Debt Limits Policy
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Overview of the Debt Limits Policy (DLP)
- The Debt Limits Policy establishes the framework for using quantitative conditionality to address debt vulnerabilities in countries with IMF-supported programs.
- The Executive Board approved reforms of the DLP in October 2020; the reforms entered into effect on June 30, 2021.
- Last update: June 2021.
- Use of debt conditionality is justified when:
- There are merits to using debt targets instead of, or as a complement to, fiscal conditionality; or
- A country has significant debt vulnerabilities that cannot be tackled by fiscal conditionality alone.
- Design of debt conditionality should reflect the nature and extent of debt vulnerabilities and country-specific circumstances, particularly financing.
- Debt Sustainability Analysis (DSA) results and reliance on concessional external financing are key factors driving differences in DLP conditionality requirements across countries.
Core principles and conditionality requirements
- Conditionality differs between:
- Countries that normally rely on concessional external financing (use the Debt Sustainability Framework for Low-Income Countries, LIC-DSF).
- Countries that do not normally rely on concessional financing (use the Debt Sustainability Analysis for Market Access Countries, SRDSF/MAC DSA).
- Summary of conditionality by country type and DSA risk:
- LIC-DSF countries with Low DSA risk:
- No debt conditionality except targeted limits if needed.
- LIC-DSF countries with Moderate DSA risk:
- Quantitative Performance Criterion (QPC) on the present value (PV) of external borrowing (in most cases).
- If weak capacity to monitor all forms of debt, nominal NCB limits for moderate risk countries (or a memo item on concessional borrowing for high risk countries) would apply, supported by capacity building.
- LIC-DSF countries with High/in debt distress:
- QPC on zero non-concessional borrowing (NCB) with exceptions for critical projects/debt management.
- Indicative Target (IT) or QPC on PV of external borrowing.
- SRDSF/MAC DSA countries:
- Debt limits if vulnerabilities are not addressed by fiscal conditionality.
- Notes on market access:
- Whether a country has significant access to international financial markets depends on whether it has a significant amount of international financial market borrowing and a demonstrated capacity to manage significant levels of market borrowing.
- Limits can be set on the basis of the currency of debt denomination if accurate high-frequency data on external borrowing is not available because of foreign investors moving in and out of domestic instruments, and between domestic-currency and foreign-currency bond issues.
- NCB exceptions:
- May be allowed where financing is needed for a project integral to the authorities’ development program for which concessional financing is not available; or
- Where non-concessional borrowing is used for debt management operations that improve the overall public debt profile.
Debt data disclosure and monitoring
- Establishing a comprehensive view of public debt vulnerabilities is essential for designing debt conditionality.
- 2020 DLP reforms incorporate steps aimed at enhanced debt data disclosure, including:
- An explicit expectation that critical debt data disclosure gaps should be addressed upfront in IMF-supported programs.
- A requirement to include a table on the debt holder profile in all IMF program staff reports.
- Where country teams determine weak capacity to monitor incurring of all forms of debt, use of nominal NCB limits or memo items is appropriate, supported by focused capacity building.
Concessionality: grant element and discount rate
- Degree of concessionality of a loan is measured by its "grant element."
- Definition: grant element = difference between loan's nominal value (face value) and the sum of discounted future debt-service payments (present value), expressed as a percentage of the loan's face value.
- Whenever the interest rate charged is lower than the discount rate, the present value is smaller than face value; the difference reflects the (positive) grant element.
- The discount rate used to calculate present value is a key assumption; the IMF uses a unified discount rate of 5 percent per annum.
- A loan is typically considered concessional if its grant element is at least equal to 35 percent.
- The Fund may assess on a case-specific basis whether an envisaged combination of financing instruments can be treated as a package for purposes of meeting concessionality requirements.
- As part of the 2020 DLP reforms, some non-standard financing types are automatically treated as non-concessional with a zero-grant element, including:
- Blended financing arrangements that include a financially significant amount of grants in kind (e.g., grants provided in the form of equipment or machinery).
- Financing involving unrelated collateral (e.g., general budget borrowing collateralized by earmarking of commodity receipts).
Analytical tools and guidance
- Concessionality Calculator and PV Tool are provided to facilitate assessment:
- The concessionality calculator facilitates calculation of grant element for an individual debt instrument, taking into account commissions and fees and alternative standard repayment profiles; it can calculate grant element for a nonconcessional loan packaged with a grant.
- The Present Value (PV) Monitoring Tool (Excel-based) is developed to set and monitor debt targets; it allows calculation of present value and grant element for multiple loans simultaneously and provides summary statistics for the entire debt portfolio, including total present value and weighted average grant element, interest rate range, and variable interest loan exposure.
- The PV Monitoring Tool includes sheets for unconventional loans (e.g., instruments issued by the Islamic Development Bank).
- The unified discount rate used by the IMF and World Bank to calculate grant element of individual loans is set at 5 percent.
- PV Monitoring tool: https://www.imf.org/external/np/spr/2015/conc/PVtool.xlsm
Inquiries and contact
- For more information on debt-related issues in low-income countries (LICs):
- E-mail: lendingtolics@imf.org
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