DEBT SUSTAINABILITY FRAMEWORK
FOR LOW INCOME COUNTRIES
Nihal Kappagoda
OBJECTIVES
• Assist Low Income Countries that benefited from debt relief to avoid
the future accumulation of unsustainable external debt levels
• Enable the World Bank to assess current and future prospects of debt
distress of IDA only countries and determine grant eligibility within
IDA 14 allocations
• Enable the IMF to monitor external debt levels and the ceilings on nonconcessional borrowing set in program countries
• Provide a framework for Joint Debt Sustainability Analyses by the
Bank and Fund for IDA only, PRGF eligible LICs
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ISSUES FOR DISCUSSION
DSF has become complex due to linkages to various
policies and institutional changes by the IMF, World Bank
and LICs. These are:
• The conduct of DSAs, the selection of debt indicators
and threshold values for them;
• Country Policy and Institutional Assessments
performed by the World Bank in LICs;
• Estimation of debt distress;
• Implementation of the IDA 14 Grant Allocation
Framework;
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ISSUES FOR DISCUSSION (Contd)
• Implementation of the MDRI and HIPC Initiative
and action remaining after the end of 2006;
• Non-concessional borrowing by LICs after receiving
debt relief and the “free rider” problem;
• Implications of the DSF on the IMF’s policy agenda
in LICs; and
• Action to be taken by the LICs to improve debt
management capacity and formulate a Medium
Term Debt Strategy to guide future borrowings
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DEBT SUSTAINABILITY
• External debt sustainability of a country is its ability to service all
foreign public and publicly guaranteed and PNG debt without
compromising its long–term goals and objectives
• Causes of debt stress are high levels of the stock of debt outstanding
measured by the absolute amount or NPV as a ratio of GNI, exports or
government revenue; weak policy and institutional environment; and
exogenous shocks to the economy
• Outward manifestations of crisis are the accumulation of arrears, an
application to the Paris Club for the restructuring of official debt when
it is judged that a breakdown in payments is imminent and agreement
with the IMF on a program
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DEBT INDICATORS
Use of debt indicators to judge debt sustainability raise a
number of conceptual issues
• Definition of debt – public and publicly guaranteed
external debt, total public debt or total external debt
• Stock of debt – nominal stock expressed in a single
currency and NPV of future debt service payments
• Capacity to pay – size of the economy (GDP or GNI),
exports of goods and services or government revenue
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THRESHOLD VALUES OF DEBT
INDICATORS
Global Development Finance
Indicator
Highly
Indebted
Moderately
Indebted
Less
Indebted
DOD/GNI
>50%
>30% &
<50%
<30%
DOD/XGS
>275%
>165% &
<275%
<165%
TDS/XGS
>30%
>18% &
<30%
<18%
INT/XGS
>20%
>12% &
<20%
<12%
NPV/GNI
>80%
>48% &
<80%
<48%
NPV/XGS
>220%
>132% &
<220%
<132%
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THRESHOLD VALUES OF DEBT
INDICATORS (Contd)
HIPC Initiative
• NPV of public and publicly guaranteed external debt to
exports of goods and services – 150 percent
• NPV of public and publicly guaranteed external debt to
government revenue – 250 percent
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THRESHOLD VALUES OF DEBT
INDICATORS (Contd)
Debt Sustainability Framework
Debt Indicator
%
Strong
Medium
Weak
NPV of
debt/GDP
50
40
30
NPV of
debt/Exports
200
150
100
Debt
service/Exports
25
20
15
NPV of
debt/Revenue
300
250
200
Debt
service/Revenue
35
30
25
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COUNTRY POLICY AND INSTITUTIONAL
ASSESSMENTS
• Based on criteria covering policy and institutional developments
needed for an effective poverty reduction growth strategy and
effective use of development assistance
• Ratings done annually and based on actual policies and institutional
changes that are implemented
• Sixteen criteria in four groups under Economic Management,
Structural Policies, Policies for Social Inclusion and Equity, and Public
Sector Management and Institutions
• CPIAs used for estimating IDA Country Performance Ratings which
with per capita income determine IDA country allocations and
assessing debt distress in LICs
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DEBT DISTRESS
• Indicators dependent on government revenue are not used for
assessing debt distress
• The average of the two stock indicators – NPV of debt to GDP and
exports of goods and services – and debt service ratio are used to assess
debt distress of LICs
• Two bands, 10 percent above and below the thresholds, are used to
assess grant eligibility
• If the operational ratio - the composite stock indicator or the debt
service ratio - is 10 percent or more below the threshold, IDA provides
its assistance as credits. If it is 10 percent or more over the threshold,
IDA assistance will only be provided as grants. A mixture of grants
and credits is provided when the ratio is between the two
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IDA ALLOCATIONS AND GRANTS
•
The CPIA has a 80 percent weight in estimating the Country Performance
Rating used for determining IDA allocations for each replenishment
•
The balance 20 percent is provided by the Bank’s assessment of its
performance on its portfolio of outstanding loans
•
A governance factor is applied to the two ratings to determine the CPR
•
Governance factor is based on the five criteria in the cluster on Public Sector
Institutions and Management in the CPIA and portfolio performance
•
Heavy weightage given to the governance factor than is warranted by its share
in the CPIA
•
Performance based on the CPR and need based on per capita GNI are used to
determine the allocation to each LIC
•
Grant eligibility is determined by the debt distress assessment
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IMPLEMENTATION OF MDRI AND HIPC
INITIATIVES
HIPC INITIATIVE
• 40 countries met the income and indebtedness criteria to receive
assistance. 21 reached the Completion Point and qualified to receive
full debt relief. 9 are between the Decision and Completion Points and
received some debt relief
• 10 are pending agreement on macroeconomic reforms, poverty
reduction strategies and plans to clear arrears. Remaining countries
grandfathered provided they met the income and indebtedness criteria
for data at the end of 2004 and permitted to qualify for debt relief at
their own pace
• Debt service payments in the 30 countries that had debt relief
packages approved declined by two percent of GDP on the average
between 1999 and 2005.
• Before the Initiative, eligible countries spent more on debt service than
on health, education and social services. Now they spend five times the
amount on the latter services than on debt service
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IMPLEMENTATION OF MDRI AND HIPC
INITIATIVES (Contd)
MULTILATERAL DEBT RELIEF INITIATIVE
• The MDRI provides full debt relief from the participating institutions
(IMF, IDA and the AfDF) unlike the HIPC Initiative that required
coordinated action by all creditors to reduce the external debt of
qualifying countries to sustainable levels with each institution
providing debt relief separately
• The IMF provided debt relief to countries reaching the Completion
Point on the full stock of debt at the end of 2004 from January 2006.
Two non-HIPCs with per capita incomes of less than $380 were also
provided assistance
• IDA provided debt relief from July 2006 on all debt outstanding at the
end of 2003 when countries reach the Completion Point
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NON-CONCESSIONAL BORROWING BY
LICs
• Debt relief under the two initiatives and grant funding by the IDA
enabled LICs to keep debt burdens below the threshold values in the
DSF
• OECD donors and IFIs have coordinated their approach in assisting
LICs
• Commercial creditors and non-OECD bilateral creditors have not
done so and begun lending on non-concessional terms. This is referred
to as the free rider problem and reflects differences between collective
and individual interests of creditors
• IFIs have begun a dialogue with other creditors based on the DSF and
an exchange of information on debt relief, grants and the problems
created by lending by this group of creditors
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CHALLENGES AHEAD
• Review the debt indicators and thresholds used in the DSF
• Integrate domestic public debt to the DSAs conducted on external
public debt
• Monitor the vulnerabilities that could arise from non-concessional
PNG debt and high levels of domestic debt
• Foster creditor coordination and broader use of the DSF by both LICs
and creditors
• Improve data quality and reporting to the IFIs
• Strengthen capacity for public debt management
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DEBT INDICATORS AND THEIR
THRESHOLD LEVELS
• DSF based on threshold levels of three selected debt
indicators
• Adopt a broad definition of public debt that takes account
of all the liabilities of the public sector
• Develop a methodology to assess the sustainability of total
public debt
• Assess macroeconomic stability taking account of the
domestic and external borrowings of the public sector
• Include debt indicators that use government revenue as a
variable in the DSF
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INTEGRATION OF DOMESTIC DEBT IN
DSAs
• Domestic public debt is significant in some LICs
• It carries higher risks due to shorter maturities and higher interest
rates than external public debt
• Methodology is being developed to prepare DSAs for total public debt
• A DSA for domestic public debt should be done at the same time as
that for external public debt using indicators similar to those used in
the DSF with government revenue replacing exports of goods and
services
• Examine vulnerabilities arising from domestic debt that may lead to a
different classification of indebtedness from that obtained by reviewing
only external public debt
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FOSTERING CREDITOR
COORDINATION
• The IFIs have begun listing the countries for which external debt DSAs
have been done and the dates on their web sites. A direct web link is
provided to the document once the countries agree
• Bank and Fund have begun outreach programs among creditors by
attending meetings such as those of the OECD Export Credit Group.
Coordination efforts focus on the DSF
• Much needs to be done with the non-OECD official creditors called
emerging creditors and their share is of the order of 10 percent of total
official assistance
• The largest are Brazil, China, India, Korea, Kuwait and Saudi Arabia.
China is the largest and Kuwait the second
• G7 Finance Ministers have called for greater coordination among
lenders possibly leading to the formulation of a charter for lending
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IMPROVED DATA QUALITY AND
REPORTING TO THE IFIs
• Collection of data on domestic debt and government revenue and
reporting them to the IFIs
• Half the LICs do not report their external debt to the World Bank’s
Debtor Reporting System or there are moderate to major problems
with the data submitted
• Country data is checked and supplemented with that obtained from
the OECD, BIS and Berne Union
• IFIs have included mandatory advance reporting of non-concessional
loans in grant and credit agreements in post-MDRI countries. A web
page on concessionality including a facility to calculate it has been set
up
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IMPROVEMENTS IN PUBLIC DEBT
MANAGEMENT
•
Strength the legal and regulatory framework and institutional framework for
public debt management
•
Establish a debt information system for recording, retrieving and analyzing
public debt
•
Formulate a public debt policy and a Medium-Term Public and External Debt
Strategy with a link to the Medium-Term Fiscal Framework
•
The MTDS should cover the terms of new borrowing, the mix between fixed
and variable rates and domestic and public debt and the currency mix for
external borrowing
•
Staff of PDMOs need to undertake comprehensive debt management functions
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