Wednesday, September 27, 2017

Debt Sustainability Framework for Low Income Countries review

The executive board of the International Monetary Fund (IMF) today reviewed the joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF).
Since its introduction in 2005, the LIC-DSF has been the cornerstone of the international community’s assessment of risks to debt sustainability in LICs, with important operational implications for stakeholders. The DSF has been playing a critical role in guiding borrowing and lending decisions; multilateral lenders including the International Development Association have linked their lending policies to the DSF results and the risk assessment derived by the DSF has informed the IMF’s debt limits policy (DLP) and the World Bank’s non-concessional borrowing policy (NCBP).
The framework was previously reviewed in 2006, 2009, and 2012. While the 2012 review added several new features, notably incorporation of more country-specific information and greater attention to domestic debt vulnerabilities, executive directors saw room for further progress, including by improving the assessment of macro-linkages in stress tests and exploring more the links between investment and growth – areas which were left for future work.
In the extensive consultations surrounding the current review, stakeholders emphasised the importance of ensuring that the DSF remains balanced in its treatment of risks and borrowing opportunities, incorporates more country-specific information, and reflects the evolving financing landscape facing LICs, including risks emanating from LICs’ increased market financing and contingent liabilities.
The current review assesses the DSF’s performance in recent years and proposes a wide-ranging set of reforms that adapts the framework to the evolving circumstances facing LICs and makes it more comprehensive and transparent, and yet simpler to use. The changes will include a revised approach to the assessment of countries’ debt carrying capacity based on an expanded set of variables; adjustments to the methodology designed to improve the framework’s accuracy in predicting debt distress; new tools prepared to help shed light on the plausibility of underlying macroeconomic projections; tailored stress tests to help better evaluate specific risks of particular relevance for some countries; and a reduction in the number of debt thresholds and standardised stress tests.   
The framework is expected to become operational in the second half of 2018. It will allow for completion of the associated Guidance Note and template, followed by an extensive six-month program of training for country-level authorities.
The executive directors welcomed the comprehensive review of the Debt Sustainability Framework for Low-Income Countries (LIC-DSF) and appreciated the extensive consultations with country authorities, the executive board, and external stakeholders. They noted that the LIC-DSF is a vital tool for country authorities to help strengthen fiscal policy and debt management and this review has highlighted areas where the framework can be reformed. Directors, on the occasion, agreed that the proposed reforms would make the framework more comprehensive and transparent and that the revised LIC-DSF would continue to play a critical role in informing borrowing and lending decisions by more accurately flagging potential debt distress with the aim of avoiding unnecessarily constraining LICs’ ability to finance their development.
Directors welcomed the proposed composite measure to assess a country’s debt-carrying capacity, based on both the CPIA and a set of macroeconomic variables. They observed that the inclusion of macroeconomic variables takes better account of country-specific features, and enables a fuller understanding of, and policy discussions on, how economic policies affect debt carrying capacity. This, in turn, will enhance the contribution of the DSF to policy formulation.
Directors endorsed the proposed new thresholds for debt stock and debt service indicators. They noted that, for countries whose assessment of debt-carrying capacity remains unchanged, the revised framework may imply additional borrowing space, provided countries manage debt service well. Directors observed that the quality of the framework’s outputs depend heavily on the quality of the inputs.
Directors agreed that adding tailored scenario stress tests will help evaluate risks of particular importance for some member countries – including those emanating from natural disasters, volatile export prices, market-financing shocks, and contingent liability exposures. They called for clear disclosure in debt sustainability analyses of the key assumptions made in calibrating these tests.

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