Summary – Informal roundtable discussion – Debt crisis prevention in developing countries
On Monday 2nd February, DFID and ODI jointly hosted an informal roundtable discussion,
bringing together some of the world’s top thinkers on debt in developing countries.
The discussion was an opportunity to raise ideas and suggestions openly and
informally. The points below reflect those raised by participants, rather than
necessarily being points of agreement or consensus (unless otherwise stated).
--Session 1: Setting the context - what do we know about debt in developing countries?
Is there consensus on the evidence of debt accumulation in developing countries?
 Whilst average developing country debt levels have fallen since the HIPC initiative, a
number of post-completion point HIPCs have more recently been accumulating debt at
rapid rates.
 Some developing countries that were not HIPC-eligible (e.g. some Caribbean and
Pacific island states) face major debt problems that remain unresolved – some face
structural challenges in keeping debt at sustainable levels.
 We cannot attribute excessive debt accumulation solely to ‘mismanagement’ by
governments, as many developing countries face acute financing challenges, and are
vulnerable to exogenous shocks (e.g. economic or natural/climatic shocks). We
therefore need a more nuanced understanding about debt portfolios, scenarios, and
triggers of debt crises.
 In an increasingly globalised world economy, one major economic shock could push
developing countries into debt crises – international community needs to be vigilant.
 There is still scope for more research, evidence gathering, data, and understanding on
what drives rapid debt accumulation in developing countries.
 Even with better information and evidence, we still need to think through how
development actors should factor this into their policies and activities, and more broadly
how the global financial architecture needs to change.
What are the main challenges that countries face in ensuring debt sustainability, and how
can the risks associated with using debt as a financing tool be best managed?
 As countries graduate from low- to middle-income status, they find it harder to access
concessional finance. The international financial architecture may need to respond to
this changing landscape, particularly if majority of poor people are living in MICs.
 We need to remember the importance of viewing debt as part of a holistic system of
Public Financial Management (PFM), where revenue mobilisation and productivity of
expenditure are critical factors in determining debt needs and costs.
 Domestic debt is worth keeping an eye on in many countries, as it tends to be more
expensive and there is less data available on it so is harder to track.
 Private debt is also often overlooked – can quickly become public debt.
 Issuance of international sovereign bonds is becoming more prevalent in developing
countries, and there are both advantages and disadvantages of using this financing tool.
Repayment could be challenging, and governments will need to be wary of future
(higher?) interest rates in case they want to re-finance the bonds.
 Sovereign bonds may not come with strict policy conditionalities, but do come with
market conditionalities – market will react badly to misuse of debt finance.
Which lessons from past debt crises are relevant in the modern context?
 We currently see a number of similarities to previous debt crises – e.g. low global
interest rates, volatile commodity prices, macroeconomic imbalances, imprudent
lending, and structural vulnerability in many countries.
 The range of financing options available to developing country governments is
nowadays much wider than ever before – this brings both opportunities and challenges.
 Interesting to note that countries that tend to be more cautious are those that have
experienced a debt crisis; those less careful are the ones that haven’t faced past issues.
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Summary – Informal roundtable discussion – Debt crisis prevention in developing countries
Other messages
 Need to be wary of debt data – e.g. ‘hidden’ build-up of arrears, and GDP rebasing, can
make debt levels appear lower than they really are.
 Different finance sources are used differently – perhaps countries are sensible in having
a mix, rather than always ruthlessly searching for the cheapest source of debt finance.
 Private Public Partnerships can end up being expensive – capacity building is needed.
 Bullet repayments on sovereign bonds are a major challenge in developing countries –
could change to greater use of staggered repayments.
 More transparent information on borrowing and lending would increase our knowledge
on debt challenges and possible solutions.
 Should remember that borrowers are politically constrained – debt accumulation is often
linked to political/electoral cycles.
 What would happen if non-traditional sovereign lenders could be convinced to lend to
developing countries with policy reform conditionalities attached?
--Session 2: Debt in the post-2015 agenda (Financing for Development [FFD] &
Sustainable Development Goals [SDGs])
What are the emerging dynamics in post-2015 negotiations on debt issues?
 We recall that debt sustainability was not covered holistically in the MDGs (only HIPC).
 Post-2015 debates on debt are currently mixed – some issues of emerging consensus,
but other issues that remain contested.
 Feeling that both borrower and lender responsibilities need to be covered, that debt
crisis prevention and resolution both deserve attention, and also that there are ‘gaps’ in
the international financial architecture that should be addressed (either in the FFD
framework or through other processes).
What specific measures can be adopted by the international community as part of the FFD
agenda to enhance debt crisis prevention efforts?
 Debt sustainability should be at the core of the post-2015 agenda on debt.
 Technical assistance and capacity building for improved debt management by
developing country governments – consensus that this is a critical area for prioritisation.
 Non-traditional areas for technical assistance were also identified and included:
assistance with risk management and developing borrowing strategies, negotiating
bond/loan contracts, capital account liberalisation and management, maximising the
productivity of debt-financed expenditure and reforms to deal with ‘Vulture Fund’ activity.
 Better debt data is also critical – both timeliness of reporting, and ideally wider
availability of data (noting sovereign/commercial sensitivities). Particular need for
greater knowledge of contingent liabilities, domestic debt, and private debt.
 Suggestion to create a body for informal engagement between creditors and debtors,
but debate about whether this already exists and how a new body would be governed.
 Debt restructuring is costly – there is general consensus that the current situation needs
to be improved, but the issue of how remains contentious e.g. contractual vs. statutory
approaches. Some developing countries, and civil society, wish to see an
independently-governed statutory system, whilst other stakeholders support current
work on contractual improvements.
 Getting some international agreement on debt restructuring is a critical short-term goal.
 Could be merit in exploring extending ‘anti-Vulture Fund’ laws to more countries and
covering other forms of private debt (not just bonds).
 Civil society would like to see more done on tackling illicit financial flows, and have
concerns about some donors’ policy shift from grants to loans (recognising finance gap).
There was a call for greater evidence on the impact of PPPs and blended finance.
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Summary – Informal roundtable discussion – Debt crisis prevention in developing countries
--Session 3: Early discussion on the forthcoming World Bank-IMF Debt Sustainability
Framework (DSF) review
What are the processes involved in the upcoming DSF review?
 A joint World Bank-IMF paper will be submitted to the Boards in early Summer 2015,
which will be the precursor to the actual DSF review.
 WB & IMF staff encourage engagement from interested stakeholders during review.
What are the key issues to be addressed as part of the forthcoming DSF review?
 Reforms will need to be both desirable and feasible – not always easy. This is important
given that DSAs should be used and understood by a wide audience; and hence should
not be overly technical.
 A comprehensive review of the DSF was carried out in 2012, and concluded that overall,
the DSF performs well; it acts as a reliable ‘temperature check’ for low-income countries’
debt risks. However it was noted that past performance is not necessarily an accurate
guide to the future, given the rapidly changing environment the DSF operates in.
 While the DSF provides a standardised framework, it allows for some degree of
customisation to facilitate country specific analyses e.g. annex of the DSF identifies how
to bring in the impacts of commodity price changes.
 An area that needs to be explored is how can we do customised frameworks better.
External shocks could be better modelled, taking into account country specificities. Also
agreement that more can be done to factor in domestic debt, private sector debt, and
contingent liabilities (e.g. PPPs) to countries’ debt profiles.
Other messages
 Public expenditure is not just about financing of public capital; it needs to finance the
services that those capital expenditures offer. Therefore, need to better understand links
between recurrent expenditures and economic performance.
 Worth exploring how DSA forecasts can remain ‘objective’; neither too optimistic (e.g.
negotiated with governments) nor too pessimistic (which restricts access to finance).
--Thank you to all participants – we look forward to further dialogue on the subject of debt in
developing countries, and please feel free to keep in contact with us.
For more information, please contact:
 DFID – Imran Shahryar, Lindsey Craig
 ODI – Annalisa Prizzon, Shakira Mustapha, Edward Hedger
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