## _110215

## Source details

**Canonical URL:** [_110215](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_110215.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_110215.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_110215.pdf.json)

---

### Executive summary — motivation and scope
- First joint IMF/World Bank report on public debt vulnerabilities in low income countries (LICs), examining developments and underlying causes since the onset of the global financial crisis.
- Purpose: inform the upcoming review of the IMF/WB joint LIC Debt Sustainability Framework (LIC DSF).
- Sample: 74 countries that were eligible for concessional financing from both the IMF and the World Bank as of end-2014.
- Public debt definition: gross public and publicly guaranteed (PPG) external and domestic debt, consistent with LIC DSF definitions.
- Data sources: LIC DSF database, a new survey of IMF country desks (noting non-uniform coverage and that most survey responses provided central government debt (face value)), World Bank DeMPA and MTDS databases.

### Recent macroeconomic and debt developments (findings)
- Improved macroeconomic performance in LICs, combined with HIPC/MDRI debt relief and high demand for commodities, contributed to improved LIC creditworthiness.
- New borrowing opportunities emerged due to accommodative liquidity conditions in international capital markets; deepening of domestic financial markets in some LICs; and growing lending activities of non-Paris Club countries (NPCCs).
- Shift toward greater reliance on non-concessional credit, most significantly in frontier LICs.
- Debt relief dominated LIC indebtedness over the past decade; average public debt-to-GDP ratio for LICs declined sharply going into the global financial crisis.
- Between 2007 and 2015:
  - the proportion of countries at high risk of external debt distress (or in distress) fell from 43 to 26 percent.
- Between 2007 and 2014:
  - primary deficits on average increased debt ratios by a cumulative 14 percentage points of GDP.
  - real GDP over 2007–14 reduced LICs’ debt-to-GDP ratio by about 12 percentage points.
- Real interest rates were close to zero on average and had a negligible impact on debt dynamics during the 2007–14 period.
- Borrowing space that emerged since 2006 accompanied increases in both capital and current spending; capital spending rose relative to GDP for most LICs, most durably for commodity exporters and frontier markets.
- Heterogeneity across country groups:
  - HIPCs: most favorable debt trends (reflecting debt relief).
  - Commodity exporters: favorable trends up to 2013 (reflecting commodity price impact on primary balances).
  - Frontier LICs: early rise in debt ratios starting around 2008, but ratios remain relatively low.
  - Small states: steady and significant rise in debt ratios through 2014, reflecting weak growth, natural disasters, and absence of HIPC/MDRI relief.

### Changing financing landscape (analysis)
- New financing sources include external commercial borrowing, greater domestic debt issuance, and lending from NPCCs.
- Frontier LICs increasingly resemble Emerging Markets (EMs) in terms of international market access.
- The changing mix has reduced reliance on concessional Paris Club financing and increased exposure to market and rollover risks associated with non-concessional and commercial borrowing.
- Survey limitations: desk-level data gaps; central government face-value reporting may understate overall indebtedness.

### Debt vulnerabilities and risk assessment (findings)
- Overall debt vulnerabilities in LICs are generally lower than before the global financial crisis, but liquidity buffers have narrowed and debt-to-GDP ratios have edged higher in recent years due to counter-cyclical policies and some use of borrowing headroom to finance priority spending.
- A few frontier LICs and commodity exporters have experienced recent risk-rating deterioration tied to inadequate fiscal discipline amid less favorable external conditions.
- Small states are an exception to the broadly improved LIC debt situation, with steadily rising debt ratios and heightened vulnerability to natural disasters.
- Debt dynamics and stress sources include primary deficits, growth shocks, external conditions (commodity prices, global lending conditions), and currency pressures.

### Policy implications and recommendations (executive)
- Heightened vigilance is needed to navigate shifting market conditions and a weaker global outlook.
- Emphasis on:
  - prudent fiscal policies to maintain debt sustainability and fiscal buffers;
  - enhanced debt management to mitigate rollover and market risks as countries access non-concessional and commercial financing;
  - stronger policy frameworks across LICs to ensure that deteriorations in a few cases remain atypical.
- Near-term tests to policies include:
  - lower global commodity prices;
  - prospects for less favorable global lending conditions as monetary policies normalize;
  - currency pressures faced by some LICs.

### Box 1 — HIPC and MDRI: key points
- Completion status and coverage:
  - Of the 39 countries eligible under the Initiative, 36 have reached their completion point.
  - The latest country—Chad—reached completion point in April 2015.
  - Three pre-decision point countries—Eritrea, Somalia, and Sudan—have yet to start the process of qualifying for debt relief under the Initiative.
- Main impacts on public finances and poverty-reducing spending:
  - Since reaching the decision point, recipient countries, on average, have been able to reduce debt service by more than two percentage points of GDP and have increased poverty-reducing expenditures by almost three percentage points of GDP.
- Important caveat on solvency and expenditure switching:
  - Expenditure switching from debt service to poverty-reducing spending does not improve the government’s “economic” solvency but does improve the government’s “accounting” solvency.
- Data note:
  - Figure and averages based on staff calculations and data from IDA and IMF (December 2014) before Chad reached the completion point.

### Frontier LICs, NPCCs, and debt composition (findings)
- Market access and macro vulnerabilities:
  - Frontier LICs have retained market access despite large swings in risk sentiments, but "shifting global conditions present a source of vulnerabilities going forward."
  - Prospective tightening of global liquidity implies market access terms for frontier LICs "will likely be less favorable than in recent times."
  - Recommended: sustainable fiscal and debt policies; strengthened debt management; prudent macroeconomic management for commodity-dependent frontier LICs.
- Non-Paris Club Creditors (NPCCs):
  - Particularly marked increase in official bilateral lending from NPCCs, with China dominant among NPCCs.
  - Debt to NPCCs rose from about 8 percent of GDP in 2007 to over 11 percent of GDP in 2014.
  - Lending to non-HIPCs varied around 2 percent of GDP over 2007–14.
  - Loans to HIPCs rose from under 1 percent of GDP in 2007 to over 3 percent in 2014.
  - NPCC lending to commodity exporters has risen sharply since 2007.
  - Implication: future debt relief operations will require coordination across a more diverse group of bilateral creditors.
- Debt concessionality and non-concessional borrowing:
  - Average effective interest rate "remained broadly constant at around 2 percent since 2007."
  - Frontier LICs: share of non-concessional debt rose from 21 percent to 45 percent of total debt between 2007 and 2014.
  - Commodity exporters: non-concessional share rose from 17 percent to 33 percent of total debt over the same period.
  - Context: For frontier LICs and commodity exporters, risks partly mitigated by generally low average debt ratios (41 and 44 percent of GDP, respectively).
- Contingent liabilities (CLs):
  - World Bank estimates US$73 billion of private investment in infrastructure in IDA-eligible countries during 2009–14; many projects likely involved sovereign guarantees or PPPs.
  - IMF estimates the average capital stock of PPPs in LICs at "just below 10 percent of GDP," with new PPP investment flows decelerating.
  - An OECD and MEFMI survey finds CLs varying between 4 and 31 percent of GDP in surveyed Eastern and Southern African countries.
  - Recommendations: better monitoring of CLs, periodic risk assessments, strong legal framework for project selection and appraisal.
- Debt management: capacity, risks, and policy measures:
  - Key operational/institutional elements: legal framework, organizational structure, reporting policies, robust systems for timely debt recording and payments, use of liability management, investor diversification, cash buffers, enhanced investor communications, transparency in public investment appraisal and selection.
  - DeMPA evaluations of 58 LICs (2008–14): majority do not meet minimum requirements for sound practice in seven out of fifteen debt performance indicators.
  - CPIA Q3B showed little or no improvement during 2011–14 for the majority; only a quarter of sample saw marginal improvement.
  - Among ten countries assessed twice with DeMPA during 2008–14, seven experienced improvement.
  - Policy guidance: build debt management capacity before commercial borrowing begins; institutional reforms and technical assistance can help.

### Evolution of LIC DSF indicators and DSA projections (analysis)
- Evolution of risk ratings:
  - Substantial net improvement in LIC DSF risk of debt distress ratings since 2007; most favorable point in 2013 with 24 percent of DSAs showing high risk of debt distress (down from 43 percent in 2007).
  - In past two years (relative to end-September 2015) net deterioration: 11 downgrades versus seven upgrades.
    - Of 11 downgrades: six moved low→moderate risk; five moved moderate→high risk; eight are commodity exporters; three are frontier LICs.
  - Small states: limited improvement since 2007; of four small LICs at low risk in 2011, only one remained so in 2015.
- Drivers of improvement (2007–2014):
  - Average tax revenue increased from 13½ to almost 15 percent of GDP between 2007–10 and 2011–14.
  - Exports increased from 31 percent of GDP over 2007–10 to 33 percent of GDP over 2011–14.
  - Institutional capacity improvements played a marginal role: thirteen countries moved to a higher CPIA category, nine moved to a lower category.
- Solvency and liquidity indicators:
  - General improvement in solvency risk indicators, concurrent with worsening liquidity indicators.
  - For the median country in each group, both solvency and liquidity indicators remain below LIC DSF thresholds (negative distance), but liquidity buffers have generally decreased.
  - Solvency indicators improved for all groups except frontier LICs and small states; liquidity indicators deteriorated for all groups except commodity exporters.
- DSA projections and public debt dynamics (2014–19):
  - Projected primary deficit initially dominates growth impact: size of average projected primary deficit: 3 percent of GDP; real GDP growth impact: less than 2 percent of GDP initially.
  - Over time, real GDP growth effect surpasses declining primary deficit and gross total public debt turns negative by third or fourth projection year.
  - Public debt projections (percent of GDP): 48.6 (2014), 49.0 (2015), 48.9 (2016), 48.4 (2017), 47.5 (2018), 46.7 (2019).
- Vulnerability to shocks (DSA stress results, counts shown as number of cases where shock causes maximum increase in indebtedness):
  - Public DSA maximum-impact shocks (counts): permanently lower GDP growth: 29 (PV of Debt-to-GDP), 30 (Debt Service-to-Revenue), 13 (PV of Debt-to-Exports), 12 (Debt Service-to-Exports).
  - Primary balance short-term shock: 25 (PV of Debt-to-GDP), 20 (Debt Service-to-Revenue), 9 (PV of Debt-to-Exports), 9 (Debt Service-to-Exports).
  - Other debt creating flows shock (including contingent liabilities): 28 (PV of Debt-to-GDP), 25 (Debt Service-to-Revenue), 61 (PV of Debt-to-Exports), 59 (Debt Service-to-Exports).
  - One-time 30 percent nominal depreciation: 12 (PV of Debt-to-GDP), 17 (Debt Service-to-Revenue), 14 (PV of Debt-to-Exports), 16 (Debt Service-to-Exports).
  - External DSA maximum-impact shocks indicate one-time 30 percent nominal depreciation and export value growth shocks frequently dominate maximum impacts.
- Global environment risks and implications:
  - Weaker growth in advanced and emerging markets reduces demand for traded goods, affecting commodity producers.
  - Prospect of tighter global liquidity could raise global interest rates, affecting Eurobond rollover and new market financing.
  - Higher cost of domestic borrowing for countries relying on foreign participation in domestic markets.
  - Exchange rate pressures (e.g., US dollar appreciation) can raise debt levels and reduce repayment capacity.

### Policy implications and recommended priorities (detailed)
- Maintain prudent macroeconomic policies with attention to downside risks.
- Be ready to implement quick and forceful policy corrections if adverse external shifts occur (terms of trade, export markets, financing terms).
- For countries with serious deterioration in debt dynamics, pursue urgent policy correction to strengthen sustainability.
- For other countries, exercise close vigilance over debt trends and financing risks; develop contingency plans for macroeconomic adjustment in the event of adverse shocks.
- Strengthen fiscal frameworks and debt management capacity, especially for small states and frontier LICs.
- Manage specific risks: downside global growth, commodity prices, exchange rate movements, export market shocks, prospective hike in U.S. interest rates and associated strengthening of the U.S. dollar, tighter global liquidity affecting Eurobond access.
- Recognize trade-offs: adjustments, particularly if they fall on capital spending, will have repercussions for growth.

### Institutional capacity, DeMPA findings, and LIC DSF review implications
- Sustainable borrowing depends on institutional capacity and a medium-term debt management strategy (MTDS).
- DeMPA database (69 countries assessed during 2008–14) — selected indicators meeting minimum international standard:
  - Coordination with monetary policy: 65 percent.
  - Managerial structure: 62 percent.
  - Audit: 10 percent.
  - Segregation of duties, staff capacity and business continuity plan: 15 percent.
- Implications for LIC DSF review:
  - More systematic assessment of risks associated with greater access to international capital markets.
  - Assessment of risks associated with increased reliance on domestic debt.
  - Development of tools to assess the realism of baseline projections of key macro variables.

### Annex highlights — charts, sovereign bond issuance determinants, and policy frameworks
- Annex II (Chart Pack): figures on total external debt, changes 2007–14, debt decomposition by group, domestic/external public debt series, official bilateral disbursements by creditor type, evolution of risk of debt distress by group, and Table AII.1 Issuance of Eurobonds by Frontier LICs.
- Annex III (Determinants of Sovereign Bond Issuances in LICs):
  - Probit specification: Prob(SBI = 1) = Φ(GLOBALt; DOMESTICi,(t-1;t-3)); sample annual data for 50 LICs (1995–2014).
  - Main findings: likelihood of bond issuance increases with stronger domestic fundamentals (higher GDP per capita, lower dependence on financial aid), past issuers more likely to issue again; looser global liquidity (lower U.S. rates) and lower global volatility (VIX) increase issuance likelihood.
  - Selected coefficient estimates (probit columns (1)–(5)) — preserve reported values and significance:
    - U.S. rates coefficients: (1) -0.185** (0.0909); (2) -0.330*** (0.0945); (3) -0.114 (0.159); (4) -0.300*** (0.103); (5) -0.293*** (0.104).
    - VIX index coefficients: (1) -0.0361** (0.0170); (2) -0.0502** (0.0222); (3) -0.0475** (0.0220); (4) -0.0460** (0.0214); (5) -0.0493** (0.0221).
    - GDP per capita: (1) 0.569*** (0.165); (2) 0.839*** (0.200); (3) 0.704*** (0.208); (4) 0.577*** (0.209); (5) 0.699*** (0.220).
    - CA balance (% of GDP): (2) 0.0425*** (0.0158); (3) 0.0404** (0.0161); (4) 0.0308* (0.0170); (5) 0.0428** (0.0169).
    - Past Bond Issuance: (1) 0.685** (0.308); (3) 0.553* (0.284); (4) 0.581* (0.297); (5) 0.661** (0.292).
    - Financial Aid: (1) -0.0304* (0.0184).
    - Number of observations and diagnostics: No. of Observations: (1) 949; (2) 833; (3) 833; (4) 825; (5) 824. Pseudo (McFadden's) R2: (1) 0.29; (2) 0.29; (3) 0.32; (4) 0.32; (5) 0.33.
- Annex IV (IMF DLP and World Bank NCBP):
  - IMF DLP 2014 reform (effective June 2015): broadened to focus on all public debt; integrated treatment of external finance; tightened link between debt vulnerabilities, capacity, and conditionality; simplified capacity assessment focused on debt monitoring.
  - IDA grant allocation framework:
    - low risk: 100 percent of annual IDA allocation on credit terms.
    - moderate risk: 50:50 split between credit and grants.
    - high risk or in distress: 100 percent grants.
    - All grant allocations are discounted 20 percent in volume.
  - NCBP evolution:
    - Since introduction in 2006 reviewed twice; 2008 adapted for project packages; 2010 allowed ex-ante non-zero ceilings for regular non-concessional access.
    - Proposed harmonization with IMF DLP: streamlined capacity assessment based on debt monitoring ability; introduce PV ceilings on total external debt for countries with adequate capacity.
  - NCBP mechanics (post-2010 and proposed enhancements) preserve distinctions by debt vulnerability and capacity and propose nominal and PV ceilings for eligible countries.

### Annex V summary — debt vulnerability evolution (2008–10 vs. 2011–13)
- Overall: number of breaches fell between 2008–10 and 2011–13, consistent with improved risk-of-debt-distress ratings.
- PV debt-to-revenue: breach on average in 2008–11, but not in 2011–13.
- HIPCs: improvement in 4 of 5 debt burden indicators; no baseline breaches in 2011–13; had breach of PV debt-to-exports in 2008–10.
- Frontier markets and small states: deterioration in almost all indicators in the baseline; small states breached PV debt-to-GDP in 2011–13 (baseline).
- Non-HIPCs: deterioration in all indicators under baseline and extreme scenarios, though not enough to increase number of breaches.
- Frontier markets under shock: breached PV debt-to-GDP in 2011–13 only under most extreme shock.

*Source: PUBLIC DEBT VULNERABILITIES IN LICs: THE EVOLVING LANDSCAPE (IMF/World Bank, excerpts).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Motivation and scope
- First joint IMF/World Bank report on public debt vulnerabilities in low income countries (LICs), examining developments and underlying causes since the onset of the global financial crisis.
- Purpose: inform the upcoming review of the IMF/WB joint LIC Debt Sustainability Framework (LIC DSF).
- Sample: 74 countries that were eligible for concessional financing from both the IMF and the World Bank as of end-2014.
- Public debt definition: gross public and publicly guaranteed (PPG) external and domestic debt, consistent with LIC DSF definitions.
- Data sources: LIC DSF database, a new survey of IMF country desks (noting non-uniform coverage and that most survey responses provided central government debt (face value)), World Bank DeMPA and MTDS databases.

### Recent macroeconomic and debt developments (findings)
- Improved macroeconomic performance in LICs, combined with HIPC/MDRI debt relief and high demand for commodities, contributed to improved LIC creditworthiness.
- New borrowing opportunities emerged due to:
  - accommodative liquidity conditions in international capital markets;
  - deepening of domestic financial markets in some LICs;
  - growing lending activities of non-Paris Club countries (NPCCs).
- These new financing possibilities mitigated the decline in Paris Club lending and have been associated with a shift toward greater reliance on non-concessional credit, most significantly in frontier LICs.
- Debt relief dominated LIC indebtedness over the past decade; reflecting HIPC/MDRI relief and generally healthy growth, the average public debt-to-GDP ratio for LICs declined sharply going into the global financial crisis.
- Between 2007 and 2015:
  - the proportion of countries at high risk of external debt distress (or in distress) fell from 43 to 26 percent.
- Between 2007 and 2014:
  - primary deficits on average increased debt ratios by a cumulative 14 percentage points of GDP.
  - real GDP over 2007–14 reduced LICs’ debt-to-GDP ratio by about 12 percentage points.
- Real interest rates were close to zero on average and had a negligible impact on debt dynamics during the 2007–14 period.
- Borrowing space that emerged since 2006 accompanied increases in both capital and current spending; capital spending rose relative to GDP for most LICs, most durably for commodity exporters and frontier markets.
- Heterogeneity across country groups:
  - HIPCs: most favorable debt trends (reflecting debt relief).
  - Commodity exporters: favorable trends up to 2013 (reflecting commodity price impact on primary balances).
  - Frontier LICs: early rise in debt ratios starting around 2008, but ratios remain relatively low.
  - Small states: steady and significant rise in debt ratios through 2014, reflecting weak growth, natural disasters, and absence of HIPC/MDRI relief.

### Changing financing landscape (analysis)
- New financing sources include external commercial borrowing, greater domestic debt issuance, and lending from NPCCs.
- Frontier LICs increasingly resemble Emerging Markets (EMs) in terms of international market access.
- The changing mix has reduced reliance on concessional Paris Club financing and increased exposure to market and rollover risks associated with non-concessional and commercial borrowing.
- Survey limitations: desk-level data gaps; central government face-value reporting may understate overall indebtedness.

### Debt vulnerabilities and risk assessment (findings)
- Overall debt vulnerabilities in LICs are generally lower than before the global financial crisis, but:
  - liquidity buffers have narrowed;
  - debt-to-GDP ratios have edged higher in recent years due to counter-cyclical policies and some use of borrowing headroom to finance priority spending.
- A few frontier LICs and commodity exporters have experienced recent risk-rating deterioration tied to inadequate fiscal discipline amid less favorable external conditions.
- Small states are an exception to the broadly improved LIC debt situation, with steadily rising debt ratios and heightened vulnerability to natural disasters.
- Debt dynamics and stress sources include primary deficits, growth shocks, external conditions (commodity prices, global lending conditions), and currency pressures.

### Policy implications and recommendations
- Heightened vigilance is needed to navigate shifting market conditions and a weaker global outlook.
- Emphasis on:
  - prudent fiscal policies to maintain debt sustainability and fiscal buffers;
  - enhanced debt management to mitigate rollover and market risks as countries access non-concessional and commercial financing;
  - stronger policy frameworks across LICs to ensure that deteriorations in a few cases remain atypical.
- Near-term tests to policies include:
  - lower global commodity prices;
  - prospects for less favorable global lending conditions as monetary policies normalize;
  - currency pressures faced by some LICs.

### Role of the analysis
- The report’s findings will inform the periodic review of the LIC DSF to assess whether the framework captures relevant risks to debt sustainability in LICs.
- The report also takes stock of the impact of HIPC/MDRI on debt burdens and recent trends in poverty-reducing government spending in countries that have reached decision point.

*Prepared jointly by the IMF and World Bank teams as summarized in the Executive Summary.*

### Box 1. HIPC and MDRI: A Synopsis

### Box 1. HIPC and MDRI: A Synopsis

### Completion status and coverage
- Of the 39 countries eligible under the Initiative, 36 have reached their completion point.
- The latest country—Chad—reached completion point in April 2015.
- Three pre-decision point countries—Eritrea, Somalia, and Sudan—have yet to start the process of qualifying for debt relief under the Initiative.

### Main impacts on public finances and poverty-reducing spending
- Since reaching the decision point, recipient countries, on average:
  - have been able to reduce debt service by more than two percentage points of GDP.
  - have increased poverty-reducing expenditures by almost three percentage points of GDP.
- Despite increases in poverty-reducing expenditures, HIPCs are lagging behind on reaching the Millennium Development Goals in many areas, especially in education and health related sectors.

### Important caveat on solvency and expenditure switching
- Expenditure switching from debt service to poverty-reducing spending:
  - does not improve the government’s “economic” solvency.
  - does improve the government’s “accounting” solvency because the present value of future poverty-reducing spending is not reported on countries’ balance sheet as a contractual obligation of the government.
- See Burnside and Fanizza (2004) for further discussion (as cited in the source).

### Data note
- The figure and averages reported are based on staff calculations and data from IDA and IMF (December 2014) before Chad reached the completion point.

*International Monetary Fund — Box 1. HIPC and MDRI: A Synopsis*

### 22.      While frontier LICs’ access to international capital markets is likely to be sustained,

### 110215 - 22.      While frontier LICs’ access to international capital markets is likely to be sustained,

### Market access and macro vulnerabilities
- Frontier LICs have retained market access despite large swings in risk sentiments, but "shifting global conditions present a source of vulnerabilities going forward."
- Prospective tightening of global liquidity conditions implies market access terms for frontier LICs "will likely be less favorable than in recent times."
- To minimize vulnerabilities associated with enhanced market access, the report emphasizes:
  - sustainable fiscal and debt policies;
  - strengthened debt management;
  - prudent macroeconomic management for commodity-dependent frontier LICs and for those sensitive to emerging market growth.
- Efforts to diversify the investor base and smooth repayment profiles can help alleviate rollover risks; some frontier LICs have issued Eurobonds with amortizations spread over several years rather than a single bullet repayment.

### Non-Paris Club Creditors (NPCCs)
- The mix of creditors has changed with a "particularly marked increase in official bilateral lending from non-Paris Club creditors (NPCCs)."
- China is a dominant NPCC, with the greatest number of loans and amount of financing provided to LICs.
- NPCC credits comprised the majority of new lending by official bilateral creditors in recent years, helping offset receding lending by Paris Club creditors.
- Key statistics on NPCC lending:
  - Debt to NPCCs rose from about 8 percent of GDP in 2007 to over 11 percent of GDP in 2014.
  - Lending to non-HIPCs varied around 2 percent of GDP over 2007–14.
  - Loans to HIPCs rose from under 1 percent of GDP in 2007 to over 3 percent in 2014.
  - NPCC lending to commodity exporters has risen sharply since 2007.
- Implications and recommended actions:
  - Future debt relief operations will require coordination across a more diverse group of bilateral creditors.
  - A gap in the global architecture for resolving official debt crises has emerged as the Paris Club's role in bilateral official flows has declined.
  - The report calls for a systematic effort to collect more data on the terms of borrowing to better understand risks from increased reliance on NPCCs.

### Debt concessionality and non-concessional borrowing
- LIC debt portfolios have included an increased share of non-concessional debt, reflecting HIPC/MDRI debt elimination and new borrowing on non-concessional terms (commercial sources and NPCCs).
- Average effective interest rate: "remained broadly constant at around 2 percent since 2007."
- Frontier LICs experienced the greatest increase in non-concessional borrowing:
  - The share of non-concessional debt in frontier LIC portfolios broadly doubled between 2007 and 2014 (up from 21 percent to 45 percent of total debt).
  - Commodity exporters: non-concessional share rose from 17 percent to 33 percent of total debt over the same period.
- Context and policy adjustments:
  - The Fund’s Debt Limits Policy (DLP) and IDA’s non-concessional borrowing policy (NCBP) have been modified to allow countries with greater capacity to benefit from new borrowing options while safeguarding debt sustainability.
  - Risks associated with higher non-concessional debt are partly mitigated for frontier LICs and commodity exporters by generally low average debt ratios (41 and 44 percent of GDP, respectively).
  - The report stresses that the rise in non-concessional borrowing should be closely scrutinized given exposure to market volatility.

### Contingent liabilities (CLs)
- CLs include debt guarantees, PPP-linked agreements, pension funds, debts from state-owned enterprises and sub-national entities, bailouts of nonpublic entities, and natural disasters.
- CLs can move onto the sovereign balance sheet during adverse shocks, sharply increasing debt and jeopardizing debt sustainability.
- Evidence on CLs:
  - World Bank estimates US$73 billion of private investment in infrastructure in IDA-eligible countries during 2009–14; many of these projects would have involved sovereign guarantees or PPPs.
  - IMF estimates the average capital stock of PPPs in LICs at "just below 10 percent of GDP," with the flow of new PPP investments decelerating in recent years.
  - An OECD and MEFMI survey of Eastern and Southern African countries finds contingent liabilities that vary between 4 and 31 percent of GDP in the countries surveyed.
- Recommendations:
  - Better monitoring of CLs, periodic risk assessments, and strengthening the LIC DSF analysis on CLs should be given priority.
  - Adoption of a strong legal framework for project selection and appraisal to curtail the probability of CLs materializing.

### Debt management: capacity, risks, and policy measures
- The evolving debt landscape increases the importance of comprehensive debt management to track diverse portfolios and assess associated risks and costs.
- Sound debt management policies and a medium-term debt management strategy (MTDS) can help manage and reduce the emergence of debt distress. Key operational and institutional elements include:
  - clear legal framework, organizational structure, and reporting policies;
  - robust systems and procedures for timely debt recording and debt service payments;
  - active use of mitigating measures: liability management operations (buybacks, exchanges, switches, reverse auctions), investor base diversification, deepening domestic debt markets, building cash buffers, and enhanced investor communications;
  - stronger fiscal institutions and improved public investment efficiency through transparency in appraisal and selection.
- Capacity gaps:
  - Debt Management Performance Assessment (DeMPA) evaluations of 58 LICs (2008–14) indicate the majority do not meet minimum requirements for sound practice in seven out of fifteen debt performance indicators.
  - Frontier LICs perform slightly better on a few indicators; HIPCs show particularly weak capacity.
  - CPIA Q3B (debt management capacity) showed little or no improvement during 2011–14 for the majority of countries; only a quarter of the sample saw a marginal improvement.
  - Among ten countries assessed twice with DeMPA during 2008–14, seven experienced an improvement in the score.
- Policy guidance:
  - LICs should build debt management capacity before commercial borrowing begins.
  - Improvements in debt management are strongly positively associated with debt sustainability; institutional reforms and enhanced technical assistance from the IMF and the World Bank can help build local capacity.

*Source: PUBLIC DEBT VULNERABILITIES IN LICs: THE EVOLVING LANDSCAPE (excerpts).*

### 37.      Against a background of a generally stable average public debt–to-GDP ratio and a

### _110215 - 37.      Against a background of a generally stable average public debt–to-GDP ratio and a

### Overview
- The section analyzes LIC DSF indicators of debt vulnerabilities using different vintages of LIC DSAs for individual countries, noting trends are based on the most recent DSA for any given year and thus "may tend to slightly lag actual debt market conditions."
- A more extended analysis is presented in Annex V.

### Evolution of Risk Ratings
- Substantial net improvement in LIC DSF risk of debt distress ratings since 2007.
- Ratings reached their most favorable point in 2013 with 24 percent of DSAs showing high risk of debt distress, down from 43 percent in 2007.
- In the past two years (relative to end-September 2015), there has been a net deterioration in risk ratings: 11 downgrades versus seven upgrades.
  - Of the 11 downgrades:
    - Six countries moved from low to moderate risk.
    - Five countries moved from moderate to high risk.
    - Eight of these 11 countries are commodity exporters.
    - Three are classified as frontier LICs.
- The seven upgrades during 2013–15 primarily reflect the use of a higher discount rate to calculate present value.
- Small states have not seen improvement since 2007:
  - Of the four small LICs that were at low risk in 2011, only one remained so in 2015.

### Drivers of the Trend Improvement (2007–2014)
- Stronger tax revenue and export performance were key determinants.
  - Average tax revenue increased from 13½ to almost 15 percent of GDP between 2007–10 and 2011–14.
  - Exports increased from 31 percent of GDP over 2007–10 to 33 percent of GDP over 2011–14.
- Improved institutional capacity played a more marginal role:
  - Thirteen countries moved into a higher CPIA category, while nine moved to a lower category.

### Solvency and Liquidity Indicators
- General improvement in solvency risk indicators across LICs, concurrent with a worsening of liquidity indicators.
- Vulnerability metric: maximum distance of each indicator from the relevant LIC DSF threshold, reported as the median distance by country group.
- For the median country in each group:
  - Both solvency and liquidity indicators remain below LIC DSF thresholds (negative distance).
  - Liquidity buffers have generally decreased (decreased distance between liquidity indicators and thresholds).
- Group-specific changes:
  - Solvency indicators improved for all groups except frontier LICs and small states (minor deterioration).
  - Liquidity indicators deteriorated for all groups except commodity exporters.
- Considerable variation exists across countries, with some showing very large breaches of thresholds.

### DSA Projections and Debt Dynamics (2014–19)
- DSAs forecast an initial increase in total public debt in the first few projection years, followed by a gradual decline over the medium term.
- Aggregate projections (median/average dynamics):
  - The average projected primary deficit initially dominates the growth impact:
    - Size of average projected primary deficit: 3 percent of GDP.
    - Real GDP growth impact: less than 2 percent of GDP initially.
  - Over time, real GDP growth effect surpasses the declining primary deficit and change in gross total public debt turns negative by the third or fourth years of projection.
- Public debt projections (percent of GDP) show values: 48.6 (2014), 49.0 (2015), 48.9 (2016), 48.4 (2017), 47.5 (2018), 46.7 (2019).

### Vulnerability to Shocks (DSA Stress Tests and Table 2 Summary)
- Public DSA: shocks that most often cause maximum increase in indebtedness:
  - Permanently lower GDP growth: 29 (PV of Debt-to-GDP), 30 (Debt Service-to-Revenue), 13 (PV of Debt-to-Exports), 12 (Debt Service-to-Exports).
  - Primary balance short-term shock: 25 (PV of Debt-to-GDP), 20 (Debt Service-to-Revenue), 9 (PV of Debt-to-Exports), 9 (Debt Service-to-Exports).
  - Other debt creating flows shock (including contingent liabilities): 28 (PV of Debt-to-GDP), 25 (Debt Service-to-Revenue), 61 (PV of Debt-to-Exports), 59 (Debt Service-to-Exports).
  - One-time 30 percent nominal depreciation: 12 (PV of Debt-to-GDP), 17 (Debt Service-to-Revenue), 14 (PV of Debt-to-Exports), 16 (Debt Service-to-Exports).
- External DSA: majority of countries are vulnerable to:
  - One-time 30 percent nominal depreciation: 52 (PV of Debt-to-GDP), 54 (PV of Debt-to-Exports), 0 (Debt Service-to-Revenue for PV of Debt-to-Exports row), 71 (Debt Service-to-Revenue for Debt Service-to-Exports column).
  - Export value growth shock: 13 (PV of Debt-to-GDP), 57 (PV of Debt-to-Exports), 14 (Debt Service-to-GDP?), 68 (Debt Service-to-Exports), 6 (Debt Service-to-Revenue).
  - New public sector loans on less favorable terms: 7 (PV of Debt-to-GDP), 20 (PV of Debt-to-Exports), 9 (Debt Service-to-GDP?), 13 (Debt Service-to-Exports), 4 (Debt Service-to-Revenue).
- Summary interpretation:
  - For public debt, a permanently lower GDP scenario results in the largest rise in indebtedness for a third of the sample.
  - Contingent liabilities shocks (an exogenous 10 percent of GDP increase in debt in one year) can cause similar increases and spikes in debt service.
  - For external debt, depreciation of the nominal exchange rate and a slowdown in export growth are common maximum-impact shocks.

### Global Environment Risks and Implications
- Recent global developments create considerable uncertainty for LICs:
  - Weaker growth outlooks in advanced and emerging markets reduce demand for traded goods, affecting commodity producers.
  - Prospect of tighter global liquidity could lead to higher global interest rates, affecting rollover of Eurobonds and new market financing.
  - Higher cost of domestic borrowing may result for countries relying on foreign participation in domestic debt markets.
  - Exchange rate pressures, e.g., US dollar appreciation, can raise debt levels and reduce repayment capacity.
- LICs vulnerable to downside revisions of the global growth outlook given growth is projected as the main driver of debt dynamics.

### Policy Implications and Recommendations
- Strong domestic policies are critical for managing public debt vulnerabilities amid shifting global conditions.
- Recommended priorities:
  - Maintain prudent macroeconomic policies with attention to downside risks.
  - Be ready to implement quick and forceful policy corrections if adverse external shifts occur (terms of trade, export markets, financing terms).
  - For countries with serious deterioration in debt dynamics, pursue urgent policy correction to strengthen sustainability.
  - For other countries, exercise close vigilance over debt trends and financing risks; develop contingency plans for macroeconomic adjustment in the event of adverse shocks.
  - Strengthen fiscal frameworks and debt management capacity, especially for small states and frontier LICs.
- Specific risks to manage include:
  - Downside global growth, commodity prices, exchange rate movements, and export market shocks.
  - Prospective hike in U.S. interest rates and associated strengthening of the U.S. dollar.
  - Tighter global liquidity affecting access to Eurobond markets for frontier markets.
- Recognize trade-offs: adjustments, particularly if they fall on capital spending, will have repercussions for growth.

### Conclusions (Key Takeaways)
- Overall debt vulnerabilities in LICs have generally declined since 2007, aided by debt relief (2005–06) and robust growth through around 2011–2012.
- Average LIC debt ratios rose modestly in recent years to a level broadly similar to that in 2007, amid increased use of non-concessional financing (domestic financing, international capital markets, non-concessional bilateral financing).
- Fewer countries are at risk of debt distress than in 2008, but liquidity buffers have narrowed relative to some thresholds and risk ratings have edged higher for frontier and commodity-exporting LICs.
- Frontier LICs experienced the most rapid change in financing landscape: increased domestic debt and access to international capital markets; greater reliance on market financing raises monitoring needs.
- Small states face the most challenging debt conditions—largest rise in debt-to-GDP ratios—driven by sizeable fiscal deficits and weak growth.
- HIPC beneficiaries and commodity exporters generally have more favorable debt dynamics but must safeguard positions against changing global conditions.
- Baseline projections for declining debt-to-GDP ratios are contingent on continuing strong growth and fiscal performance; less favorable dynamics would follow slower GDP growth, larger fiscal deficits, or weaker external current account performance.
- Close monitoring and fiscal prudence remain paramount.

*Source: _110215 - 37.      Against a background of a generally stable average public debt–to-GDP ratio and a (IMF PDF).*

### 52.      Safeguarding countries’ debt sustainability in the context of greater financial

### Safeguarding countries’ debt sustainability in the context of greater financial integration and a changing global environment

### Institutional capacity and debt management findings
- Sustainable borrowing depends on institutional capacity to manage fiscal policy and budgets, guided by a medium-term debt management strategy (MTDS).
- The analysis shows that debt management capacity in LICs continues to lag behind.
- Assessment of fiscal risks from contingent liabilities related to state-owned enterprises, PPPs, the nonpublic sector, and natural disaster remains limited; these areas should be the focus of intensified capacity building.
- Debt monitoring and creditor harmonization are important; the LIC DSF is a key information source and coordination mechanism for a wide range of creditors.
- DeMPA database findings (69 countries with assessments completed during 2008–14):
  - DeMPA assesses debt management capacity on 35 dimensions.
  - Coordination with monetary policy: 65% of countries meet the minimum international standard.
  - Managerial structure: 62% of countries meet the minimum international standard.
  - Audit: 10% of countries meet the minimum international standard.
  - Segregation of duties, staff capacity and business continuity plan: 15% of countries meet the minimum international standard.

### Implications for the LIC Debt Sustainability Framework (LIC DSF) review
- The analysis suggests factors relevant for the forthcoming review of the LIC DSF, including:
  - A more systematic assessment of risks associated with greater access to international capital markets.
  - Assessment of risks associated with increased reliance on domestic debt.
  - Development of tools to assess the realism of baseline projections of key macro variables.
- The upcoming LIC DSF review could consider exploring these issues based on the experience with implementation since the last review and consultation with key stakeholders.

### Sample coverage, classifications, and data sources (scope of analysis)
- Sample coverage:
  - The report covers 74 low income countries that were both IDA and PRGT eligible as of end-2014.
  - The coverage ensures relevance of findings for the LIC DSF review.
- Country classification groups and counts:
  - HIPC eligible: 39 countries.
  - Frontier markets: 14 countries. (Frontier markets are defined as countries whose market access indices are within one standard deviation from the EM average; indices use indicators including cross-border loans, M2/GDP, and issuance of international bonds.)
  - Commodity exporters: 37 countries (commodity exports represent at least 85% of merchandise exports averaged over 2008-13; data source: UNCTAD, State of Commodity Dependence, 2014).
  - Small states: 14 countries (defined as countries with a 2013 population of less than 1.5 million and a per capita income above the IDA cutoff of $2390).
- MTDS implementation note:
  - Through 2010–14 forty MTDS missions have been conducted including 26 IDA-eligible countries representing 33.3 percent of all IDA eligible countries.

### Data sources and survey coverage
- Main data sources used in analyses:
  - LIC DSF database: provides comprehensive coverage and consistent data on historical and projected debt-related variables.
  - IMF country teams survey: collected detailed data on public debt composition not available in LIC DSF; survey response rate covered around 90 percent of all LICs, though some variables remain sparse due to lack of official data.
  - DeMPA database: assessments of public debt management capacity using a 35-dimension qualitative tool (scores A–D).
  - MTDS database: contains key information on debt portfolios, measures of costs and risks, projected gross financing needs, and projected future debt portfolios under varying borrowing strategies.
  - Dealogic database: data on commercial loans and Eurobonds; Loan Analytics used to pick loans to central governments by commercial lenders and certain official agencies on commercial terms (excluding loans from other official multilateral and bilateral lenders such as aid agencies).

### Policy recommendations and priorities
- Intensify capacity building focused on:
  - Assessment and management of contingent liabilities related to state-owned enterprises, PPPs, and the nonpublic sector.
  - Assessment and management of fiscal risks from natural disasters.
  - Strengthening audit, segregation of duties, staff capacity, and business continuity planning in debt management (noting current low shares meeting minimum standards: audit 10%, segregation of duties/staff capacity/business continuity plan 15%).
- Strengthen debt monitoring and creditor harmonization using the LIC DSF as a coordination mechanism.
- Enhance the LIC DSF review to:
  - Incorporate systematic tools to evaluate risks from increased international market access and from greater reliance on domestic debt.
  - Incorporate tools to assess the realism of baseline macroeconomic projections used in debt sustainability analysis.

*Source: PUBLIC DEBT VULNERABILITIES IN LICs: THE EVOLVING LANDSCAPE (excerpts).*

### Annex II. Chart Pack

### Annex II. Chart Pack

### Purpose and scope
- Provides graphical information on debt development to supplement the report.
- Pulls together information on public debt developments for different country groups, sources of financing, and the evolution of the risk of debt distress for country groups not included in the report.

### Figures and thematic coverage (by figure number)
- Figure AII.1. Total External Debt (in percent of GDP).
- Figure AII.2. Change in External Debt, 2007-14 (in percent of GDP).
- Figures AII.3–AII.4. Cumulative Contribution of the Primary Balance to Debt and Cumulative contribution of Growth and Interest to Debt: Frontier LICs (in percent of GDP).
- Figures AII.5–AII.6. Cumulative Contribution of the Primary Balance to Debt and Cumulative contribution of Growth and Interest to Debt: HIPC (in percent of GDP).
- Figures AII.7–AII.8. Cumulative Contribution of the Primary Balance to Debt and Cumulative contribution of Growth and Interest to Debt: Non-HIPC (in percent of GDP).
- Figures AII.9–AII.12. Same debt decomposition charts for Commodity Exporters and Small States (in percent of GDP).
- Figures AII.13–AII.17. Domestic and External Public Debt series by group: Small States, Commodity Exporters, HIPC, Non-HIPC, Frontier Markets (in percent of GDP).
- Figures AII.18–AII.22. Official Bilateral Debt Disbursements by creditor type (Non-Paris Club Creditors, Paris Club Creditors) for HIPC, Non-HIPC, Commodity Exporters, Frontier LICs, and Small States (in percent of GDP).
- Figures AII.23–AII.26. Evolution of the Risk of Debt Distress for Frontier LICs, Commodity Exporters, HIPCs, Non-HIPCs (in percent of total). Notes: Frontier sample size: "The number of countries in 2007 through 2015 was 14." Commodity exporters: "The number of countries in 2007 was 30; this increased to 36 by 2015." HIPCs: "The number of countries in 2007 was 37; this increased to 38 by 2015." Non-HIPCs: "The number of countries in 2007 was 23; this increased to 35 by 2015."
- Figures AII.27–AII.28. Evolution of the Risk of Debt Distress: Small States and Expanded Small States (in percent of total). Notes: Small States sample change: "The number of countries in 2007 was 6; this increased to 14 by 2015." Expanded Small States sample: "The number of countries in 2007 was 11; this increased to 20 by 2015. In addition to the small states, the expanded sample includes Bhutan, Comoros, Djibouti, Kiribati, Sao Tome and Principe, and Solomon Islands."
- Figure AII.29. Total Public Debt (in percent of GDP). Small States sample identified as: "Sample includes Cape Verde, Dominica, Grenada, Guyana, Maldives, Marshall Islands, Micronesia, FS, Samoa, St. Lucia, St Vincent, Timor-Leste, Tonga, Tuvalu, and Vanuatu." Expanded sample: "Sample additionally includes Bhutan, Comoros, Djibouti, Kiribati, Sao Tome and Principe, and Solomon Islands."
- Table AII.1. Issuance of Eurobonds by Frontier LICs. Sources: Dealogic, Bloomberg.
- Table AII.2. Official Development Assistance by Creditor Type — US$ billion (unless otherwise stated). Source: OECD Development Assistance Committee (DAC). (Table excerpts in the chart pack include: 2010 ODA from current DAC members = 141.8; 2011 = 149.6; 2012 = 140; 2013 = 151.4; Flows from non-DAC providers: 11.4, 14.7, 12.8, 23.5; Non-DAC flows (percent of total flows): 7.4, 8.9, 8.4, 13.4; Estimated global total: 153.2, 164.3, 152.9, 174.9.)
- Table excerpt: Eurobond issuance rows list Country, Year, Currency, Amount (US$ mn), Coupon, Yield, Tenor, Redemption, Rating at issue (examples from the table: Bolivia 2012 USD 500 4.875 4.875 10 Bullet BB-; Bolivia 2013 USD 500 5.95 6.25 10 Bullet BB-; Cote d'Ivoire 2010 USD 233 22.5 -23 Amortization/Debt exchange NA; Ghana 2007 USD 750 8.5 8.5 10 Bullet B+; Kenya 2014 USD 1500 6.875 6.993 10 Bullet B+; Nigeria 2011 USD 500 6.75 7.12 6 10 Bullet B+; Zambia 2012 USD 750 5.375 5.625 10 Bullet B+; many entries marked NA or specific coupon/yield/tenor details.)
- Figures and calculations note sources: LIC DSF Database; Calculations based on 2015 Survey of IMF country teams; Sources for risk of debt distress charts: LIC DSF database and staff calculations.

### Key visuals / data points reproduced verbatim where shown in chart text
- Chart axis and series labels appearing in the pack include numeric scales such as: -80, -60, -40, -20, 0, 20, 40, 60, 80; -25, -20, -15, -10, -5, 0, 5, 10, 15, 20, 25; 0, 2, 4, 6, 8, 10, 12, 14, 16, 18; -18, -16, -14, -12, -10, -8, -6, -4, -2, 0, 2; 35, 40, 45, 50, 55, 2007–2014 series; and similar numeric ticks visible across the figures.
- Risk-of-debt-distress stacked-bar numeric labels appearing in the figures include multiple year-by-year numeric annotations visible in the pack, for example sequences like: 71 79 79 79 86 71 71 64 21 14 14 14 14 29 29 21 77 77 77 0 0 14 (these are reproduced from the chart labels as shown in the annex figures).
- Total public debt figure axis: 30 35 40 45 50 55 60 65 70 75 80 for 2006–2014 series.

---

### Annex III. Determinants of Sovereign Bond Issuances in LICs

### Model specification and data
- Probit regression estimating Prob(SBI = 1) = Φ(GLOBALt; DOMESTICi,(t-1;t-3)).
- Dependent variable: SBI = 1 if country i issued a sovereign bond in year t, 0 otherwise.
- Global factors: contemporaneous yield on the 10 year U.S. Treasury notes and the VIX index.
- Domestic factors: GDP per capita, GDP growth, inflation, current account balance to GDP ratio, fiscal balance to GDP ratio, total debt-to-GDP ratio, private sector credit to GDP ratio, foreign financial assistance to GDP ratio.
- Domestic explanatory variables measured as the 3-year average prior to the year of issuance.
- Includes a dummy equal to 1 if a LIC country issued at least once in the previous 3-year period.
- Data sources: sovereign bonds from Bloomberg; independent variables from World Economic Outlook and World Development Indicators.
- Sample: annual data for 50 LICs, including 14 Frontier LICs, over the 1995–2014 period.

### Main findings (text)
- Likelihood of bond issuance increases with stronger domestic fundamentals, though global conditions also matter.
- Domestic factors with statistically significant positive effects include higher GDP per capita and lower dependence on financial aid.
- Past issuers are more likely to issue again.
- Other factors (debt level, inflation, GDP growth, current account, private credit) show expected signs but are not statistically significant in the basic specification.
- Looser global liquidity (measured by U.S. rates) and lower global volatility (measured by VIX) increase the likelihood of bond issuance in LICs.
- Marginal effects of domestic factors are larger than those of global factors.
- Results robust to alternative specifications and additional variables.

### Table AIII.1 — Selected coefficient estimates and diagnostics (probit regressions, robust standard errors in parentheses)
- Columns: (1)–(5) different specifications; dependent variable SBI.
- Global factors
  - U.S. rates coefficients:
    - (1) -0.185** (0.0909)
    - (2) -0.330*** (0.0945)
    - (3) -0.114 (0.159)
    - (4) -0.300*** (0.103)
    - (5) -0.293*** (0.104)
  - VIX index coefficients:
    - (1) -0.0361** (0.0170)
    - (2) -0.0502** (0.0222)
    - (3) -0.0475** (0.0220)
    - (4) -0.0460** (0.0214)
    - (5) -0.0493** (0.0221)
- Country-specific factors (selected)
  - Fiscal balance (% of GDP):
    - (1) -0.0312 (0.0362)
    - (2) -0.0508 (0.0401)
    - (3) -0.0407 (0.0380)
    - (4) -0.0287 (0.0415)
    - (5) -0.0300 (0.0402)
  - Total debt (% of GDP):
    - (1) -0.00656 (0.00466)
    - (2) -0.00589 (0.00570)
    - (3) -0.00323 (0.00535)
    - (4) -0.00417 (0.00521)
    - (5) -0.00591 (0.00523)
  - CA balance (% of GDP):
    - (1) 0.0142 (0.0161)
    - (2) 0.0425*** (0.0158)
    - (3) 0.0404** (0.0161)
    - (4) 0.0308* (0.0170)
    - (5) 0.0428** (0.0169)
  - GDP per capita:
    - (1) 0.569*** (0.165)
    - (2) 0.839*** (0.200)
    - (3) 0.704*** (0.208)
    - (4) 0.577*** (0.209)
    - (5) 0.699*** (0.220)
  - GDP growth:
    - (1) 0.00212 (0.0389)
    - (2) -0.0160 (0.0493)
    - (3) -0.0170 (0.0454)
    - (4) -0.0137 (0.0421)
    - (5) 0.00821 (0.0433)
  - Inflation:
    - (1) 0.000461 (0.00147)
    - (2) 0.0263* (0.0151)
    - (3) 0.0200 (0.0147)
    - (4) 0.0217 (0.0136)
    - (5) 0.0230 (0.0145)
  - Government Effectiveness (where included):
    - (2) 0.568** (0.251)
    - (3) 0.598** (0.252)
    - (4) 0.617** (0.257)
    - (5) 0.578** (0.253)
  - Past Bond Issuance (where included):
    - (1) 0.685** (0.308)
    - (3) 0.553* (0.284)
    - (4) 0.581* (0.297)
    - (5) 0.661** (0.292)
  - Financial Aid:
    - (1) -0.0304* (0.0184)
    - (3) -0.0274 (0.0169)
  - Private sector credit (% of GDP):
    - (1) 0.00273 (0.00503)
    - (3) 0.000208 (0.00497)
    - (4) 0.000816 (0.00551)
  - Volatility of Debt (where included):
    - (4) 0.0154 (0.0110)
  - Past IMF program (where included):
    - (4) 0.939* (0.552)
  - Global Commodity Prices (where included):
    - (3) 0.683 (0.448)
- Constants:
  - (1) -3.751*** (1.201)
  - (2) -4.560*** (1.613)
  - (3) -7.786*** (2.972)
  - (4) -2.915* (1.753)
  - (5) -4.216** (1.867)
- Model diagnostics:
  - No. of Observations: (1) 949; (2) 833; (3) 833; (4) 825; (5) 824
  - Pseudo (McFadden's) R2: (1) 0.29; (2) 0.29; (3) 0.32; (4) 0.32; (5) 0.33
  - Wald Chi2 reported with p-values = 0.00 in all columns (specific statistics: 78.34, 63.10, 74.43, 72.24, 77.51).
  - AIC and BIC values reported for each specification (AIC: 0.203, 0.216, 0.212, 0.217, 0.217; BIC: -6254.828, -5375.079, -5368.620, -5300.148, -5287.589).
- Significance notation: *** p<0.01, ** p<0.05, * p<0.1.

---

### Annex IV. The IMF Debt Limits Policy and the World Bank Non-Concessional Borrowing Policy

### IMF Debt Limits Policy (DLP): background and reforms
- Pre-2009: DLP limited contracting of non-concessional external borrowing defined as loans with a grant element less than 35 percent; no limit on concessional external borrowing.
- 2009: Policy reformed to move away from single "concessionality" design toward a menu of options; modality of debt limits linked to the risk of external debt distress assessed under the LIC DSF and to macroeconomic and public financial management capacity.
- Identified practical issues prior to 2014 reform: debt limits seen as restrictive, constrained ability to diversify financing sources, concessional/non-concessional dichotomy maintained, focus on individual projects rather than broader fiscal program and borrowing policy.
- 2014 reform (entered into effect in June 2015) key changes:
  - (i) Broadened to focus on all public debt.
  - (ii) Adopted integrated treatment of external finance covering both concessional and non-concessional borrowing.
  - (iii) Tightened the link between debt vulnerabilities, capacity, and the use and specification of debt conditionality.
  - (iv) Simplified capacity assessment focused only on debt monitoring.
- Operational implication: Use of debt conditionality is generally not warranted for countries at low risk of external debt distress; countries at moderate risk of external debt distress with sufficient capacity are eligible for limits on the present value of new external public borrowing.

### World Bank / IDA mechanisms and the NCBP
- IDA supports debt sustainability via:
  - IDA grant allocation framework,
  - Technical assistance in debt management capacity,
  - Support in monitoring external public debt developments,
  - Implementation of IDA’s Non-Concessional Borrowing Policy (NCBP),
  - Creditor outreach to advocate concessional financing and dissemination of the joint WB-IMF debt sustainability framework.
- Historical context: Debt relief (HIPC Initiative and MDRI) substantially enhanced the borrowing space of IDA countries; IDA seeks to maintain the benefits of that relief.
- IDA grant allocation framework (as described in the annex):
  - (a) Countries at low risk of debt distress per the joint WB-IMF Debt Sustainability Analysis receive 100 percent of the annual IDA allocation on credit terms.
  - (b) Countries at moderate risk of debt distress are subject to a 50:50 split between credit and grants in the annual IDA allocation.
  - (c) Countries at high risk of debt distress or in debt distress receive 100 percent grants.
  - All grant allocations are discounted 20 percent in volume.
- NCBP focus:
  - Integral to IDA’s dialogue with authorities.
  - Focuses on the debt burden impact of external non-concessional borrowing.
  - Supports dialogue on balancing debt sustainability with developmental benefits of non-concessional financing.
  - Recognizes non-concessional financing can help address infrastructure gaps in low income countries.

*Source: Annex II–IV, "Annex II. Chart Pack"; "Annex III. Determinants of Sovereign Bond Issuances in LICs"; "Annex IV. The IMF Debt Limits Policy and the World Bank Non-Concessional Borrowing Policy" (as provided in the source content).*

### introduction in 2006, the NCBP has been reviewed twice,

### _110215 - introduction in 2006, the NCBP has been reviewed twice,

### Evolution and prior reforms of the NCBP
- Since its introduction in 2006, the NCBP has been reviewed twice, with notable adaptations:
  - 2008: policy adapted to allow for project packages instead of a purely loan-by-loan approach.
  - 2010: policy adapted to set ex-ante non-zero debt ceilings for countries that plan to access non-concessional financing on a more regular basis.
- Lessons since the 2010 reform:
  - The NCBP, in collaboration with the IMF’s DLP, identifies countries with adequate capacity to handle more flexible financing options, enabling movement away from the default loan-by-loan policy.
  - The two-by-two assessment matrix combining debt vulnerability and capacity has proven overly complex and has not been applied to the full extent.

### Proposed harmonization with the IMF’s DLP (end-2014)
- Two main modifications proposed to harmonize the NCBP with the IMF’s DLP:
  - The Bank would adopt the streamlined joint WB-IMF capacity assessment and distinguish two types of countries based on debt monitoring and management capacity alone (Table AIV.2, first row):
    - (1) those with adequate capacity, and
    - (2) those with limited capacity.
  - The Bank would harmonize with the IMF’s DLP and introduce PV ceilings on total external debt for those countries with adequate capacity, while countries with limited capacity would maintain the current system.
- Operational implication:
  - Countries at low or moderate risk of debt distress with adequate debt monitoring capacity would be eligible for ceilings on external public borrowing in PV terms rather than nominal terms for non-concessional loans or could rely on the default option of ex-ante loan-by-loan considerations.

### Current and enhanced approaches (Tables AIV.1 and AIV.2 — policy mechanics)
- Table AIV.1 (NCBP Financing Options after 2010 Revision) — summary of options by DEBT VULNERABILITY and CAPACITY:
  - LOWER DEBT VULNERABILITY / LOWER CAPACITY:
    - Minimum concessionality requirement based on-by-loan approach, but with added flexibility on non-concessional external debt (e.g., higher and untied non-zero limits, if consistent with maintenance of low debt vulnerabilities)
  - HIGHER DEBT VULNERABILITY / LOWER CAPACITY:
    - Minimum concessionality requirement based on-by-loan approach, likely higher than 35 percent, with limited or no room for non-concessional external borrowing debt
  - LOWER DEBT VULNERABILITY / HIGHER CAPACITY:
    - Minimum average concessionality requirement applied to total external or total public borrowing. For most advanced IDA countries no concessionality requirements and overall nominal debt limit if needed
  - HIGHER DEBT VULNERABILITY / HIGHER CAPACITY:
    - Overall limit on the Present Value of external or total public debt. For most advanced IDA countries, ceilings on nominal external or public debt
- Table AIV.2 (Adjustments to the NCBP) — current vs. enhanced approach:
  - 1. Capacity assessment
    - Current: Assessed on a wide range of debt and public financial management indicators
    - Enhanced: Assessment based on ability to record and monitor external PPG debt in timely manner
  - 2. Debt ceilings
    - Current: Nominal ceiling only; Zero ceilings with loan by loan exceptions
    - Enhanced: Nominal and PV ceiling for countries at low and moderate risk with adequate capacity; Zero ceilings with loan by loan exceptions

### Annex V — debt vulnerability analysis and evolution (2008–10 vs. 2011–13)
- Scope and indicators:
  - Analysis extends Section IV and shows evolution of solvency and liquidity indicators across country groups.
  - Time periods compared: 2008–10 and 2011–13.
  - Solvency indicators: PV debt-to-GDP, PV debt-to-export, PV debt-to-revenue.
  - Liquidity indicators: debt service-to-export and debt service-to-revenue.
  - Analysis uses mean deviations from LIC DSF thresholds under the baseline and the most extreme shock scenario in the DSA.
  - The most extreme scenario is defined as the shock that causes the debt burden indicator to reach its highest value relative to the threshold at any point during the projection horizon.
- Interpretation convention used in figures:
  - A green cell: indicator for that country group was on average below its threshold.
  - A red cell: indicator was on average in breach of the threshold.
  - A green dot: improvement between two periods.
  - A red dot: worsening between two periods.
  - Green and red circles summarize overall evolution: green indicates improvement across periods; red indicates deterioration across periods.
  - A green circle atop red cells: group remained in breach but the size of the breach reduced.
- Key findings and group-specific outcomes:
  - Overall trend:
    - Number of breaches fell between 2008–10 and 2011–13, consistent with the improvement in risk of debt distress among LICs reported in the main text.
  - PV debt-to-revenue:
    - For all countries there was on average a breach in the PV of debt-to-revenue indicator in 2008–11, but not in 2011–13.
  - HIPCs:
    - Witnessed an improvement in 4 of the 5 debt burden indicators under both the baseline and the most extreme scenarios.
    - The group had no breaches in 2011–13 under the baseline, while it had a breach of the PV debt-to-exports threshold in 2008–10.
    - Example interpretation: HIPCs were on average in breach of the PV debt-to-exports threshold in 2008–10, but not in 2011–13.
    - Liquidity nuance: HIPCs’ debt service-to-revenue indicator had green cells for both time periods but a red circle in the summary figure, meaning the baseline did not breach thresholds in either period but the group saw a deterioration in liquidity position over time.
  - Frontier markets and small states:
    - Experienced a deterioration in almost all indicators in the baseline.
    - Small states breached the PV debt-to-GDP threshold during the second time period (2011–13) in the baseline.
  - Non-HIPCs:
    - Saw a deterioration in all indicators under both baseline and most extreme shock scenarios, although the worsening was not large enough to increase the number of breaches.
  - Frontier markets under shock:
    - Frontier markets breached the PV debt-to-GDP threshold during the second time period only under the most extreme shock scenario.

*Sources: LIC DSF database; and staff calculations.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2015/_110215.pdf_