IMF Policies to Help Low-Income Countries Restore and Maintain Debt Sustainability

Review Session on Chapter V of the Monterrey Consensus

March 10, 2008Martine Guerguil, IMF

Outline

Restoring sustainability. Quick overview of advances under the HIPC and MDR Initiatives since Monterrey

Maintaining sustainability. Quick

overview of IMF support to low-income countries in the design of sound borrowing policies

Part IRestoring Sustainability

HIPC Initiative and MDRI Original HIPC Initiative launched in 1996 to

reduce debt burdens of eligible countries to sustainable levels Enhanced in 1999 to provide deeper debt relief

Equitable burden sharing: all creditors, including commercial ones, are expected to participate

Further steps taken to accelerate and facilitate access to debt relief, most recently for HIPCs with protracted official arrears

MDRI introduced in 2005 to complete debt relief and provide more resources to foster development

Implementation to Date (I)

32 countries are past the decision point, of which 23 countries past the completion pointMost have reached these stages since

Monterrey 9 countries still have to initiate the

process

Implementation to Date (II)

Post-Completion-Point Countries (23)

Benin Honduras Rwanda

Bolivia Madagascar São Tomé & Príncipe

Burkina Faso Malawi Senegal

Cameroon Mali Sierra Leone

Ethiopia Mauritania Tanzania

The Gambia Mozambique Uganda

Ghana Nicaragua Zambia

Guyana Niger

Interim Countries (Between Decision and Completion Point) (9)

Afghanistan Chad Guinea

Burundi Republic of Congo Guinea-Bissau

Central African Republic Democratic Republic of the Congo Haiti

Pre-Decision-Point Countries (9)

Comoros Kyrgyz Republic Somalia

Côte d’Ivoire Liberia Sudan

Eritrea Nepal Togo

Countries in bold have reached their completion or decision point since Monterrey

Debt Burdens Have Been Substantially Reduced...

Making Room for Poverty-Reducing Spending

Challenges in Implementation

The political, security and economic situation of remaining HIPCs is challenging Most of them have experienced conflicts A number have arrears to multilateral

institutions, which need to be cleared and raise financing issues

The debt relief framework is used with maximum flexibility to address these challenges

More resources are needed to fully finance the Initiatives

Increasing the participation of non-Paris Club (NPC) creditors

While all Paris Club creditors provide full HIPC relief (and even beyond), only a few NPC bilateral creditors do

Most provide only partial or no relief Efforts to raise awareness and encourage

them to deliver their share of relief Information on IMF websiteGood offices and technical assistance

Aggressively Litigating Creditors

A small but highly visible group of creditors to HIPCs As of mid-2007, 11 HIPCs targeted by 44 lawsuits. 24 judgments so far awarding about $1 billion

The international response to litigation is constrained Participation in HIPC Initiative is voluntary Little can be done without infringing contractual rights

Stepped-up efforts within these constraints Moral suasion DRF-supported buybacks Building debt management capacity

• Legal support (donor-funded) can help if provided early

Part IIMaintaining Sustainability

Maintaining Sustainability

Debt relief frees up resources, but more resources are needed to meet the MDGs

A new financial environment ODA is often falling short of commitments Emergence of a more diverse group of lenders,

both public and private A new policy challenge

Investment opportunities are large But additional lending, if in excessive volume or

on unfavorable terms, could contribute to the re-emergence of debt vulnerabilities

IMF policies and tools

The debt sustainability framework (DSF)

Country-specific policy advice Technical assistance in the area of

debt management

The Debt Sustainability Framework (DSF)

Developed by the IMF in 2002 A tool to:

Examine the sources and extent of debt-related vulnerabilities under alternative borrowing scenarios

Guide new borrowing decisions to match financing with ability to repay debt

Design preventive policies to avoid debt payment problems

Undertaken annually in the context of Article IV consultations

The Debt Sustainability Framework for Low-Income Countries (LIC DSF)

Developed jointly by the World Bank in 2005 Acknowledges the specificities of low-income

countries’ debt Higher vulnerability to shocks Weaker institutional settings Joint debtor-creditor responsibility for outcomes

A tool to improve IFIs’ policy advice and guide their provision of needed technical assistance

The DSF will be effective in preventing new crises only if it is used actively by both creditors and borrowers

Support to Borrowers Medium-term debt strategies (MTDSs)

To meet government's financing needs at the lowest possible cost consistent with a prudent degree of risk

Stepped-up capacity building program in debt management

Concessional finance remains the most appropriate form of finance for LICs, even after debt relief Many LICs remain susceptible to shocks, and have

limited capacity to manage debt MDG-related expenditures generally do not generate the

cash flows necessary to service nonconcessional debt Access to nonconcessional finance should be cautious

and gradual

Outreach to Creditors

Information sharing DSAs produced annually on more than 60 LICs A unique source of information and analyses on LICs’

debts Most DSAs are published and can be found on a

dedicated webpage: http://www.imf.org/dsa Awareness raising

Enhanced cooperation is needed to avoid negative outcomes

Some multilaterals already use DSA results in their lending decisions (AfDB, AsDB, IFAD)

Development of sustainable lending principles• OECD Export Credit Group

Thank you for your attentionFurther information at:www.imf.org/dsa

Questions or queries? Lending toLICs@imf.org