IMF Executive Board Reviews IMF Debt Sustainability Framework for Market Access Countries

IMF News, February 3, 2021

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Bibliographic details

• Published: February 3, 2021

Review outcome and purpose

• The Executive Board reviewed on January 14, 2021 the IMF Debt sustainability Framework for Market Access Countries (MAC DSA).
• The review revealed scope to improve the MAC DSA framework’s ability to identify risk of sovereign stress and better align it with the IMF’s lending framework, to be achieved by replacing the current approach with a new methodology.
• The MAC DSA plays a key role in surveillance and lending:
  • In surveillance, it helps identify a member’s vulnerability to sovereign stress to steer the member away from such stress.
  • In Fund-supported programs, it helps determine if sovereign stress can be resolved via IMF financing and economic reforms or if measures such as debt restructuring are needed.
  • The framework informs IMF conditionality and the need for debt relief in debt restructuring operations undertaken in the context of Fund-supported programs.

Historical context and prior reviews

• The framework was introduced in 2002 and reviewed in 2003, 2005, and 2011–13.
• The 2011–13 review introduced:
  • a risk-based approach distinguishing high and low scrutiny countries;
  • standardization of writeup and publication requirements;
  • realism tools to guard against optimistic economic projections;
  • a heatmap summarizing debt vulnerabilities;
  • debt fancharts to convey uncertainty around projected debt/GDP paths.
• A careful review over the past two and a half years identified further improvement opportunities to predict sovereign stress with greater accuracy.

Key changes in the new framework (MAC SRDSF)

• The framework will be renamed “Sovereign Risk and Debt Sustainability Framework for Market Access Countries” (MAC SRDSF).
• New framework features:
  • broader and more consistent debt coverage;
  • a longer projection horizon;
  • new tools at multiple horizons based on analytical methods that account for countries’ structural characteristics;
  • enhanced transparency in bottom-line assessments, including the exercise of judgment;
  • tools supporting probabilistic debt sustainability assessments required by the Fund’s lending framework.
• Operationalization timeline: expected in the final quarter of 2021/first quarter of 2022, preceded by a Guidance Note, template, and extensive engagement with country authorities and external stakeholders.
• Transition management: the transition between the old and the new framework will be carefully managed to ensure consistency.

Executive Board assessment — consensus and points of attention

• Directors broadly supported reforms to improve predictability of sovereign stress, enhance transparency and communication, and align with the three-zone sustainability assessment required under the exceptional access framework.
• Technical fine-tuning required ahead of the Staff Guidance Note and implementation.

Debt coverage and assets

• Continued application of the existing definition of debt sustainability was supported.
• Most Directors concurred that General Government (GG) debt, defined per GFSM 2014 classification, should be the default institutional coverage.
• Implementation concerns:
  • A few Directors suggested phased implementation of GG expansion because two-fifths of EMs currently report data for the central government only.
  • Directors welcomed inclusion of public sector liquid financial assets as a mitigating factor.
  • Most Directors supported the risk‑based approach where central bank liabilities and/or SOE contingent liabilities would need inclusion in the debt perimeter.
  • A few Directors advised incorporating a broader range of public sector assets and wider adoption of net public debt concepts.
  • Directors stressed capacity-development support would be needed to bring country data coverage to adequate levels.

Projection horizon and realism tools

• A few Directors preferred continuation of the existing 5-year time horizon in certain cases given large uncertainties regarding public debt projections.
• Directors welcomed the expanded realism toolkit for baseline projections and tools to assess sovereign risks at three horizons: short, medium, and long term.
• Use of new tools:
  • Supported, with slight adjustments, to produce probabilistic debt sustainability assessments required in Fund-supported programs and to evaluate consistency of restructuring targets with restoring sustainability in restructuring cases.
  • Some Directors emphasized the need to adequately account for the impact of climate change on sovereign risk and debt sustainability.
  • A few Directors questioned expanding the realism toolkit to cover exchange rate analysis, especially for pegged regimes.
  • Concerns were raised about using perceptions-based third-party indicators to build the institutional quality variable in the short- and medium-term models; Directors asked to leave adequate room for judgment and cross-check results with alternative non-perceptions-based indicators.

Disclosure, application, and use cases

• Sovereign risk analysis should generally be prepared in both program and surveillance contexts.
• In program context, staff reports should contain the full range of risk-of-sovereign-stress outputs for the medium and long term (but not for the near term), as well as an overall risk assessment.
• Disclosure approach:
  • In surveillance and precautionary arrangement cases, most Directors endorsed full disclosure to the Board but limited disclosure to the public (omitting the near-term risk signal and assessment) for a 12-month period, after which full public disclosure would be reconsidered.
  • Some Directors expressed concern about unintended consequences from market sensitivity of full public disclosure; others favored immediate full public disclosure.
  • Implementing limited disclosure options would require a targeted modification to the Transparency Policy, proposed on a lapse‑of-time basis.
• Scope of required sustainability assessments:
  • Agreed to require sustainability assessments for arrangements involving GRA resources (including precautionary arrangements) as well as for the PCI.
  • Most Directors agreed sustainability assessments should be optional in surveillance cases; a few favored preparing them in surveillance cases with high risk of sovereign stress (Board disclosure but not public), while a few favored public disclosure even in such cases.
  • Views differed on program cases; ultimately Directors could go along with disclosure to the Board of three-zone assessments in both normal and exceptional access cases, and to the public only in exceptional access cases, with experience assessed at the end of a 12-month period.

Precautionary arrangements and scenarios

• In precautionary arrangements, sovereign risk assessments would be informed by the baseline scenario.
• Sustainability assessments would be informed by baseline and, when appropriate, by an adverse (full drawing) scenario.
• Use of adverse scenarios:
  • Appropriate in exceptional access cases (excluding FCL cases) if shocks triggering a drawing are not adequately captured by medium-term tools, or when departments doubt baseline realism that cannot be resolved through country-team discussions.
  • A few Directors stressed that appropriate use of the new realism tools should resolve such doubts.

Implementation, testing, and capacity building

• Most Directors supported the proposed timeline with a roll-out expected for Q4 2021 or Q1 2022; some favored acceleration, others considered it ambitious.
• Transition between old and new frameworks should be carefully managed to ensure consistency.
• Next steps encouraged by Directors:
  • Preparation of a guidance note and new templates;
  • Early engagement with a subset of country teams to test new tools in parallel with the current framework;
  • Provision of appropriate capacity development support;
  • Close engagement with the Board during implementation;
  • An effective communication strategy with member-country authorities and external stakeholders.

IMF, "IMF Executive Board Reviews IMF Debt Sustainability Framework for Market Access Countries", February 3, 2021.

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• IMF-World Bank Debt Sustainability Framework for Low-Income Countries -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home