## Reform of the Policy on Public Debt Limits in Fund‑Supported Programs (Content unit: _111414)

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### Executive summary
- Reform builds on Board review (March 2013), informal Board discussions (January and May 2014), informal seminar (September 2014), and stakeholder consultations.
- Objective: provide countries greater flexibility to finance productive investments while containing medium-term debt sustainability risks; ground treatment of countries that normally rely on concessional financing within a broader framework governing debt conditionality in all Fund-supported programs.
- Key concerns accommodated:
  - Even‑handedness across membership (uniformity of treatment).
  - Unified and comprehensive coverage of debt limits (concessional and non‑concessional borrowing).
  - Preserve incentives for concessional lending.
- Proposed effective date: end-June 2015.
- Stock taking of implementation: no later than 3 years after policy takes effect.

### Role of Debt Sustainability Analysis (DSA)
- DSA is the primary tool to identify debt vulnerabilities.
- For market-access countries: use MAC DSA (heat map, realism tools, fan charts); heat map indicators exceeding upper benchmarks signal significant vulnerabilities but require analysis of drivers.
- For concessional-financing (LIC) countries: use joint Bank‑Fund LIC DSF; assessment informed by assessed risk of external debt distress or overall risk.
- Footnote: debt conditionality may also be warranted where fiscal statistics quality/coverage favors limits on budget financing (“below‑the‑line”) instead of, or as a complement to, limits on budget balances (“above‑the‑line”).

### Principles guiding use of debt conditionality
- Use of debt conditionality normally warranted when:
  - Country has significant debt vulnerabilities; or
  - Fiscal statistic quality/coverage favors financing-flow (“below‑the‑line”) conditionality or where important debt-creating activities are not captured in fiscal accounts.
- Specification must reflect country circumstances: can target external debt, total public debt, specific maturities, contracting of new debt, nominal or PV terms, other debt-creating transactions; normally cover public and publicly guaranteed debt (PPG) or targeted sub-components.
- Form of limit chosen should:
  - Account for capital account openness and financial integration.
  - Allow separate external/domestic limits where segmentation exists.
  - Prefer limits on contracting of new debt for project loans disbursing over time.
  - Target specific vulnerabilities (e.g., maturity bunching, guarantees).
  - Reflect debt management and monitoring capacity constraints and realistic capacity-building timelines.
  - Not inhibit active debt management—adjustors can be used.

### Conditionality instruments and treatment
- Where debt conditionality is critical and nonobservance would warrant interruption of disbursements → use Performance Criteria (PCs).
- Where critical for objectives/monitoring but nonobservance does not warrant interruption → use Indicative Targets (ITs).
- Staff report with program request must explain specification choices, role of data quality/coverage, and debt management capacity; flag capacity-strengthening efforts.

### Common approach to setting quantitative debt limits
- Quantitative limits are derived from an agreed fiscal program and informed by DSA and assessment of borrowing plan feasibility.
- Borrowing plan assessment considers:
  - Compatibility with medium‑term debt sustainability.
  - Extent and nature of debt vulnerabilities.
  - Feasibility of achieving planned borrowing at envisaged terms.
  - Implications for debt composition and structure.
  - Public investment management capacity and plausibility of growth projections.
- Large scaling up of public investment with weak implementation capacity warrants careful assessment and possibly conditionality on capacity strengthening.

### Implementation timetable and transitional arrangements
- Proposed effective date: end-June 2015.
- Rationale: allow time for staff to communicate new policies and work with debt management offices on monitoring, analytical, and reporting frameworks.
- Stock taking of implementation no later than 3 years after policy takes effect.
- Modification of conditionality in pre-existing programs only after staff-authority understandings and Executive Board approval; staff to discuss modifications at first program review after entry into effect.

### Observations on experience with 2009 reforms
- Implementation challenges: large threshold effects from marginal loan term changes; difficulties obtaining independent project assessments; shifts in loan classification due to discount rate unification issues (resolved October 2013).
- GRA programs: debt accumulation often contained via PC on fiscal balance; debt limits used to widen coverage of debt-creating activities; limits often covered total public debt.
- PRGT programs: near‑universal debt limits focused on composition of external borrowing (CB vs NCB); as of end‑September 2014, all PRGT-supported programs included a PC on contracting of new non‑concessional debt.

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### Guidelines for countries that do not normally rely on official external concessional financing
- Deployment:
  - Debt conditionality expected where countries are judged to have significant debt vulnerabilities, as assessed using the MAC DSA.
- Specification:
  - Limits on public debt specified in nominal value terms; precise specification depends on country circumstances and data availability.
  - Separate limits on externally‑issued debt and domestically‑issued debt could be justified depending on financial market integration.
- Coverage:
  - Ideally cover all public and publicly guaranteed debt, but narrower coverage may be justified by institutional circumstances and data availability.
- Targeted conditionality:
  - Targeted measures (e.g., short‑term external debt, issuance of public guarantees) can be used to address specific vulnerabilities.
- Footnote: public sector debt typically refers to non‑financial public sector debt.

### Guidelines for countries that normally rely on official concessional external financing
- Low risk of debt distress:
  - Program conditionality need not include limits on public external borrowing.
- Moderate risk of debt distress:
  - Program conditionality would include a Performance Criterion (PC) on new external borrowing.
  - The PC would cover all forms of external borrowing (both non‑concessional (NCB) and concessional (CB)) and be specified in net present value (NPV) terms, except under circumstances identified in the full paper.
- High risk of debt distress (or in distress):
  - Current use of debt conditionality would not change significantly.
  - NCB allowed only under exceptional circumstances; program conditionality would include a PC setting nominal level of NCB, and a PC or indicative limit on the level of CB.
- Operational constraint when monitoring capacity is weak:
  - Pending improvements, debt conditionality would take the form of a nominal limit on contracting of NCB, coupled with an agreed target (explicit in conditionality table) on the level of CB.
- Terminology change:
  - Replace “countries to whom concessional financing is normally available” with “countries that normally rely on concessional (external) financing” (shorthand: countries that normally rely on official external financing provided on concessional or near concessional terms).

### Exceptions and operational considerations
- Open capital account and significant financial integration: may be more appropriate to set limit on total public debt rather than externally‑issued debt.
- Weak capacity to capture and monitor contracting of debt: PC may take form of nominal limit on contracting of non‑concessional external debt; target for contracting of concessional external debt included as memorandum item.
- Assessment of debt monitoring capacity driven, but not mechanically determined, by methodology in Annex III; final determination by Fund staff with World Bank consultation.

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### Implementation, monitoring, and assessment of debt policies
- Assessment steps:
  - Review observance of specified program quantitative targets (PC nonobservance requires waivers or completion of review; IT nonobservance requires investigation).
  - Assess whether realized debt accumulation aligns with the programmed borrowing plan (currency composition, terms, maturities, project implementation, market taps).
  - Program documentation must include sufficient detail on envisaged borrowing plan to enable assessment in program reviews (maturity structure, currency composition, large project loans, sectoral use).
- Program documentation should:
  - Include breakdown of sources of new borrowings across concessionality categories (see Table 1 illustration).
  - Identify any large‑scale loans envisaged.
  - Provide aggregated information on planned use of external financing across sectors where project loans are bulk of public external financing.
  - Preserve country negotiating flexibility and confidentiality—program assumptions should not provide terms (grant element) of specific loans.

---

### Table 1 — Summary Table on External Borrowing Program: Illustration (figures preserved)
- PPG external debt contracted or guaranteed
  - Sources of debt financing: Volume of new debt, US million 1/ = 100; Present value of new debt, US million 1/ = 62
  - Concessional debt, of which 2/: Volume = 65; Present value = 33
    - Multilateral debt: 35; 14
    - Bilateral debt: 30; 19
  - Non-concessional debt, of which 2/: Volume = 35; Present value = 29
    - Semi-concessional debt 3/: 20; 14
    - Debt on commercial terms 4/: 15; 15
- Uses of debt financing: Volume = 100; Present value = 62
  - Infrastructure: 40; 30
  - Healthcare: 20; 7
  - Education: 15; 7
  - Budget financing: 15; 10
  - Other: 10; 8
- Memorandum items — Indicative projections:
  - Year 2: 100; 60–65
  - Year 3: 120; 72–78
- Notes:
  - 1/ Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate.
  - 2/ Debt with a grant element that exceeds a minimum threshold. This minimum is typically 35 percent, but could be established at a higher level.
  - 3/ Debt with a positive grant element which does not meet the minimum grant element.
  - 4/ Debt without a positive grant element. For commercial debt, the present value would be defined as the nominal/face value.

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### Special cases and concessional lending guidance
- Countries at high risk of debt distress (or in debt distress):
  - Debt limits more tightly framed.
  - Non‑concessional borrowing expected to be exceptional but not precluded.
  - Programs include a PC on non‑concessional borrowing and a PC or IT on contracting of concessional debt.
  - Possibility to define concessionality as a higher grant element than the typical 35 percent where supported by key bilateral donors.
- Large loans with highly uncertain terms:
  - Use appropriately specified adjustors, capped to fully accommodate moderate ex post deviations in assumed grant element but only partly accommodate large deviations.
  - Adjustors warranted where loan scale is large enough to generate significant uncertainty in projected present value.
- On concessional lending to LICs:
  - Staff will continue to advocate financing on fully concessional terms to LICs (defined as all countries eligible to obtain concessional financing from the Fund).
  - Ensuring adequate volumes of concessional financing may require understandings among creditors to avoid competitive erosion of concessionality.

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### Monitoring capacity diagnostics (Annex III) — findings and methodology
- Preliminary finding: about 40 percent of PRGT‑eligible countries have debt records that are either incomplete or produced with significant delays.
- Indicators/frameworks:
  - DeMPA: in‑depth coverage of debt records and reporting (DPI‑14(1,2); DPI‑15(1,2,3)); reports usually confidential.
  - PEFA: PI‑17(i) assesses central government debt data recording and reporting; updated on average every three years and published.
  - CPIA: A3 component (Debt Policy) produced annually; broader assessment including data quality and debt management.
- Proposed diagnostic criteria to flag weaknesses:
  a) Country scoring ‘D’ in any of DPI‑14(1), DPI‑15(2) where relevant, or PI‑17(i) over last three years; or
  b) CPIA Debt Policy score equal to 3 or below.
- Flow: check for recent DeMPA/PEFA within last 3 years; if none, consider CPIA Debt Policy score ≤ 3 to flag potential weaknesses.
- Policy implications:
  - Debt limit design should allow for monitoring/reporting capacity limitations, especially for concessional debt.
  - Use diagnostics to identify countries that should not immediately adopt continuous PCs covering both concessional and non‑concessional debt.
  - Accompany debt limits with structural conditionality to strengthen debt management and monitoring capacity.
  - Expect capacity‑building efforts to bear fruit over a three‑year period to allow transition to comprehensive PV limits on all new public external debt.

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### Evidence from PRGT‑eligible countries and LIC debt developments (selected statistics preserved)
- Sample: 61 PRGT‑eligible countries with a Fund program and at least one DSA.
- Public debt levels (2007–13):
  - On average stable between 2007 and 2013 across PRGT‑eligible countries, with substantial cross‑country variation.
  - Public debt increased in 15 of the 20 “early HIPC” countries; two‑thirds of that increase accounted for by higher external debt levels.
- Concessionality of external borrowing (staff estimates for 2009–11):
  - Average grant element of external loans contracted: about 39 percent for PRGT‑eligible countries.
  - Substantial cross‑country variation: five countries had average grant element of new loans below 20 percent; issuance of sovereign bonds contributed (example: Senegal).
  - Calculations based on 5 percent discount rate; sample includes 60 LIC countries (excludes Zimbabwe due to data).
- LIC DSF risk of external debt distress (as of July 31, 2014):
  - Low: 20 countries
  - Moderate: 27 countries
  - High: 11 countries
  - In Debt Distress: 3 countries
- Evolution of risk ratings (January 2007–July 2014):
  - Risk rating improved since 2007: 24 countries (16 upgraded during a Fund program).
  - Risk rating deteriorated since 2007: 6 countries (2 downgraded during a Fund program).
  - Unchanged since 2007: 31 countries.

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### Cases with significant weaknesses in debt monitoring (Table AIII3 — preserved entries)
- Inclusion rule: Any of the recent DPI‑14(1), DPI‑15(2), or PI‑17(i) has D rating; CPIA Debt policy score equal or below 3. Columns preserved as in source.
1. Comoros **; D2013; DN/R2011; 2.33; High
2. Haiti **; D2012; 2.50; High
3. Sao Tome and Principe **; C2013; DD2011; 2.50; High
4. Congo, Democratic Republic of **; D2013; 2.67; Moderate
5. Burundi *; *C2012; DD2012; 2.83; High
6. Central African Republic *; *DD2012; 3.00; High
7. Mauritania *; *DD2011; 3.00; Moderate
8. Djibouti *; *DD2012; 3.00; ...
9. Mali *; B2011; DC2011; 3.67; Moderate
10. Madagascar *; C2013; DD2013; 4.00; Low
11. Burkina Faso *; B2014; CD2011; 4.00; Moderate
12. Nigeria *; D2013; CN/R2012; 4.17; Low
13. Zimbabwe *; C2012; 1.50; In debt distress
14. Sudan *; 1.50; In debt distress
15. Chad *; 2.50; High
16. Afghanistan *; A2013; 2.50; High
17. Cote d'Ivoire *; A2013; 2.50; Moderate
18. Grenada *; 2.50; In debt distress
19. Guinea Bissau *; C2013; 2.50; Moderate
20. Maldives *; C2014; 2.50; ...
21. Togo *; 2.67; Moderate
22. Guinea *; B2013; 2.83; Moderate
23. Gambia *; 3.00; Moderate
24. LAO, PDR *; 3.00; Moderate
25. Nepal *; 3.00; Moderate
26. Yemen *; 3.00; Moderate

- Methodological notes preserved:
  - PEFA data as of April 16, 2013; indicators measured on A–D scale.
  - CPIA score reflects average overall score from 2011–13.
  - DeMPA: in cases where a dimension cannot be assessed, N/R assigned.
  - DSA risk rating reported as of end‑July 2014.

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### Summary — key procedural recommendations
- Use of debt conditionality guided primarily by extent of debt vulnerabilities and by technical merits of “below‑the‑line” versus “above‑the‑line” fiscal measures.
- Consider broadening scope to cover public debt (external and domestic) and specify separate limits where warranted.
- For concessional‑financing countries, consider specifying debt limits in NPV terms, subject to exceptions for monitoring capacity or large project loan disbursement patterns.
- Assess country capacity to manage/monitor debt using DeMPA, PEFA, CPIA diagnostics; adopt transitional specifications (nominal PCs with memorandum items) where capacity weak and strengthen via structural conditionality over a three‑year horizon.

*Source: EXECUTIVE SUMMARY and selected sections from "Reform of the Policy on Public Debt Limits in Fund‑Supported Programs" (November 14, 2014).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background and rationale for reform
- Reform of the Fund’s policy on the use of conditionality on public external debt in Fund-supported programs (the “debt limits policy”) has been under discussion since March 2013.
- Context motivating reform:
  - Lower income countries seek to boost growth through higher public investment, targeted in particular at large infrastructure gaps.
  - Countries face a wider range of external financing opportunities and limits on the supply of traditional concessional financing.
- The 2009 reform of the Fund’s policy on debt conditionality was a first step to accommodate these realities; experience since 2009 pointed to the need for more fundamental reforms to provide greater flexibility to finance productive investments while containing medium-term debt sustainability risks.
- The reform proposal builds on:
  - Board review of the debt limits policy in March 2013.
  - Informal Board discussions in January and May 2014.
  - Informal seminar in September 2014 and various stakeholder consultations.
- Staff approach in developing the proposal:
  - First specify a robust set of principles to guide use of public debt conditionality in all Fund arrangements.
  - Then examine how those principles apply to countries that normally rely on official external concessional financing.

### Key concerns the proposal seeks to accommodate
- Ensure even-handedness across the membership in application of the policy, consistent with the principle of uniformity of treatment.
- Ensure that coverage of debt limits is unified and comprehensive, covering both concessional and non-concessional borrowing, where relevant.
- Ensure incentives for creditors to provide, and borrowers to seek, financing on concessional terms.

### Role of debt sustainability analysis
- The use of debt conditionality is closely linked to the extent of a country’s debt vulnerabilities, with debt sustainability analysis playing the key role in identifying debt vulnerabilities.
- Footnote: Consistent with long-standing Fund practice, debt conditionality may also be warranted where the quality and coverage of fiscal statistics favors limits on budget financing (“below-the-line” data) instead of, or as a complement to, limits on budget balances (“above-the-line” data).

### Guidelines for countries with little/no access to concessional financing
- Debt conditionality would be expected to be deployed in cases where countries are judged to have significant debt vulnerabilities, as assessed using the MAC DSA.
- In such cases:
  - Limits on debt would be specified in terms of the nominal value of debt, with the precise specification depending on country circumstances, including the quality and availability of data.
  - Depending on the extent of financial market integration, separate limits on externally issued debt and domestically-issued debt could be justified.
  - Limits on public debt would ideally cover all public and publicly guaranteed debt, but institutional circumstances and data availability could justify the use of narrower coverage of the public sector.

### Guidelines for countries that normally rely on concessional official external financing
- For countries assessed as being at low risk of debt distress:
  - Program conditionality need not include limits on public external borrowing.
- For countries assessed as being at moderate risk of debt distress:
  - Program conditionality would include a performance criterion (PC) on new external borrowing.
  - The PC would cover all forms of external borrowing (i.e., both non-concessional (NCB) and concessional (CB)) and would be specified in net present value (NPV) terms, except under circumstances identified in the full paper.
- For countries assessed as being at high risk of debt distress (or in distress):
  - Current use of debt conditionality would not change significantly.
  - NCB would be allowed only under exceptional circumstances; program conditionality would include a PC setting nominal level of NCB, and a performance criterion or indicative limit set on the level of CB.
- Operational constraint when monitoring capacity is weak:
  - Pending improvements in monitoring capacity, debt conditionality would take the form of a nominal limit on NCB, coupled with an agreed target, made explicit in the conditionality table, on the level of CB.
- Note on terminology:
  - The proposal replaces “countries to whom concessional financing is normally available” with “countries that normally rely on concessional (external) financing”, shorthand for “countries that normally rely on official external financing provided on concessional or near concessional terms.”

### Common approach to setting quantitative debt limits
- Evaluation of proposed borrowing plans is one component of the assessment of the fiscal program, drawing on the assessment of vulnerabilities in the DSA.
- Debt limits are derived from an agreed fiscal program, rather than established or assessed from a project-by-project review.
- Reflecting increased financial integration, the policy focus is proposed to be broadened to encompass total public debt; however, where there is significant segmentation between domestic and external financing, specifying debt limits on public external debt remains economically defensible.
- The appropriate form of any debt limit depends on specific country circumstances.

### Implementation timetable and transitional arrangements
- It is proposed that the revised policy take effect at end-June 2015.
  - Rationale: provide adequate time for staff to communicate new policies to countries and work with debt management offices on necessary monitoring, analytical, and reporting frameworks.
- A stock taking of implementation of the new policy would take place no later than 3 years after the policy takes effect.

### Observations on experience with the 2009 reforms and policy distinctions
- Experience with the 2009 reforms was uneven; implementation challenges included:
  - Large threshold effects associated with marginal changes in loan terms.
  - Difficulties obtaining the independent project assessments that were a cornerstone of the policy.
  - Prior to the unification of discount rates in October 2013, shifts in loan classification following regular adjustment of discount rates contributed to unintended misreporting.
- Differences in how debt conditionality has been used:
  - In GRA programs, debt accumulation has typically been contained through a PC on the fiscal balance, with debt limits used to allow wider coverage of debt-creating activities; in most such programs debt limits covered total public debt rather than external public debt alone.
  - In PRGT-supported programs, debt limits have been near-universal and focused on controlling the composition of external borrowing (breakdown between CB and NCB) rather than the aggregate level of external borrowing.
  - As of end-September 2014, all PRGT-supported programs included a performance criterion on the contracting of new non-concessional debt.

### Overarching objective of the reform
- Provide countries with greater flexibility to finance productive investments while containing risks to medium-term debt sustainability.
- Ground treatment of countries that normally rely on concessional financing within a broader framework governing debt conditionality in all Fund-supported programs.
- Take into account key concerns of Executive Directors and stakeholders:
  - Even-handedness in application.
  - Unified coverage of concessional and non-concessional external borrowing where relevant.
  - Preserving incentives for concessional lending.

*Source: EXECUTIVE SUMMARY, Reform of the Policy on Public Debt Limits in Fund-Supported Programs (November 14, 2014).*

### 11.      This section describes the broad principles that would guide the use of debt limits in

### 11.      This section describes the broad principles that would guide the use of debt limits in

### A. When is the use of debt conditionality justified?
- Public borrowing plans are a component of the fiscal program under a Fund arrangement; limits on debt accumulation are one tool for fiscal conditionality and their use depends on country conditions and program objectives (para. 12).
- Use of limits (or targeted sub-limits) on debt accumulation is normally warranted when a country has significant debt vulnerabilities (para. 13).
  - Debt sustainability depends on debt level and trajectory, maturity (including grace periods), interest rate (market versus concessional), currency composition (domestic or foreign), and creditor base (para. 13).
  - Where sustainability depends on ensuring new debt with specific characteristics (e.g., long maturities; concessional terms), these can be addressed via appropriately targeted conditionality (para. 13).
- Debt conditionality is also warranted when fiscal statistic quality and coverage favor financing-flow (“below-the-line”) conditionality or when important debt-creating activities are not captured in fiscal accounts (para. 14):
  - Merits in setting quantitative conditionality on financing flows rather than on fiscal balance if financing data quality and timeliness are significantly better than “above-the-line” data (para. 14, bullet).
  - Merits in using a public debt limit as a complement to budgetary targets where debt-creating activities outside fiscal accounts (e.g., bank recapitalization, government guarantees, noncommercial SOEs) threaten fiscal position (para. 14, bullet).
- Debt Sustainability Analysis (DSA) is the primary tool to identify extent and type of debt vulnerabilities (para. 15):
  - Market-based financing countries use IMF’s Market Access Country DSA (MAC DSA); concessional-financing countries use the joint Bank-Fund LIC DSF; the joint MTDS Framework can also help identify vulnerabilities (para. 15).
  - For MAC DSA, standard indicators include the heat map, realism tools, fan charts; heat map indicators exceeding upper benchmarks signal significant vulnerabilities but require analysis of drivers and breaches (para. 16).
  - For LIC DSF, assessment is informed by assessed risk of external debt distress or overall risk; significant domestic public debt vulnerabilities use the overall risk of debt distress (para. 17).
  - An assessed rating of moderate or high risk of debt distress under LIC DSF typically signals significant vulnerabilities; form of conditionality differs between high and moderate risk (para. 18).
- Absence of debt conditionality where vulnerabilities are not significant does not imply ignoring rapid debt build-up; such cases warrant diagnostic and, if needed, policy corrections and targeted conditionality (para. 19).

### B. What form should debt conditionality take?
- Specification of limits must reflect country circumstances; design will vary by country and program objectives (para. 20).
  - Limits may be on external debt or total public debt; target specific maturities; be limits on debt stock or contracting of new debt; be nominal or PV terms; extend to other debt-creating transactions; normally cover public and publicly guaranteed debt (PPG) or targeted sub-components (para. 20).
- General principles for specification (para. 21):
  - Open capital account and close integration with international markets: limits typically cover total public debt and not distinguish domestic vs external debt (para. 21, bullet).
  - Significant segmentation between domestic and external financing (capital controls or substantial official concessional financing): economically sound to specify distinct limits on external and domestic financing, depending on circumstances (para. 21, bullet).
  - Where external financing is project loans disbursed over time, may be more appropriate to specify limit on contracting of new debt rather than on disbursement for monitoring accuracy (para. 21, bullet).
  - Where vulnerabilities are specific (e.g., maturity bunching; weak guarantee controls), limits should be targeted on those vulnerabilities (para. 21, bullet).
  - Specification must allow for debt management and monitoring capacity constraints and realistic capacity-building timelines (para. 21, bullet).
  - Form of limit should not inhibit active debt management (e.g., prefinancing); specification of adjustors can address this (para. 21, bullet).
- Form of debt conditionality guided by Fund’s program conditionality guidelines (para. 22):
  - Where debt conditionality is critical and nonobservance would warrant interruption of disbursements, limits should be performance criteria (PCs) (para. 22).
  - Where critical for objectives or monitoring but not warranting interruption of disbursements, limits could be indicative targets (ITs) (para. 22).
- Staff report accompanying program request must explain specific selections and role of data quality, coverage, and debt management capacity in influencing specification; flag capacity-strengthening efforts (para. 23).

### C. How should quantitative debt limits be set?
- A borrowing (financing) plan is an integral part of a country’s fiscal program and macroeconomic policy framework; program quantitative targets for debt accumulation are elements of the agreed framework (para. 24).
- Appropriateness of a borrowing plan depends on factors including compatibility with debt sustainability over the medium-term, extent and nature of debt vulnerabilities, feasibility of achieving planned borrowing at envisaged terms, and implications for debt composition and structure (para. 25).
- Level of borrowing reflects a wider assessment of macroeconomic policy framework: demand management, trajectory of public investment and savings, composition of public spending, feasibility given capacity constraints (para. 26).
- Significant proposed increases in borrowing warrant careful assessment:
  - If reflecting major public investment expansion, scrutinize plausibility of growth projections and consistency with planned level/composition of investment and public investment management capacity (para. 27).
  - Fund staff can use model-based analysis and third-party assessments to assess growth payoff of investment; public investment management capacity assessed via standardized capacity assessments and technical assistance reports (para. 27).
- Specification of quantitative limits “drops down” from features of agreed fiscal program and macro framework; DSA is one element alongside evaluation of borrowing plan feasibility; large scaling up of public investment with weak implementation capacity warrants careful assessment (para. 28).

### D. How should implementation of debt policies be assessed?
- Assessment starts with reviewing observance of specified program quantitative targets (para. 29):
  - Observance of limits specified as performance criteria requires waivers for linked disbursements and/or completion of review; nonobservance of indicative targets requires investigation to determine threat to program success and need for remedial action (para. 29).
- Assess whether realized pattern of debt accumulation aligned with program expectations (para. 30):
  - Examine realized financing mix: currency composition, terms, maturities—were deviations from envisaged mix a concern? (para. 30).
  - For plans predicated on large projects or major bond issues, did these materialize and were deviations a cause for concern? (para. 30).
  - For sectoral investment-linked borrowing plans, was implementation as envisaged? (para. 30).
- Program documentation must include sufficient detail on key features of envisaged borrowing plan to enable assessment in program reviews (para. 31):
  - Relevant features include maturity structure of new borrowing (where rollover needs large), currency composition (where exchange rate pressures exist), tapping market niches (e.g., nonresident citizens), contracting of specific project loans large relative to output, and sectoral focus of project financing for investment scale-up (para. 31).

*REFORM OF THE POLICY ON PUBLIC DEBT LIMITS IN FUND-SUPPORTED PROGRAMS*

### 32.      We consider here the role of debt conditionality in countries that normally rely on the

### We consider here the role of debt conditionality in countries that normally rely on the provision of official concessional external financing

### A. When is the use of debt conditionality justified?
- Use of debt conditionality may be justified on the basis of:
  - (a) the presence of significant debt vulnerabilities; or
  - (b) fiscal data quality or coverage concerns that favor the use of debt measures for specifying quantitative conditionality.
- Concrete examples:
  - In countries with significant debt vulnerabilities (as reflected in a moderate-to-high risk of debt distress), conditionality on the accumulation of debt would generally be warranted.
  - In countries where the quality and timeliness of the data produced by the budgetary accounting system is poor, limits on debt accumulation—split into limits on (a) domestic credit to government and (b) the accumulation of public external debt—has typically represented the most effective specification of fiscal conditionality.
  - In countries where debt sustainability is not a significant concern (as reflected in a low risk of debt distress) and where the quality and coverage of fiscal data justifies the use of ”above-the line” fiscal conditionality (e.g., on the fiscal balance), the use of debt conditionality would generally not be warranted.

### B. What form should debt conditionality take?
- Typical form where warranted:
  - Separate limits on public external and domestic debt accumulation, given segmentation of financing sources.
- Specific guidance for countries that normally rely on official concessional financing:
  - There will typically be sizeable differences between the nominal and the present value of loans; to accurately capture the burden of the new debt being incurred, the limit on external debt accumulation should be specified in present value terms.
  - When a large share of new external debt takes the form of project loans disbursing over several years, the limit on external debt would likely take the form of contracting or guaranteeing of new debt rather than on the disbursement-based incurring of new debt.
  - In situations where a significant share of debt in local currency is in fact external financing by foreign portfolio investors, segmentation between external and domestic financing may be more apparent than real; in these cases, there may be a case for setting the debt limit on total public debt accumulation.
- Where capacity to monitor evolution of debt is weak:
  - Specification should allow for capacity limitations; main weakness likely in capturing and tracking contracting and disbursement of new external loans.
  - Nominal-term performance criterion on contracting of non-concessional external borrowing (the current approach), supplemented by a nominal-term limit on contracting of new concessional debt. This limit would be explicitly specified in program documentation and included as a memorandum item in the standard quantitative conditionality table.
  - As debt management and monitoring capacity is strengthened, specification would be modified over time to converge to a present value limit on all new public external debt.
- Assessment of capacity to manage/monitor debt should draw on technical assistance reports, DeMPA, PEFA, CPIA, etc., with close collaboration with World Bank staff.
- Capacity-building expectation:
  - Strengthening debt monitoring capacity should be an explicit objective of the Fund-supported program, with sufficient external technical assistance mobilized.
  - Expectation that capacity-building efforts will bear fruit over the course of a three-year period, sufficient to allow the use of a comprehensive debt limit in any ensuing program.

### C. How should quantitative debt limits be set?
- Quantitative limits on debt accumulation are derived from the agreed fiscal framework.
- Approach to quantification is similar across program cases (GRA or PRGT), but low income countries with significant concessional financing often have weaker public investment and debt management capacity—these factors figure more significantly in staff assessments.
- Levels of debt accommodatable depend on:
  - Assessed risk of debt distress; and
  - Within a risk category, the scale of the existing debt burden.
  - Example: within “moderate risk,” countries closer to “low risk” debt burdens have larger borrowing space than those approaching “high risk” levels.
- Staff assessment should account for imperfect substitutability between non-concessional and concessional loans; concessional loans are preferable all else equal, but available loans differ in terms of expenditure types and conditionality and must be compared in context of developmental priorities.

### D. How should implementation of debt policies be assessed?
- Program reviews should examine:
  - (a) observance of specified program quantitative targets; and
  - (b) consistency with the programmed borrowing plan.
- Assessment of borrowing plan implementation should cover:
  - Realized financing mix (currency composition, terms and maturities, concessionality mix).
  - Extent to which high-profile components of borrowing plan (e.g., sovereign bond issues, large project loans) evolved as anticipated.
- Nonobservance of a performance criterion requires investigation and assessment on whether waiver for nonobservance should be proposed.
- Assessment of other borrowing plan components will be judgment-based and may point to program modifications.
- Program documentation must specify key features of the borrowing plan, including:
  - a) breakdown of sources of new borrowings across different categories of concessionality, along lines contained in Table 1;
  - b) identification of any large scale loans envisaged (e.g., large external bond issues, large project loans);
  - c) provision of aggregated information on planned use of external financing across sectors, in countries where project loans account for the bulk of external public financing.
- Table 1 includes program targets for both concessional and non-concessional borrowing levels—the latter being a key element in implementation of the World Bank’s Non-Concessional Borrowing Policy (NCBP).
- Documentation should preserve country negotiating flexibility and confidentiality; program assumptions should not provide terms (grant element) of specific loans to avoid hampering negotiation.

- Table 1. Summary Table on External Borrowing Program: Illustration
  - PPG external debt contracted or guaranteed
    - Sources of debt financing: Volume of new debt, US million 1/ = 100; Present value of new debt, US million 1/ = 62
    - Concessional debt, of which 2/: Volume = 65; Present value = 33
      - Multilateral debt: 35; 14
      - Bilateral debt: 30; 19
    - Non-concessional debt, of which 2/: Volume = 35; Present value = 29
      - Semi-concessional debt 3/: 20; 14
      - Debt on commercial terms 4/: 15; 15
  - Uses of debt financing: Volume = 100; Present value = 62
    - Infrastructure: 40; 30
    - Healthcare: 20; 7
    - Education: 15; 7
    - Budget financing: 15; 10
    - Other: 10; 8
  - Memorandum items — Indicative projections:
    - Year 2: 100; 60–65
    - Year 3: 120; 72–78
  - Notes in table:
    - 1/ Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate.
    - 2/ Debt with a grant element that exceeds a minimum threshold. This minimum is typically 35 percent, but could be established at a higher level.
    - 3/ Debt with a positive grant element which does not meet the minimum grant element.
    - 4/ Debt without a positive grant element. For commercial debt, the present value would be defined as the nominal/face value.

- Provision of borrowing plan information serves to:
  - Clarify relationship between nominal debt, financing assumptions in fiscal accounts and balance of payments, and present value/average grant element figures in debt limits.
  - Provide official creditors with confidence regarding country’s debt management goals and capacity to repay.
  - Help address burden-sharing concerns and ensure continuing access to concessional financing.

### E. Special Cases
- Countries at high risk of debt distress (or in debt distress):
  - Debt limits would be more tightly framed.
  - Non-concessional borrowing is expected to be exceptional—but not precluded.
  - Programs would include a performance criterion on non-concessional borrowing, coupled with a performance criterion or indicative target on contracting of concessional debt.
  - There could be grounds, conditional on support from key bilateral donors, for defining concessionality as entailing a higher grant element than the 35 percent level typically employed.
- Large loans with highly uncertain terms:
  - Where likely terms of large loan(s) are sufficiently uncertain to generate significant uncertainty on projected present value, appropriately specified adjustors would be warranted.
  - Adjustor would be capped to fully accommodate moderate ex post deviations from assumed grant element but only partly accommodate large deviations.
  - Loans would need to be large in scale for uncertainty to translate into significant uncertainty regarding projected present value.

### F. On Concessional Lending to Low Income Countries
- Staff will continue to advocate for provision of financing on fully concessional terms to low income countries (LICs), defined here as all countries eligible to obtain concessional financing from the Fund.
- Existing debt limits policy signaled importance of ensuring LICs have access to substantial external financing on concessional terms to enhance net impact on growth and poverty reduction.
- Ensuring adequate volumes of concessional financing may require understandings among creditors to collectively avoid competitive erosion of concessionality; such understandings may be more easily reached in wider dialogue between official lenders and LIC borrowers on “pro-development” lending practices.

### V. Guidelines on public debt conditionality: key elements (summary)
- Key elements of proposed Guidelines focus on:
  - Circumstances under which debt conditionality should be used.
  - Form that debt conditionality should take.
- Determination of quantitative targets for debt accumulation in individual cases depends on country conditions, including borrowing space as determined by the DSA.
- The authorities’ borrowing plan is a component of the fiscal program; limits on debt accumulation are a tool to be deployed in designing fiscal conditionality depending on country conditions and program objectives.

*Source: Excerpt from IMF document on Reform of the Policy on Public Debt Limits in Fund-Supported Programs.*

### 50.      The use of limits (or targeted sub-limits) on debt accumulation is normally warranted

### _111414 - 50.      The use of limits (or targeted sub-limits) on debt accumulation is normally warranted

### Rationale for using debt limits
- Debt limits (or targeted sub-limits) are normally warranted when:
  - a country has significant debt vulnerabilities; or
  - the quality and coverage of fiscal statistics favor the use of debt conditionality instead of, or as a complement to, “above-the-line” fiscal conditionality.
- Quantitative debt limits are set via evaluation of proposed borrowing plans, informed by the assessment of debt vulnerabilities in the DSA, and are a “drop-down” from the agreed fiscal program.

### Guidelines for countries that do not normally rely on official external concessional financing
- Deployment:
  - Debt conditionality expected where countries are judged to have significant debt vulnerabilities, as assessed using the MAC DSA.
- Specification:
  - Limits on public debt specified in terms of the nominal value of debt; precise specification depends on country circumstances and data availability.
  - Depending on financial market integration, separate limits on external-issued debt and domestically-issued debt could be justified.
- Coverage:
  - Ideally cover all public and publicly guaranteed debt, but narrower coverage may be justified by institutional circumstances and data availability.
- Targeted conditionality:
  - Targeted conditionality (e.g., short-term external debt, issuance of public guarantees) could be justified on the basis of specific debt vulnerabilities and institutional weaknesses.
- Footnote definition:
  - Public sector debt would typically refer to non-financial public sector debt.

### Guidelines for countries that normally rely on official external concessional financing
- Low risk of debt distress:
  - Program conditionality need not include limits on public external borrowing.
- Moderate risk of debt distress:
  - Include a performance criterion (PC) on the accumulation of external debt.
  - The PC would cover all forms of public external borrowing (both concessional and non-concessional) and be specified in net present value (NPV) terms.
- High risk of debt distress (or in distress):
  - Non-concessional external borrowing allowed only under exceptional circumstances.
  - A PC set on the allowed nominal level of non-concessional external borrowing.
  - A limit on accumulation of concessional external debt specified as either a performance criterion or an indicative target.
- Interaction with domestic debt:
  - Where external borrowing limits are integral to fiscal conditionality, they would be accompanied by specified limits on accumulation of domestic debt.
  - Where external borrowing limits supplement “above-the-line” fiscal conditionality, limits on domestic debt accumulation may not be needed.

### Exceptions and operational considerations
- Exceptions to the concessional-financing guidance accommodated when:
  - Countries with an open capital account and significant financial integration: may be more appropriate to set a limit on total public debt accumulation rather than on externally-issued debt.
  - Weak capacity to capture and monitor contracting of debt: the performance criterion may take the form of a limit on the contracting of non-concessional external debt.
    - To enhance centralized control and monitoring of concessional debt, a target for the contracting of concessional external debt would be specified and included as a memorandum item in the conditionality table.
- Assessment of debt monitoring capacity:
  - Driven, but not mechanically determined by, the methodology outlined in Annex III; final determination based on judgment of Fund staff in consultation with World Bank staff.

### Transitional arrangements and implementation timeline
- Gradual introduction expected given significance of reforms.
- Proposed effective date: end-June 2015.
- Modification of conditionality in pre-existing Fund-supported programs only after staff-authority understandings and Executive Board approval.
  - Staff expected to discuss modifications at the first program review following entry into effect of new guidelines.
- Review of implementation:
  - A review of experience to be conducted once sufficient evidence has accumulated, but no later than three years after the entrance into effect of the new policy.

### Issues posed for Directors (selection)
- Whether use of debt conditionality should be guided by:
  - the extent of a country’s debt vulnerabilities; and
  - the relative technical merits of using “below-the-line” debt measures versus “above-the-line” fiscal balance measures.
- Whether to broaden scope of guidelines to cover public debt (both external and domestic) and specify separate limits where warranted.
- Whether to broaden scope in concessional-financing countries to cover all public external debt (not only non-concessional).
- Whether program conditionality for low risk countries need not include limits on public external borrowing.
- Whether debt limits for concessional-financing countries should be specified in NPV terms, subject to specified exceptions.
- Support for assessing a country’s capacity to manage/monitor debt for program monitoring along lines described in Annex III.
- Agreement that program documentation should include a description of key features of the authorities’ borrowing plans.

### Evidence from recent GRA programs (illustrative cases)
- Selected examples (period 2010–14) show variation in design and coverage of fiscal and debt conditionality:
  - Cyprus (2013 EFF): General Government fiscal conditionality; stock of General Government (GG) debt and accumulation of new GG guarantees as a PC.
  - Ireland (2010 EFF): General Government fiscal conditionality above-the-line; Central Government stock of net debt as an IT.
  - Jordan (2012 SBA) and Georgia (2014 SBA): below-the-line fiscal conditionality and no additional debt conditionality.
  - Ukraine (2010 SBA): below-the-line fiscal conditionality; Publicly Guaranteed Debt as a PC.
  - Bosnia and Herzegovina (2012 SBA): above-the-line fiscal conditionality; Central Government contracting and guaranteeing of new nonconcessional short-term external debt as a PC.
- Where debt level was a key concern, programs generally included overall debt limits on the stock of debt (e.g., Cyprus and Ireland) except where fiscal conditionality captured most debt-creating transactions (e.g., Jordan).
- Where debt levels were low, debt limits sometimes targeted risks from debt outside the fiscal framework (e.g., public guarantees in Ukraine; composition of debt in Bosnia and Herzegovina).

### Debt developments in PRGT-eligible countries (summary findings)
- Sample: 61 PRGT-eligible countries that have had a Fund program and at least one DSA.
- Public debt levels as share of GDP:
  - On average stable between 2007 and 2013 across PRGT-eligible countries, but with substantial cross-country variation.
  - Public debt levels increased in 15 of the 20 “early HIPC” countries; two-thirds of that increase accounted for by higher external debt levels.
  - No clear trend for “non-HIPCs.”
  - In several countries debt increases were driven by higher levels of domestically-issued debt.
- Concessionality of external borrowing:
  - Staff estimates: average grant element of external loans contracted was about 39 percent for PRGT-eligible countries during 2009–11.
  - Substantial cross-country variation: in five countries the average grant element of new loans was below 20 percent; issuance of sovereign bonds contributed to low grant element in some cases (e.g., Senegal).
  - Note: grant element calculations based on 5 percent discount rate; sample includes 60 LIC countries (excludes Zimbabwe as data not available).
- Risk of external debt distress (LIC DSF, as of July 31, 2014):
  - Low: 20 countries
  - Moderate: 27 countries
  - High: 11 countries
  - In Debt Distress: 3 countries
  - One third of the sample at low risk; over two-fifths at moderate risk.
  - Countries at high risk include countries in conflict or post-conflict, those hit by natural disasters, and small island economies with large fiscal deficits. Grenada, Sudan and Zimbabwe are in debt distress.
- Evolution of risk ratings (January 2007–July 2014):
  - Risk rating improved since 2007: 24 countries (all groups), of which 16 were upgraded during a Fund program.
  - Risk rating deteriorated since 2007: 6 countries, of which 2 were downgraded during a Fund program.
  - Risk rating unchanged since 2007: 31 countries (including 7 that had both an upgrade and a downgrade between 2007 and 2014).
  - Six countries experienced a downgrade since 2007; thirteen countries (excluding late-HIPCs) experienced an upgrade over the period; seven countries experienced both an upgrade and a downgrade with no net change.
- Common causes of downgrades between 2007–13:
  - Weaker than projected macroeconomic outlook or exogenous shocks (examples: Central African Republic, Mali, Mongolia, Samoa, Sao Tome and Principe).
  - Weaker fiscal performance or slower-than-projected fiscal adjustment (example: Cape Verde).
  - Contracting of significant external debt to finance public investment or natural resource projects (examples: Cameroon, Mozambique, Niger, Cape Verde, Chad, Mongolia).
  - Changes in discount rate or CPIA ratings (examples: Mongolia, Mozambique, Burkina Faso).

*Source: IMF staff analysis and guidelines contained in the chapter "The use of limits (or targeted sub-limits) on debt accumulation is normally warranted."*

### 6.      Public debt levels in LICs have, on average, been broadly stable between 2007 and

### 6. Public debt levels in LICs have, on average, been broadly stable between 2007 and 2013

### Aggregate trends and cross‑group variation (2007–13)
- Aggregate (weighted average) public debt in LICs was broadly stable between 2007 and 2013.
- The aggregate data mask important differences across country groups:
  - Average debt levels declined in late HIPCs, reflecting the impact of debt relief.
  - Average debt levels rose in most early HIPCs and in about half of the non‑HIPC grouping.
- The variation across individual countries is wide (see Figure AII4).

### Early HIPCs: pattern and drivers of rising debt
- Most early HIPCs have seen rising debt levels since 2007:
  - Public debt (share of GDP) increased in 15 of the 20 early‑HIPCs between 2007 and 2013.
  - About two‑thirds of the increase was accounted for by external debt.
  - For early HIPCs whose debt increased:
    - The public debt‑to‑GDP ratio increased by an average of 12 percentage points.
    - Of that, 7 percentage points reflected an increase in public external debt.
- Country‑level notable developments:
  - Largest increases in public external debt: Senegal and Tanzania (largely reflecting scaling‑up of public investment), and Honduras (large deterioration of the fiscal position).
  - Largest increases in total public debt: Ghana and Malawi (bulk of increases accounted for by domestic borrowing).
  - Several early HIPCs (Bolivia, Ghana, Senegal, among others) accessed international capital markets via sovereign bonds issuance.
- Additional note: Red diamonds in Figure AII5 indicate countries experiencing deteriorating risk of debt distress during 2007–14 (Cameroon, Mozambique).

### Non‑HIPCs: mixed outcomes and causes
- No clear overall pattern: debt increased in about half of the non‑HIPCs and declined in the other half.
- Main drivers of increases in non‑HIPCs vary:
  - Sustained low growth and poor fiscal performance (e.g., Grenada, Maldives).
  - Large public investment programs financed with external or domestic debt (e.g., Mongolia).
  - Prolonged debt overhang with accrued late interest and penalty fees (e.g., Sudan, Zimbabwe).
- Red diamonds in Figure AII6 indicate non‑HIPCs experiencing deteriorating risk of debt distress during 2007–14 (Cape Verde, Dominica, Maldives).

### Countries with significant rises in both total and external public debt (2007–13)
- Definition used: a) increase in public debt‑to‑GDP ratio during 2007–13 of at least 5 percentage points; and b) increase in public external debt‑to‑GDP ratio over the same period of at least 5 percentage points.
- Thirteen countries met this threshold.
- Raising thresholds to require at least a 10 percentage point increase in the public debt‑GDP ratio would eliminate three early HIPCs from the list.
- Standout early HIPC cases:
  - Ghana and Malawi: public debt burden rose by close to 30 percentage points of GDP, mainly due to increased domestically‑issued debt.
  - Senegal: increase in the public debt‑GDP ratio of 22 percentage points, the bulk financed externally.
  - Honduras and Tanzania: increases in external debt‑GDP ratio of at least 10 percentage points of GDP.
- Appendix Table 2 provides specific country tabulations (examples include Ghana, Malawi, Senegal, Honduras, Tanzania).

### Annex III — Assessing the quality of debt monitoring
- Purpose: provide an overview of indicators to identify weaknesses in debt monitoring and reporting in countries relying significantly on concessional official financing.
- Preliminary analysis finding:
  - In about 40 percent of PRGT‑eligible countries, debt records are either incomplete or produced with significant delays.
  - Where weaknesses—particularly in tracking concessional debt—are confirmed, debt limit specifications should make appropriate allowance for these capacity limitations.

A. Background
- Specification of debt limits needs to account for a country’s debt management and monitoring capacity constraints.
- Moving to continuous performance criteria covering both concessional and non‑concessional debt increases monitoring demands and may raise misreporting risk in countries with weaker administrative capacity.
- Diagnostics focus on timeliness and completeness of debt records and reports at least at the central government level.

B. Available indicators and frameworks
- Relevant frameworks and sub‑indicators:
  - DeMPA (Debt Management Performance Assessment): covers debt records and reporting in depth (DPI‑14(1,2); DPI‑15(1,2,3)), including aspects beyond central government; reports usually remain confidential.
  - PEFA (Public Expenditure and Financial Accountability): PI‑17(i) assesses central government debt data recording and reporting; less detailed than DeMPA but updated more frequently (on average every three years) and published.
  - CPIA (Country Policy and Institutional Assessment): A3 component (Debt Policy) is produced annually and is broader—reflects quality of public debt data, risk of debt distress, and overall debt management practices.
- Comparability and complementarities:
  - DeMPA allows deeper, more granular assessments; PEFA provides more frequent, publicly available coverage; CPIA is broader and annual.
  - Where recent DeMPA (PEFA) scores are unavailable, the other framework can often be used as a proxy.
  - PEFA ratings of D (incomplete and inaccurate debt records) generally correspond to lower CPIA Debt Policy scores (average CPIA for PEFA D group is significantly below averages for other PEFA groups).

C. Proposed methodology to identify potential weaknesses
- Emphasize lower (weaker) ratings when diagnosing deficiencies.
- Criteria to identify cases where quality of debt monitoring may be insufficient:
  a) A country scoring ‘D’ in any of the most critical dimensions (DPI‑14(1), DPI‑15(2) where relevant, or PI‑17(i)) over the last three years; or
  b) A CPIA Debt Policy score equal to 3 or below.
- Step‑by‑step diagnostic flow (Figure AIII2):
  - Check for recent DeMPA or PEFA rating produced within the last 3 years.
  - If none, consider CPIA Debt Policy score ≤ 3 to flag potential weaknesses.
- Additional considerations in final assessment:
  - Recent track record, fragile state status, relevant TA reports, and other country‑specific evidence.
  - Country teams produce assessments at program request and update during reviews.
  - Where monitoring quality is low—particularly for concessional debt—capacity limitations should be reflected in debt limit design and addressed via structural conditionality.
  - As capacity is strengthened, debt limit specifications can be progressively enhanced toward a present value limit on all new debt.

D. Key quantitative and programmatic findings from diagnostics
- Diagnostics suggest about 40 percent of PRGT‑eligible countries have incomplete or significantly delayed debt records.
- For many of these countries, the trigger was low DeMPA and/or PEFA ratings; in several cases CPIA Debt Policy scores were low as well.
- Majority of selected low‑capacity countries have CPIA Debt Policy scores equal to or below 3.
- All such countries are classified as lower capacity under the then‑current capacity assessment framework.

Policy implications and recommendations
- Debt limit design should:
  - Make explicit allowance for debt monitoring and reporting capacity limitations, especially where concessional debt monitoring is weak.
  - Use diagnostics (DeMPA, PEFA, CPIA) to identify countries that should not immediately adopt performance criteria covering both concessional and non‑concessional debt on a continuous basis.
  - Be accompanied, where appropriate, by structural conditionality to strengthen debt management and monitoring capacity.
  - Be progressively tightened as debt monitoring capacity improves, toward a present value limit on all new debt.

*Source: “REFORM OF THE POLICY ON PUBLIC DEBT LIMITS IN FUND‑SUPPORTED PROGRAMS,” Annex and Appendix material (figures, tables, and text) as provided in the content unit.*

### 9.      A list of the 26 countries deemed to have weaknesses in the quality of debt monitoring

### 9.      A list of the 26 countries deemed to have weaknesses in the quality of debt monitoring

### Cases with Significant Weaknesses in Debt Monitoring (Table AIII3)
- Any of the recent DPI-14(1), DPI-15(2), or PI-17(i) has D rating; CPIA Debt policy score equal or below 3.
- Columns/fields preserved exactly as in the source: Rating/Year; (1) Completeness and Timeliness; (2) Total NFPS Debt and Loan Guarantees; CPIA Debt Policy (Avg. of 2011-13); DSA Risk Rating (as of end-July 2014); PEFA PI-17 (i)/Trigger; DeMPA DPI-14: Debt records.

- 1 Comoros **; D2013; DN/R2011; 2.33; High
- 2 Haiti **; D2012; 2.50; High
- 3 Sao Tome and Principe **; C2013; DD2011; 2.50; High
- 4 Congo, Democratic Republic of **; D2013; 2.67; Moderate
- 5 Burundi *; *C2012; DD2012; 2.83; High
- 6 Central African Republic *; *DD2012; 3.00; High
- 7 Mauritania *; *DD2011; 3.00; Moderate
- 8 Djibouti *; *DD2012; 3.00; ...
- 9 Mali *; B2011; DC2011; 3.67; Moderate
- 10 Madagascar *; C2013; DD2013; 4.00; Low
- 11 Burkina Faso *; B2014; CD2011; 4.00; Moderate
- 12 Nigeria *; D2013; CN/R2012; 4.17; Low
- 13 Zimbabwe *; C2012; 1.50; In debt distress
- 14 Sudan *; 1.50; In debt distress
- 15 Chad *; 2.50; High
- 16 Afghanistan *; A2013; 2.50; High
- 17 Cote d'Ivoire *; A2013; 2.50; Moderate
- 18 Grenada *; 2.50; In debt distress
- 19 Guinea Bissau *; C2013; 2.50; Moderate
- 20 Maldives *; C2014; 2.50; ...
- 21 Togo *; 2.67; Moderate
- 22 Guinea *; B2013; 2.83; Moderate
- 23 Gambia *; 3.00; Moderate
- 24 LAO, PDR *; 3.00; Moderate
- 25 Nepal *; 3.00; Moderate
- 26 Yemen *; 3.00; Moderate

### Key methodological and data notes (preserved from source)
- PEFA data contains the most recent status of a national assessment as of April 16, 2013; updated on a six-monthly basis.
- Each indicator is measured on a four point ordinal scale from A to D.
- CPIA score used reflects the average CPIA score of the overall score from 2011-13.
- DeMPA is the Debt Management Performance Assessment Tool; in cases where a dimension cannot be assessed, an N/R score is assigned.
- DSA Risk Rating is reported as of end-July 2014.

*Source: PEFA Secretariat; World Bank; and Fund staff calculations. Table AIII3, "Cases with Significant Weaknesses in Debt Monitoring", Reform of the Policy on Public Debt Limits in Fund-Supported Programs.*

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