Debt Sustainability in Low-Income Countries--Proposal for an Operational Framework and Policy Implications

Public Information Notice: IMF Discusses Operational Framework for Debt Sustainability in Low-Income Countries, April 5, 2004

Fund Assistance for Countries Facing Exogenous Shocks, August 8, 2003

Role of the Fund in Low-Income Member Countries Over the Medium-Term - Issues Paper for Discussion, July 21, 2003

Debt Sustainability in Low-Income Countries - Towards a Forward-Looking Strategy, May 23, 2003

Debt Sustainability in Low-Income Countries—Proposal for an Operational
Framework and Policy Implications

Prepared by the Staffs of the IMF and the World Bank

Approved by Mark Allen and Gobind Nankani

February 3, 2004

Use the free Adobe Acrobat Reader to view the full text (600 kb pdf file)

Contents

Executive Summary

I.	Introduction

II.	Why is Debt Sustainability Important?

III.	An Operational Framework for Debt Sustainability Assessments
	A.	General Considerations
	B.	Empirical Thresholds
	C.	Analysis of Current and Projected Debt Indicators
			Long-Term Projections and Stress Testing
			Analysis of the Main Debt Sustainability Concerns

IV.	Policy Implications for The Global Community
	A.	Incorporating Debt Sustainability Considerations Into External Financing Policies
			Implications for New Lending
			Prospects for Increasing Aid Flows
	B.	Designing Instruments That Mitigate the Impact of Exogenous Shocks

V.	Policy Implications for Low-Income Countries
	A.	Improving Policies and Institutions
	B.	Strengthening Debt Management
	C.	Increasing Resilience to Exogenous Shocks

VI.	Conclusions

VII.	Issues for Discussion

Text Tables
1.	Empirical Debt Sustainability Ranges
2.	Indicative Policy-Dependent Debt and Debt-Service Thresholds
3.	Concessionality of Loans by Selected Creditors

Boxes
1.	Implementing the HIPC Initiative
2.	Methodology for NPV Calculations Under the Proposed Framework
3.	Debt Sustainability Analysis-Illustration of the Proposed Approach
4.	Domestic Debt in Low-Income Countries
5.	Adopting An Ex-Ante Framework for New Lending
6.	Ex-Post Mechanisms for Mitigating Exogenous Shocks
7.	Official Uses of Commodity Derivative Markets

Figures
1.	Official Development Assistance to Selected Low-Income Countries, Average 1995–2000
2.	NPV of Debt-to-Exports Ratios in Selected Low-Income Countries, 2001
3.	Frequency Distribution of the Present Value of Debt to GDP for Distress and Non-Distress Events
4.	Simulations of Debt-Burden Indicators Under Alternative Scenarios, 2003–2023
5.	Trends in ODA Flows, 1991–2002
6.	Composition of Grant Funding, end-2001
7.	NPV of Debt, Exports and Output Volatility, 1980–2001
8.	Developing Countries' Vulnerability to Exogenous Shocks

Appendix I. Empirical Analysis

Appendix II. Illustration of Proposed Debt-Sustainability Framework

Appendix III. Stochastic Simulation of External Debt Ratio

References