## Reform of the Policy on Public Debt Limits in Fund-Supported Programs—Proposed Decision and Proposed New Guidelines

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### Proposed Decision
- Replacement and reference updates:
  - Decision No. 6230–(79/140) of August 3, 1979, as amended, “Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements” is replaced by “Guidelines on Public Debt Conditionality in Fund Arrangements” as set forth in the Attachment to this decision.
  - Any existing reference in Fund policies to the old Guidelines shall be read as a reference to the new Guidelines on Public Debt Conditionality in Fund Arrangements.
- Amendment to Policy Support Instrument:
  - Paragraph 18 of the Policy Support Instrument Framework decision, Decision No. 13561–(05/85), adopted October 5, 2005, as amended, shall be amended by removing the reference to “and” immediately preceding “(c)” and by adding at the end: “and (d) Guidelines on Public Debt Conditionality in Fund Arrangements”.
- Effective date and transitional provisions:
  - This decision shall become effective on June 30, 2015.
  - Any performance criterion or indicative target on external debt in place when this decision becomes effective shall continue to apply in accordance with its terms unless and until amended consistent with the Guidelines on Public Debt Conditionality in Fund Arrangements.
- Review timeline:
  - It is expected that the Fund will review the implementation of the Guidelines on Public Debt Conditionality in Fund Arrangements no later than June 30, 2018.

### Guidelines on Public Debt Conditionality — Scope and Use
- General application:
  - Public debt conditionality in the form of a performance criterion or an indicative target establishing a limit on public and publicly guaranteed debt, or some sub-component of this aggregate, will normally be included in Fund arrangements in the General Resources Account (GRA) or under the Poverty Reduction and Growth Trust (PRGT) when a member faces significant debt vulnerabilities.
- Alternate justifications:
  - Use of public debt conditionality may be warranted where the quality and coverage of fiscal statistics favor public debt conditionality in place of, or as a complement to, “above-the-line” fiscal conditionality.
- Default and tailored coverage:
  - Public debt conditionality will be established as a limit on “total” public and publicly guaranteed debt unless country circumstances and program objectives justify narrower conditionality.
  - a) Where significant segmentation exists between domestic and external public financing, conditionality will normally be separate limits on external and domestic public and publicly guaranteed debt.
  - b) Where vulnerabilities are specific in nature, conditionality should target specific areas of vulnerability with limits covering relevant sub-categories of debt.
  - c) The design and coverage should take into account the quality and timeliness of the financial information produced by the member country’s public sector accounting system.

### Definition of Public Sector and External Debt Criteria
- Public sector definition:
  - The appropriate definition of the public sector will depend on institutional arrangements and will normally include all nonfinancial public enterprises and other public entities, unless explicit exclusions are made.
  - Explicit exclusions could include specific public enterprises or other official sector entities assessed to be able to borrow without a government guarantee and whose operations pose limited fiscal risk to the government.
  - The specification of what constitutes “public sector” for conditionality will be explained clearly in the program documents.
- External debt definition criteria:
  - For specifying public debt conditionality, “external” debt may be defined on the basis of the residency of the creditor or the currency of denomination of the debt.
  - The public debt conditionality will specify which of these two criteria is being used.

### Formulation of Debt Limits and Data Considerations
- Possible formulations:
  - Debt limits (performance criteria or indicative targets) may be formulated in terms of:
    - a) debts contracted or authorized;
    - b) disbursements made; or
    - c) changes in the stock of public and publicly guaranteed debt.
  - The chosen approach depends on program objectives, predictability of loan disbursements, and quality and timeliness of data availability.
- Guiding considerations (paragraph 7):
  - a. Guidelines applied with reasonable flexibility while safeguarding uniformity of treatment among members; interpreted in light of the Guidelines on Conditionality.
  - b. Appropriate level and composition of debt for conditionality based on evaluation of the member’s fiscal program and borrowing plan and on debt vulnerabilities identified through a debt sustainability analysis.
  - c. Public debt conditionality is warranted instead of, or alongside, “above-the-line” fiscal conditionality when at least one of:
    - i. National fiscal accounting yields fiscal financing data significantly better in quality and timeliness than “above-the-line” measures (such as the fiscal balance); or
    - ii. Important public debt-creating activities are not adequately captured in fiscal accounts (e.g., bank recapitalization, issuances of government guarantees, noncommercial state-owned enterprises, and other agencies outside the budgetary framework) and these activities pose a threat to the overall fiscal position.
  - d. The debt limit would normally be set on the nominal value of debt, except in cases under paragraph 7(e).
- Special rules for members relying on concessional financing (paragraph 7(e)):
  - (i) For members assessed as facing a high risk of debt distress or in debt distress:
    - Public debt conditionality will take the form of:
      - (a) a performance criterion specifying a ceiling on the nominal amount of non-concessional external debt accumulation; and
      - (b) a performance criterion or indicative target setting a ceiling on the accumulation of concessional external debt.
    - The accumulation of non-concessional debt would be allowed under the conditionality only under exceptional circumstances.
  - (ii) For members assessed as facing a moderate risk of debt distress:
    - Public debt conditionality will take the form of a performance criterion setting a ceiling specified in present value (PV) terms on the accumulation of public and publicly guaranteed external debt, without distinctions between concessional and non-concessional debt.
  - (iii) For members assessed as facing a low risk of debt distress:
    - Conditionality on debt accumulation would not be warranted, except where justified on the basis of the criteria in 7(c).
  - (iv) Where the member’s capacity to monitor the contracting of debt is weak:
    - Public debt conditionality will consist of a performance criterion, specified in nominal terms, on the accumulation of non-concessional external debt, supplemented by a memorandum item, specified in nominal terms, on the accumulation of concessional external debt.
  - (v) For members with an open capital account and significant financial integration with international markets:
    - Public debt conditionality may be set on total public debt accumulation rather than on the accumulation of external debt.
- Inclusion and explicit specification:
  - In principle, a performance criterion or an indicative target establishing a debt limit will incorporate by reference the definition of debt set forth in paragraph 8.
  - Financial instruments not covered by the definition but with potential to create substantial external liabilities for governments will be included in the debt limit where appropriate and explicitly specified in program documents.

### Definition of Debt (Paragraph 8)
- General definition:
  - “Debt” means a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
- Primary forms of debt listed:
  - i. Loans: advances of money to the obligor by the lender on the basis of an undertaking that the obligor will repay in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets equivalent to fully collateralized loans (such as repurchase agreements and official swap arrangements).
  - ii. Suppliers’ credits: contracts where the supplier permits the obligor to defer payments until some time after delivery of goods or services.
  - iii. Leases: arrangements under which property is provided for use for specified period(s) shorter than the total expected service life while the lessor retains title. For these guidelines, debt is the present value (at the inception of the lease) of all lease payments expected to be made during the agreement period excluding payments that cover operation, repair, or maintenance.
- Treatment of arrears and other obligations (paragraph 8(b)):
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Applicability to Policy Support Instrument
- Analogy:
  - These Guidelines on Public Debt Conditionality in Fund Arrangements shall apply by analogy to programs supported under the Policy Support Instrument Framework Decision No. 13561–(05/85), adopted October 5, 2005, as amended.

*Source: IMF staff supplement “Reform of the Policy on Public Debt Limits in Fund-Supported Programs—Proposed Decision and Proposed New Guidelines” (Attachment: Guidelines on Public Debt Conditionality in Fund Arrangements).*

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