Application of the Bank-Fund Debt Sustainability Framework

MDB Meeting on Debt IssuesJuly 11, 2007Hervé Joly, IMF

Outline

Recent changes in applying the DSF

Raising awareness of debt sustainability risks:With borrowersWith creditors

Current challenges

Recent Assessment (April and November 2006)

DSF has now been in use for about 2 years

Boards reviewed use of DSF in April 2006 and viewed it as broadly appropriate but asked for a deeper analysis of MDRI implications and other issues: Apparent borrowing space Changes in the lender landscape Treatment of domestic debt

Proposed changes approved by Boards in end-2006 and implemented since

Main Changes to DSF Application

Pace of New Borrowing Using more systematically the precautionary features of

the DSF. Building more realistic macroeconomic scenarios Additional precautionary features (5% “caution flag”)

Domestic Debt Domestic debt matters for risk of debt distress... ...but can’t be easily integrated into thresholds Public sector DSA requirement Possibility of “splitting the risk rating”

Private Creditors Use of additional liquidity indicators as needed

Methodology Use of a three-year moving average of the CPIA

Improving Dissemination of DSAs

Effectiveness of DSF depends on broader information sharing by debtors and creditors

Dedicated webpages on DSAs http://www.imf.org/dsa http://www.worldbank.org/debt

Boards requested that staffs increase

outreach to debtors and creditors.

Broader Use by Borrowers (I)

Active dialogue with borrowers.

Ultimate purpose of DSF is to enable borrowers to design appropriate financing strategies, i.e., a debt path that is sustainable while consistent with development plans and poverty reduction strategy

DSA key element for discussion of fiscal stance and determination of appropriate financing terms

DSA tool to obtain appropriate terms on new finance

Broader Use by Borrowers (II)

Recognized need for stronger capacity building in the debt management area

Need to ensure better coordination of existing providers and initiatives

Boards have agreed to step up assistance. This will start with a pilot covering 4-6 countries a year. The situation will be reassessed in 18 months.

Outreach to Creditors

IMF/WB have stepped up outreach to major creditor groups to raise their awareness of debt sustainability risks MDBs Traditional bilateral creditors Export Credit Agencies Non-OECD creditors

Some creditor groups are considering developing principles for sustainable lending

Emerging Issues (I)

Non-OECD creditors: A diverse universe

Some raise specific challenges: Expanding fast Not members of traditional creditor fora

• Limited information• Risk of overlap

May lend on nonconcessional terms May not use conditionality

Emerging Issues (II)

These creditors are difficult to approach:

May see DSF as an instrument of traditional creditors meant to constrain them

Blame traditional creditors for not living up to their aid scaling-up commitments

How do MDBs perceive non-OECD creditors? Do they collaborate with them? Do they have views on how they should be approached?

Emerging Issues (III)

Concessional finance remains the most appropriate form of financing for LICs. Although debt levels are much lower in

many LICs post debt relief, they remain poor, highly susceptible to shocks, and with limited debt management capacity.

Debt relief has reduced the capacity of some creditors/donors to provide concessional finance

How do MDBs approach this problem?