailor TA.
- WBG Development Policy Financing (DPF): Between 2015 and 2021, about one-third of all DPFs and almost half of DPFs in fragile, conflict and violence (FCV)-affected countries focused on fiscal and debt-related reforms.
- WBG investment and Program-for-Results (PforR) projects: financing and TA for public financial management, procurement, crisis response, and ex ante disaster and crisis preparation.
- Innovative financial products: WBG as the biggest multilateral funder of climate investments in developing countries; IMF’s new Resilience and Sustainability Trust (RST) being developed to finance long-term structural transformation in low-income countries at affordable interest rates and long maturities.

### Policies encouraging sustainable borrowing and lending
- WBG Sustainable Development Finance Policy (SDFP) and IMF Debt Limit Policy (DLP):
  - Encourage sustainable borrowing and lending; binding in the context of lending arrangements and rely on adequate debt information and analytical tools.
  - Incentivize countries to improve debt management capacity and serve as reference frameworks for other creditors and institutions.
- IDA’s SDFP:
  - Under the SDFP adopted in 2020, 55 countries at moderate, high risk of debt distress or in debt distress (including five countries with market access) agreed to implement performance and policy actions (PPAs) and 58 countries are doing so in FY22.
  - In FY21, most PPAs focused on debt management (mainly debt ceilings) and debt transparency.
  - SDFP supported capacity to contract loans, issue guarantees, and identify and manage fiscal risks from contingent liabilities from SOEs and PPPs.
  - Between end-2019 and end-2020, an increase of 20 percentage points occurred in the share of IDA countries that make debt data available in line with best practices.
  - Implementation challenges remain due to global economic uncertainty and limited implementation capacity, particularly in FCS countries and Small States.
- IDA financing framework and LIC DSF:
  - IDA-only countries at high risk of debt distress or in debt distress receive 100 percent of their IDA allocation on grant terms.
  - Those at moderate risk receive 50 percent of their IDA allocation on grant terms and 50 percent as loans.
  - Low risk is associated with 100 percent credits.
  - IDA19 grant financing reached US$17.2 billion as of end-February 2022, or 35 percent of total IDA19 financing.
  - Unsatisfactory implementation of PPAs for two consecutive years results in loss of the set-aside amount; WBG Management can harden IDA financing terms for repeated failures.
- IMF Debt Limit Policy (DLP) reform (November 2020):
  - Provides more financing flexibility while maintaining a risk-based approach tied to Debt Sustainability Analysis.
  - Requires critical debt data disclosure gaps to be addressed upfront in program cases, including a debt holder profile table in all program documents.
  - Of 18 program requests and reviews approved so far, all staff reports included information on the debt holder profile with 11 out of 18 countries already meeting all data requirements (countries have two program reviews to complete the requirements).
  - DLP applies to all IMF members with Fund-supported programs; SDFP applies to all IDA-eligible countries.
- Joint technical assistance and facilities:
  - Joint World Bank-IMF Debt Management Facility (DMF) provides TA and advisory services to IDA countries.
  - DMF TA has helped enhance legal frameworks, managerial structure, debt management strategies, coordination between debt and cash management, and debt reporting.
  - DMF prepared a Crisis-Response Framework for Debt Managers and introduced just-in-time TA; in FY21 the DMF scaled up virtual training and MOOCs for debt-related contingent liabilities, fiscal risk, and debt reporting and monitoring.
  - Significant gaps remain in comprehensiveness of debt coverage and frequency of debt audits.
  - Government Debt and Risk Management Program (GDRM) provides customized TA to middle-income countries.

*Source: ppea2022019*

### 24. IMF and World Bank TA cover aspects of debt management made more difficult by

### 24. IMF and World Bank TA cover aspects of debt management made more difficult by the pandemic

### TA to strengthen debt management and preparedness
- Areas covered by TA: revisions of debt strategies and annual borrowing plans, reform of domestic market auctions, review of the operational risk management framework, investor communication, and cash flow forecasting and management.
- Outcomes and scope:
  - One in four countries with a World Bank DPF had at least one prior action supporting improvements in debt management policies and institutions in 2020-21.
  - Half of IDA countries had DPFs with debt management-related prior actions.
  - About one in five IMF-supported programs in recent years have had structural benchmarks tied to the improvement of debt management capacity.
  - IMF delivers TA through regional debt management advisors stationed in IMF Regional Capacity Development Centers in the Caribbean, Pacific Islands, and West and Central Africa.
- Example of TA impact: Mongolia and Benin successfully swapped short-term debt into a longer-term debt in 2020, significantly reducing roll-over pressures.

### Fiscal risk identification, quantification, disclosure, and management
- Tools and frameworks:
  - World Bank’s Fiscal Risk Toolkit helps countries manage debt-related contingent liabilities and quantify the expected impact on the budget and debt sustainability analysis.
  - IMF's Fiscal Risk Assessments and Fiscal Transparency Evaluations (FTEs) help identify scope and scale of fiscal risks, evaluate fiscal risk management practices, and propose actions.
  - IMF’s expanded Fiscal Risk Toolkit was released in November 2021.
  - IMF expanding the Public Sector Balance Sheet Database using the framework of IMF’s Government Finance Statistics Manual 2014.
- Coverage and activity:
  - IMF’s Fiscal Affairs Department and Regional Capacity Development Centers had nearly 100 fiscal risk capacity development activities for more than 50 member countries in 2021.
  - The IMF’s fiscal risk assessment tools have been applied in around 40 countries over the past two years.
  - Fiscal risk assessments have been undertaken as part of 35 Fiscal Transparency Evaluations completed since 2014.
  - In 2021, the World Bank rolled out the revised Fiscal Risk Framework with 22 technical assistance activities, and 7 activities on the WBG Integrated State-Owned Enterprises Framework (iSOEF).
- Data and disclosure recommendations:
  - Regular reporting of contingent liabilities (including PPPs and domestic arrears) as memorandum items to debt statistics and in fiscal risk statements could be useful.
  - Data on debt redemption profiles and refinancing costs would be beneficial.
- Public Sector Balance Sheet Database rollout target:
  - The database will cover 50 countries by July 2022, up from 38 in 2018.
  - Time series data is available for 25 countries compared with 17 in 2018.

### Public investment management (PIM)
- Objective: reserve limited resources for investments with the highest returns and manage trade-offs between scaling up public investment and containing debt vulnerabilities.
- Complementary policies to ease trade-offs: higher official development assistance (ODA), boost domestic revenue, attract foreign direct investment, and improve efficiency of investment expenditures.
- Evidence: economies with strong management and accountability systems can better ensure value for money by minimizing cost and time overruns more effectively than the typical developing country (Anand et al. 2014).
- WBG and IMF instruments and coverage:
  - Since 2008, the WBG PIM diagnostic framework has been applied in more than 70 countries; follow-up work includes building PIM institutional frameworks, regulations, guidelines, and capacity-building programs.
  - The Public Investment Management Assessment (PIMA), developed by the IMF in 2015, had been conducted in over 70 countries across all regions and income levels as of 2021.
  - In December 2021, a new module to the PIMA framework was introduced: the climate-PIMA (C-PIMA).
    - The C-PIMA aims to help governments identify potential improvements in public investment institutions and processes to build low-carbon and climate-resilient infrastructure.
    - Five C-PIMAs have been conducted thus far (Anguilla, Costa Rica, Croatia, Nepal, and the United Kingdom). Two additional C-PIMAs are underway for Argentina and Haiti.
  - The PPP Fiscal Risk Assessment Model (PFRAM), launched in April 2016 and jointly developed by the IMF and World Bank, helps assess potential fiscal costs and risks from PPP projects and has been used in IMF and WBG TA programs and by country authorities.

### Access to long-term finance and domestic debt market development
- WBG and IMF support:
  - WBG support for domestic debt market development reached over 50 low- and middle-income countries in the last five years through advisory support, training, operations-related work, and programs including the Debt Management Facility (DMF), the Global Debt and Risk Management (GDRM) Program, and the Joint Capital Markets Program (J-CAP).
  - J-CAP is designed to mobilize domestic and international private capital to invest in strategic sectors and provide longer-term local currency funding, especially for banks and nonbank financial institutions.
  - WBG guarantee programs (Partial Risk Guarantees [PRGs] and Public Credit Guarantees [PCGs]) help mobilize private capital.
  - IMF supports development of local currency government bond markets through training and TA to avoid currency fluctuation risks, support financial system development, finance budget deficits non-inflationarily, and improve resiliency to sudden foreign capital flow movements.
  - MIGA and IFC catalyze FDI and play roles in PPPs, corporate equity investments, and via private equity and venture capital funds.
- Targeted assistance for moderately developed markets:
  - Includes programs such as the Issuer-Driven Exchange Traded Program (ID-ETF) launched in Brazil in 2018 (also implemented in Colombia and Peru) and advisory services on the sustainable finance agenda.
- Joint framework and building blocks:
  - A new joint WB-IMF framework for local currency bond market development launched in March 2021 provides a roadmap and identifies six key building blocks: (i) money market, (ii) primary market, (iii) investor base, (iv) secondary market, (v) financial market infrastructure, and (vi) the legal and regulatory framework.
  - The framework allows identification of development gaps to inform local debt market development plans.
- Innovative de-risking and long-term instruments:
  - Efforts include innovative de-risking instruments and climate-linked products.

### MIGA and IFC instruments to support long-term finance
- MIGA:
  - Supports access to long-term finance through credit guarantees such as non-honoring of financial obligations (NHFO) for debt issued by eligible sovereigns.
  - NHFO supports sovereign borrowers in obtaining lower interest rates and longer tenors (as long as 20 years).
- IFC:
  - Encourages long-term finance through risk-sharing and capital relief transactions with banks and other lenders, directing proceeds to development priorities including MSMEs, rural and agribusiness borrowers, and women-owned firms.
  - Invests directly in corporate equity and indirectly via private equity and venture capital funds.

### Debt resolution, crisis prevention, and restructuring support
- IMF mandate and roles:
  - Conducts surveillance of members’ policies for domestic and external stability, including DSAs prepared jointly with the WBG for countries using the LIC DSF.
  - Assists members in solving balance of payments problems through IMF-supported programs to achieve macroeconomic stability.
  - For unsustainable debt and IMF-supported program requests, assists in designing macroeconomic adjustment frameworks and setting debt restructuring envelopes consistent with program parameters.
- WBG and IMF historical initiatives and contributions:
  - Led design and implementation of the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI), reducing debt stocks of poor countries with unsustainable debt.
  - Under HIPC/MDRI, WBG and IMF provided debt relief of US$50.9 billion and US$7.4 billion, respectively, to 38 countries as of end-2021.
  - IDA-administered Debt Reduction Facility (DRF) (set up in 1989) supported operations that helped extinguish US$10.3 billion of external commercial debt owed by 21 countries.
  - The institutions support global debt initiatives while preserving financial integrity and fiduciary responsibility; the WBG maintains an unchallenged AAA credit rating.
- Pandemic-era relief initiatives:
  - The G20 set up the Debt Service Suspension Initiative (DSSI) in April 2020 following the call by the WBG President and the IMF Managing Director.
    - Between initiation and expiration in December 2021, the DSSI temporarily suspended US$12.9 billion of 48 countries’ debt service payments.
    - The DSSI provided liquidity support to participating countries estimated to average about 0.5 percent of GDP in 2020.
    - The debt service suspended in 2020-21 will add to the debt service of those countries starting in 2022.
  - IMF provided debt service relief through grants to the 31 poorest countries under the Catastrophe Containment and Relief Trust (CCRT).
    - Debt relief under the CCRT has been approved to cover debt service to the IMF falling due between April 2020 and April 2022.
    - Total debt service relief for five tranches amounted to about US$1 billion.
  - In the context of the DSSI, the WBG began publishing external public debt and debt service data by creditor on its International Debt Statistics (IDS) website to support enhanced debt transparency.
  - IMF and WBG are strong supporters of the Common Framework (CF) for debt treatments to DSSI-eligible countries and have been working with the G20 to improve CF implementation.

### Domestic private sector debt resolution and insolvency
- Problem and scale:
  - On average, less than 30 cents on the dollar is recovered by secured creditors in private sector insolvencies in EMDEs, compared to 70 cents on the dollar in OECD high-income countries.
  - Causes include weaknesses in insolvency systems, lack of workable options to preserve viable enterprises, inefficient processes, costly and slow debt recovery and restructuring, and inadequate courts and insolvency administrators.
  - Low creditor recovery affects loan pricing, loan availability, entrepreneurship, and investor risk.
- Institutional support:
  - WBG support via technical assistance, lending, advisory services, and development of alternative dispute resolution (ADR) systems.
  - IMF support includes policy and technical assistance and analytical work during surveillance, IMF-supported programs, and capacity development.

### IFC support for private debt resolution and distressed assets
- IFC activities:
  - Invests in distressed bank assets and works with clients and partners, especially in middle-income countries, to establish and strengthen secondary markets for nonperforming loans.
  - Supports sizable amounts of debt restructuring for individual and corporate borrowers, mostly on retail bank credit.
  - Helps create large, well-functioning markets for distressed asset resolution to address increases in nonperforming loans that threaten financial stability, bank profitability, capital positions, and availability of credit for smaller firms.
- Preconditions for success:
  - Investments are most successful when accompanied by appropriate regulatory changes, supportive tax treatment, stronger supervisory pressures, and insolvency regimes that enable banks to write down distressed assets sufficiently to clean balance sheets and redirect financing to productive uses.

*Source: ppea2022019 - 24. IMF and World Bank TA cover aspects of debt management made more difficult by the pandemic*

### 35. The WBG participates in global standard-setting initiatives for efficient private debt

### 35. The WBG participates in global standard-setting initiatives for efficient private debt resolution

### WBG role in global standard-setting and technical assistance
- The WBG is the designated co-standard setter for efficient private debt resolution and convenes a global task force of leading experts to issue principles for developing efficient and modern insolvency systems.
- Technical assistance activities span:
  - Legislative support for governments reforming insolvency legislation.
  - Institutional developments such as establishing insolvency regulators and strengthening technical knowledge within commercial courts.
  - Non-performing loan (NPL) resolution, including NPL trading on secondary markets and stakeholder capacity building.
- The WBG collaborates with regulator groups such as the International Association of Insolvency Regulators (IAIR) and INSOL International on initiatives including the Africa Roundtable and the Forum for Asian Insolvency Reform (FAIR).

### IMF–WBG collaboration on research, standards, and debt-resolution frameworks
- The IMF and the WBG contribute to research and development of private debt resolution techniques.
- The IMF cooperates with the WBG and the United Nations Commission on International Trade Law (UNCITRAL) in the development of international standards and conducts its own research, including dialogue with member countries and other international organizations.
- The two institutions will continue to prepare joint Low-Income Countries Debt Sustainability Analyzes (LIC DSAs) to help the poorest countries achieve development objectives while maintaining debt sustainability. LIC DSAs are conducted annually for 66 countries eligible for IDA financing.
- The IMF will commence the rollout of the new Sovereign Risk and Debt Sustainability Framework for market access countries (SRDSF) after March 2022. Compared to its predecessor, the SRDSF will:
  - provide more comprehensive and consistent debt coverage;
  - enhance debt transparency;
  - provide clearer signals of sovereign debt risks based on improved analytical methods;
  - offer new risk assessments at three different horizons (short, medium, and long term).
- The WBG and IMF provide debt information through the World Bank’s International Debt Statistics and the IMF’s Global Debt Database. The two institutions are supporting efforts of the IIF and the OECD to build a commercial creditor database for LICs.

### Strengthening fiscal policy, debt transparency, and debt management (findings and recommendations)
- Record-high debt levels necessitate efforts to:
  - address causes of increased debt vulnerabilities through improved fiscal policy, debt transparency, and debt management frameworks in EMDEs;
  - expand access to long-term finance, in particular to micro-, small-, and medium-size enterprises (MSMEs);
  - ensure timely and efficient debt restructuring processes where necessary.
- For countries not facing immediate refinancing risks and unsustainable debt situations, priorities include:
  - strengthen fiscal policy, public investment management, and debt transparency and management frameworks;
  - develop credible and sustainable medium-term fiscal frameworks to reduce debt vulnerabilities, facilitate political consensus on debt objectives, and reduce borrowing costs;
  - incorporate climate considerations to diversify funding sources and address growth risks;
  - enhance debt transparency for adequate borrowing and lending decisions and efficient debt resolutions;
  - improve efficiency of public investment and promote access to long-term debt and equity finance for firms and households.
- Policy recommendations:
  - Governments should adopt policies that credibly commit them to reduce deficits to improve creditors’ confidence and reduce borrowing costs.
  - Reallocate government spending to more growth-enhancing uses, including education, health, social transfers, and climate-smart infrastructure investment; remove large, regressive energy subsidies.
  - Broaden government revenue bases by removing tax exemptions and strengthening tax administration; actions (e.g., taxing digital services) need to consider effects on private sector growth and distributional impacts over the medium-term.
  - Foster private sector-led growth through reforms that improve business climate and institutions to attract FDI and link countries to global value chains.

### Debt transparency: findings and recommended reforms (Box 3)
- Debt transparency is described as the cornerstone of good debt management, reliable debt sustainability analysis, and appropriate and timely debt restructuring.
- Observations:
  - Increased creditor-base diversification in LICs has not been matched by capacity, institutions, or legal and operational frameworks for public debt management, resulting in mis- or under-reporting of sectors or instruments.
  - Use of confidentiality clauses exacerbates opacity; no African country with outstanding collateralized debt publicly discloses the details of the collateral (Mihalyi et al. 2022).
  - Insufficient transparency can lead to inappropriate pricing of risk, inadequate capital allocation, and lengthened restructuring negotiations.
- Recommended borrower reforms:
  - Adopt and implement a legal framework for public debt management that: (i) clearly defines public debt, debt instruments, and debt coverage; (ii) specifies the borrowing authority and the debt authorization cycle; (iii) clarifies institutional arrangements of debt issuance, management, recording and reporting; (iii) discloses national debt strategies and borrowing; (iv) includes reporting, audit and accountability requirements; and (v) regulates the consequences of non-compliance. Adequate requirements should apply also with respect to contingent liabilities.
  - Build debt management capacity with skilled staff and modern information technology systems for debt recording and management.
- Creditor responsibilities and good practices:
  - Creditor reporting helps enhance transparency and reconcile public debt data; the G20 Operational Guidelines for Sustainable Financing emphasize the need for official bilateral creditors to share information (guideline 2).
  - The IMF-WB Diagnostic Tool identifies strong practice as publishing loan-by-loan information by creditors, including terms, on a single website with regular updates and using publicly available templates while refraining from confidentiality clauses.
- Implementation progress:
  - IMF and WBG support for debt transparency has been integrated into policies and operations and supported by scaled-up technical assistance. This approach has proven effective: in 40 percent of the IDA countries, there has been a broad improvement in the quality of data dissemination practices compared to one year ago.
- The World Bank plans to extend the coverage of the International Debt Statistics to include domestic debt and non-traditional debt instruments (e.g., resource-backed loans, central bank deposits, and others).

### Increasing access to long-term finance
- The WBG and IMF will support member countries develop domestic local currency debt securities.
- In market access countries with more developed financial infrastructure, WBG efforts will focus on the development of domestic capital markets and de-risking to attract long-term equity and debt investors.
- For less developed countries, WBG engagement aims to create conditions for viable market-based finance solutions.
- IMF will provide targeted technical assistance to help develop legal frameworks, e.g., on tax law frameworks.
- The WBG supports non-debt financial market development to encourage non-debt finance among firms:
  - IFC leads through direct equity participations, quasi-equity mezzanine structures, subordinated bonds, and capital-qualifying instruments for banks.
  - MIGA supports cross-border private equity investment through political risk insurance.
  - IFC leads private equity and venture capital investments, with emphasis on MSMEs.
- Policymakers can catalyze more stable external financial flows by cultivating conditions for increased FDI through structural reforms (examples listed in source).

### Improving debt and insolvency resolution
- The IMF and the WBG will support countries to resolve the pandemic’s legacy of record-high private debt by strengthening insolvency and debt resolution frameworks.
- Policy goals:
  - Update insolvency and restructuring regimes to provide a wide array of restructuring options for viable firms and swift liquidation of unviable firms.
  - Ensure regulators have legal tools and institutional capacity to manage a sharp rise in insolvencies in line with international best practices.
- Tailored country support:
  - Focus may be on improving legislative frameworks or on building weak institutions and stakeholder groups as needed.
  - Support exploration of how technology and data can address debt challenges, with safeguards for cybersecurity and data regulation.
  - WBG will leverage its role among insolvency law standard setters to promote reforms.
- Banking sector and supervisory priorities:
  - Assist national regulators to resolve bank balance sheet risks accumulated during the pandemic.
  - Restore compliance with international standards and reverse measures that unduly delay NPL recognition.
  - Promptly identify affected institutions, ensure adequate risk management, and impose time-bound actions to reduce NPLs.
  - IMF-WB FSAPs and financial sector diagnostics will assess supervisory arrangements, frame priority reforms, and develop capacity.
  - Assist countries to improve bank resolution and crisis management frameworks to minimize taxpayers’ costs and preserve financial stability.
  - Support regulatory and supervisory frameworks to facilitate innovation in microfinance while strengthening financial stability and addressing cybersecurity risks.
- G20 Common Framework (CF) and IMF–WBG support:
  - The G20 CF brings together Paris Club and non-Paris Club official bilateral creditors; progress in implementation has been slow and improvements are needed.
  - The IMF and WBG will continue to offer technical support, outreach, and analytical work to improve CF implementation, build confidence among eligible countries, and clarify how the comparability of treatment (COT) will be implemented to ensure fair burden sharing.
  - Four priorities identified to strengthen CF implementation:
    - (i) Quicker and more efficient processes through clear and time-bound steps in CF implementation.
    - (ii) Introduction of a debt service standstill to immediately address liquidity needs of countries requesting treatment, with no penalty interest.
    - (iii) Greater clarity on how official bilateral creditors will enforce and evaluate the comparability of treatment to private creditors.
    - (iv) Expansion of coordinated debt treatments to non-DSSI eligible countries with debt vulnerabilities.
  - The WBG and IMF will also lay out circumstances under which countries can apply for CF treatment, outline benefits from treatment, and provide outreach and technical assistance to creditors and debtors.

*Source: ppea2022019 - 35. The WBG participates in global standard-setting initiatives for efficient private debt resolution*

### Box 4. Options for Strengthening the Common Framework

### Box 4. Options for Strengthening the Common Framework

### Lessons from past coordinated debt-relief frameworks
- Since its establishment in 1956, the Paris Club has provided 477 debt treatments and a set of standards and references for debt treatments involving official bilateral creditors.
- The Brady Plan, launched in 1989, helped resolve large sovereign debt overhangs in Latin America in the 1990s.
- The HIPC Initiative, launched in 1996 and followed by the MDRI in 2005, provided deep debt stock reduction and helped resolve sovereign debt overhangs in poor countries after a lost decade of growth.
- Debt relief under the HIPC and MDRI Initiatives also enabled recipient countries to increase their poverty-reducing expenditures, while reducing debt service.
- An important historical lesson: past restructurings often initially provided limited relief, preferring rescheduling over outright reductions, but eventually shifted toward outright reductions once solvency problems were clearly identified.
- Comprehensive restructurings outside a coordinated framework before the pandemic have been protracted, incomplete and non-transparent.

### Current Common Framework (CF) implementation challenges
- Since endorsement by the G20 and the Paris Club in November 2020, the pace of implementation of the CF has been slow.
- Three countries have made requests for CF debt treatments (Chad, Ethiopia, and Zambia).
- Some important milestones have been reached but a debt treatment has not been finalized for any of these applicants more than one year after their initial requests.
- Slower than expected CF implementation reflects coordination issues involving Paris Club and other creditors, as well as multiple government institutions and agencies within creditor countries, which can slow decisions.
- Delays have put pressure on CF countries because they are unable to access new financing during a protracted restructuring phase; this could disincentivize new applicants.
- The expiration of the DSSI at end-2021 is increasing financing pressures as countries resume full debt service payments to official bilateral creditors.
- With the ongoing tightening in global financial conditions, liquidity pressures will increase further in EMDEs.

### IMF and WBG staff proposals to speed and strengthen the CF
- IMF and WBG staff have identified four sets of improvements:
  1. Greater clarity on the steps and timelines of the CF process.
     - Official bilateral creditors should aim at forming a Creditors’ Committee within 4-6 weeks after the request from the debtor country and providing financing assurances within three months of reaching a staff-level agreement (SLA) with the IMF staff.
     - This would enable the early resumption of essential financing and support the implementation of a reform program.
  2. Introduction of a debt service suspension for the duration of the negotiation.
     - Such a standstill would be provided by official creditors, on request of the debtor country, to countries requesting a CF and having reached SLA, and until the actual debt treatment, to alleviate liquidity constraints, avoid the accumulation of arrears and incentivize quicker resolutions.
     - The value of any payments received from non-participating creditors during the standstill should be fully accounted for in the assessment of the CF CoT.
  3. Assessment of the parameters and processes for CoT and clarity on the rules for its implementation.
     - Official bilateral creditors should provide more clarity on how CoT will be determined and enforced, beyond the parameters already included in the CF.
  4. Expanding coordinated debt treatments to highly indebted non-DSSI eligible countries.
     - Other countries with high debt vulnerabilities, including some LMICs and small island states, would also benefit from greater coordination, as they are recipients of large financing from both official and private sector creditors.

### Improvements to the market-based approach and private creditor treatment
- To enhance sovereign debt restructuring processes, improvements to the market-based approach should be considered.
- The IMF continues to encourage and monitor the inclusion of enhanced collective action clauses in international sovereign bonds.
- Further work by WBG and IMF staff to limit holdout creditor behavior includes:
  - Supporting the work of the G7 private sector working group on the development of majority voting provisions for modifying payment terms in syndicated loan agreements.
  - Reporting on the benefits of use of trust structures in foreign law-governed bond offerings.
  - Encouraging sub-sovereign entities to include enhanced collective action clauses in their foreign law-governed bonds.

### Conclusions
- Many EMDEs face large financing needs amid elevated debt and debt vulnerabilities, alongside urgent spending priorities.
- Restoring damage to human and physical capital from the pandemic will require sustained policy intervention by governments, the private sector, and the global community, in addition to large investment needs to make progress towards the SDGs.
- Addressing debt challenges will require coordinated prompt actions, including strengthening fiscal and debt management frameworks and greater transparency of spending and borrowing.
- To resolve private debt overhangs, the WBG and IMF support efficient bankruptcy frameworks and management of NPLs.
- Deeper financial markets can help expand access to domestic long-term finance for private and government borrowers.
- Where necessary, debt restructuring should be provided in a timely and coordinated manner, including through improvements in the G20 CF.
- The IMF-WBG multipronged approach—policy advice, lending operations, technical assistance, and close collaboration between the World Bank, the IFC, and MIGA—remains central to helping countries achieve lasting debt sustainability and recover from the pandemic.

### Questions for Discussion
- Do Governors agree with the assessment of the urgency of actions needed to address the risks to economic development and macroeconomic stability from the accelerated build-up of debt due to the COVID-19 pandemic, rising inflation, and imminent tightening in global financial conditions?
- Do Governors agree with the efforts of the WBG and the IMF to help countries improve fiscal policy, strengthen debt transparency and debt management frameworks, and expand access to long-term finance?
- Do Governors support the proposals of the IMF and the WBG to strengthen existing frameworks for debt restructuring? What are Governors’ views regarding the options for strengthening the Common Framework presented in this paper?

*Source: Box 4. Options for Strengthening the Common Framework (ppea2022019)*

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_Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022019.pdf_