Sustainability Framework (DSF) for LICs: An Overview

Transcription

1 The World Bank-IMF Debt Sustainability Framework (DSF) for LICs: An Overview Debt Management Performance Assessment (DeMPA) Tool Training, World Bank - CEMLA, February 28 March 4, Debt Management: the big picture Debt sustainability Debt management Long term debt sustainability DeMPA (process) MTDS (debt composition) DSF (debt level) DPI 6 dimension 2 1

2 Introduction Presentation Outline Why assessing debt sustainability in LICs? Why LICs? What makes LICs different? Nexus between risk of debt distress and the quality of a country s policies and institutions The DSF: how does it work The three pillars of the DSF (how the DSF works or what it is) Shortcomings and challenges The use of the DSF by IDA and the IMF Grant/Loan allocation and NCBPs 3 Presentation Outline Introduction Why assessing debt sustainability in LICs? Why LICs? What makes LICs different? Nexus between risk of debt distress and the quality of a country s policies and institutions The DSF: how does it work The three pillars of the DSF (how the DSF works or what it is) Shortcomings and challenges The use of the DSF by IDA and the IMF Grant/Loan allocation and NCBPs 4 2

3 Introduction (1) Why assessing debt sustainability in LICs? LICs face significant challenges that often are difficult to reconcile: Meet development objectives, including the MDGs ( invest borrow debt accumulation) Maintain debt at sustainable levels (avoid crisis recurrence) Those challenges may be exacerbated for those LICs that have experienced a relief of their debt burdens: Significant debt reduction Ease of borrowing (and moral hazard) But economic circumstances (will) remain highly volatile with new creditors (not necessarily under concessional terms) appearing (new kids in the block) 5 Why assessing debt sustainability in LICs? Heavily Indebted Poor Countries (as of June 30, 2010) 30 Post CP Countries Afghanistan Benin Bolivia Burkina Faso Burundi Cameroon Central African Republic Congo, Republic of Dem. Rep. of Congo Ethiopia Ghana Guyana Gambia, The Haiti Honduras Liberia Madagascar Malawi Mali Mauritania Mozambique Nicaragua Niger Rwanda São Tomé Senegal Sierra Leone Tanzania Uganda Zambia and Príncipe Chad Eritrea 6 Interim Countries Comoros Côte d Ivoire Guinea Somalia 4 Pre-DP Countries Sudan Kyrgyz Republic Guinea- Bissau Togo 3

4 Why assessing debt sustainability in LICs? Debt burdens have been reduced by 80% compared to DP levels (in billions of U.S. dollars, in end-2009 PV terms) US$ billion in DR Before traditional debt relief 44.5 After traditional debt After HIPC Initiative relief debt relief 36.7 After additional bilateral debt relief After MDRI 6 Interim Countries 30 Completion-Point Countries Why assessing debt sustainability in LICs? A new landscape (i.e., new lenders) Potential mounting of fiscal deficits (due to fiscal stimulus packages) Countries face a more volatile and uncertain financial environment A proper institutional framework is necessary to manage public debt prudently in LICs, to avoid a recurrence of debt distress (default) episodes while ensuring adequately financing future growth. 4

5 Introduction (2) What makes LICs different to other countries? Higher vulnerability to exogenous shocks Narrow (less diversified) production and export structures Structures concentrated on primary commodities with highly volatile prices (and therefore tax revenues) Response capacity to shocks is weaker (reserve currency issue) Greater reliance on official external creditors with greater dependence on concessional debt Greater political instability and weaker policies and institutions Domestic conflicts, frequent government changes, and weak political institutions Complicate the implementation of sustainable macroeconomic policies Tend to increase the risk of mismanagement and thus debt problems 9 What makes LICs different to other countries Commodity Revenues to Total Revenue, 2008 (Ratio, in percent of total revenue) Congo, Republic of Chad Nigeria Angola Yemen, Republic Azerbaijan Sudan Papua New Guinea Mauritania Mongolia Guinea Vietnam Source: IMF staff estimates. 5

6 What makes LICs different to other countries Kaufman Index on Governance (avg ) LICs MIC Political Stability* Aggregated index* *Index take values between -2.5 and 2.5. Higher number indicates better performance Source: World bank. 11 Introduction (3) Debt distress - quality of countries policies and institutions nexus Empirical foundations: Kraay and Nehru 2004 What factors explain episodes of external debt distress? Debt distress measured as: accumulation of arrears resort to Paris Club relief resort to IMF non-concessional support Three sets of predictors: vulnerability to (volatility of) macro shocks traditional debt burden indicators quality of a country s policies and institutions 12 6

7 Introduction (3) Debt distress - indebtedness Econometric results 13 Introduction (3) Debt distress - quality of countries policies and institutions nexus Econometric results 14 7

8 Introduction (3) Debt distress - quality of countries policies and institutions nexus Interpretation of the results 1. The likelihood of debt distress is mainly explained by three factors: susceptibility to shocks, debt burden, and quality of policies and institutions 2. The quality of policies and institutions is as important as the debt burden in predicting debt distress episodes (For a constant probability of debt distress, countryspecific debt thresholds are needed rather than a uniform threshold. see below). 15 Introduction Presentation Outline Why assessing debt sustainability in LICs? Why LICs? What makes LICs different? Nexus between risk of debt distress and the quality of a country s policies and institutions The DSF: how does it work The three pillars of the DSF (how the DSF works or what it is) Shortcomings and challenges The use of the DSF by IDA and the IMF Grant/Loan allocation and NCBPs 16 8

9 The DSF Based on all of the above the LIC DSF was developed jointly by the WB and the IMF (adopted in 2005) to: Allow for better informed policy advice when supporting the efforts of LICs to meet their development goals without creating future debt problems by Bring a greater consistency, discipline, and transparency to debt sustainability analyses (think of it as a regular medical check up) If properly used it allows creditors and donors to tailor their financing/grants terms Help detect potential crises early so that preventive actions can be taken (like a medical check up) 17 Main features of the DSF A tool for borrowers and lenders Helps LICs define a borrowing strategy that matches their development objectives with their present/future t capacity to pay Helps lenders & donors modulate (tailor) the terms of their financing according to debt sustainability risks NEW: Conducted every three years thoroughly but updated for interim periods (if no significant changes occur in the economic environment) Allows for corrections/adjustments Allows evaluation of earlier projections Two parallel exercises: for external public debt and for total public debt (inc. domestic) 18 9

10 The Three Pillars of the DSF 1. A standardized forward-looking analysis of debt and debt-service dynamics to asses a country s debt sustainability (for total debt: external plus domestic) that s the aim (needs a lot of judgment) gather info about the patient s weight history & prospects 2. An assessment of external debt sustainability in relation to indicative country-specific debt burden thresholds that, in turn, depend on the quality of countries policies and institutions ( a shortcoming?) comparison with gender/cohort 3. A risk of external debt distress classification that takes into consideration this threshold assessment, as well as other country specific factors ( idem) the family doctor does the final evaluation 19 The first pillar of the DSF 1. A standardized forward-looking analysis of (all) debt and debt-service dynamics Takes into consideration LICs specificities: long horizon (20 years) to reflect long grace period and maturity present value, not face value, to capture debt concessionality The analysis comprises debt projections under: a baseline scenario (most likely outcome), alternative scenarios (that discipline the assessments under the baseline), standardized di d stress test t based on a country s historical i vulnerability to shocks country-specific stress tests if the vulnerabilities are not duly captured by the standardized tests Standardization allows comparison across countries but flexibility and judgment are needed to address country-specific aspects 20 10

11 The second pillar of the DSF 2. An assessment of external debt sustainability in relation to indicative country-specific debt burden thresholds that depend on the country s quality of policies and institutions (3 yr average) For a prob. of Debt Distress 18-22% Quality of policies and institutions Weak CPIA 3.25 Medium 3.25 < CPIA < 3.75 Strong CPIA 3.75 NPV of debt-to-gdp NPV of debt-to-exports to exports NPV of debt-to-revenue Debt service-to-exports Debt service-to-revenue The second pillar of the DSF 20 year projections for the debt burden indicators are constructed under different (baseline, alternative, stress) scenarios. For a given country, its 3-yr MA CPIA determines the thresholds against which to compare its debt burden indicators. Such projections are then compared against the corresponding thresholds to determine a country s risk of debt distress rating. 11

12 The third pillar of the DSF 3. In assigning one of the four risk of debt distress ratings staffs are expected to exercise judgment and not follow a mechanistic approach. Low risk: all debt burden indicators are well below the thresholds. Moderate risk: debt burden indicators are below the thresholds in the baseline scenario but thresholds could be breached in stress tests and alternative scenarios. High risk: one or more debt burden indicators breach the thresholds on a protracted basis under the baseline scenario. Debt distress: the country is already experiencing difficulties in servicing its debt (i.e., is in arrears) irrespective of its capacity to repay based on a forward looking analysis. Classification should not be done mechanistically How does the DSF Work Example: Average CPIA for the last 3 years: 3.56 Quality of policies and institutions Weak CPIA<3.25 Medium 3.25 CPIA 3.75 Strong CPIA>3.75 NPV of debt-to-gdp NPV of debt-to-exports NPV of debt-to to-revenue Debt service-to to-exports Debt service-to to-revenue

13 How does the DSF Work Example Alt scenario 2 Alt scenario 1 Baseline 25 Threshold effects: new procedure For countries close to the cut off points of CPIA ranges, small changes in a country s CPIA may imply large changes in debt thresholds (CPIA drop from 3.26 to 3.24 threshold falls by 10% of GDP) This could result in changes to debt distress ratings which is not related to the country s underlying capacity to service its foreign debt Now, when the CPIA crosses its boundary The new threshold will apply at once if the CPIA lies outside a range of 0.05 from the boundary Otherwise, the CPIA will have to remain across the boundary for at least 2 consecutive years 13

14 Challenges with DSAs The standard analysis needs to be adapted (qualitative analysis) for LICs that have: Significant external private financing The associated vulnerabilities may not be captured (such as abrupt reversals in market sentiment leading to sudden capital outflows) The DSA needs to be complemented with a more extensive vulnerability analysis (such as the share of short-term debt and reserve coverage ratios) and consider potential contingent liabilities Accumulated large financial assets The DSF focuses on a country s liabilities, not its assets For countries with large assets (such as oil-exporting countries), the public DSA can be conducted on a net debt rather than a gross debt basis Debt distress ratings are derived based on gross ext. debt 27 Treatment of Domestic Debt Integrating domestic and external debt in the DSF poses (conceptual and) practical challenges: Not easy comparability abilit across countries Often poor data quality Different financial terms, implying a different set of risks How to incorporate into a framework that aims to provide a signal to donors regarding the appropriate level of concessionality of external debt? Most important, t we don t have (because of data availability) an empirical basis to set indicative thresholds (it s not straightforward to incorporate Domestic Debt into the existing framework in its most common use) 28 14

15 Treatment of Domestic Debt Regardless of the size of public domestic debt, all DSAs must include a public DSA judgment call in the analysis and conclusions Guidelines: > 20% GDP is a warning In cases where the inclusion of domestic debt leads to different conclusions regarding debt sustainability outlook (raises concerns about debt sustainability), the DSA analysis/write-up should include an expanded commentary on the risk and implications of domestic debt accumulation on debt sustainability 29 The investment-growth nexus Country specific (detailed) analyses are needed to properly assess the growth-dividend resulting from Public Investment programs (broadly defined) These could be based on a number of indicators (structural/macro constraints, historical rates of return, etc.) and methodologies formal (GE) models; growth diagnostics; etc. The latter are much more important if a scaling-up of public investment is ongoing or imminent. DSAs should document the staffs analysis of the investment-growth nexus. 15

16 Remittances: Growing importance Figure 2: Workers' remittances as a percentage of exports and GDP (average ) for PRGF-eligible and IDA-only countries 1/ Haiti Tonga Nepal Bangladesh Tajikistan Uganda Cape Ve rde Sudan Gambia, The Nicaragua Guinea-Bissau Ho nd ur as Senegal Moldova Sri Lanka Kyrgyz Republic Guyana Togo SierraLeone Benin Mongolia Mali São Tomé & Príncipe Nigeria Ethiopia Kenya Niger Guinea Rwanda Cambodia Solomon Islands Myanmar Ghana Cameroon Zambia Lesotho Moz ambique Djibouti Madagascar Tanzania Malawi Vanuatu Congo, Republic of Burundi Côte d'ivoire as a percentage of exports 0% 25% 50% 75% 100% 125% 150% 175% 200% Source: World Bank, World Development Indicators (2009) 1/ Average over of available data. as a percentage of GDP Tonga Haiti Tajikistan Guyana Honduras Nepal Albania Ga mbia, The Cape Ver de Moldova Nicaragua Kyrgyz Republic Guinea-Bissau Sri Lanka Mongolia Togo Bangla desh Senegal Grenada Dominica Uganda Sudan St. Vincent & Grens. Nigeria Bolivia St. Lucia Mali Sierra Leone Cambodia Benin Georgia Kenya São T omé & Príncipe Guinea Ethiopia Solomon Islands Niger Armenia Lesotho Ghana Zambia Rwanda Cameroon Djibouti Mozambique Papua New Guinea Congo, Republic of Madagascar Vanuatu Tanzania Malawi Burundi Côte d'ivoire 0% 5% 10% 15% 20% 25% 30% Remittances: new treatment under the DSF New debt burden indicators: NPV of debt / (Exports + remittances) NPV of debt / (GDP + remittances) (same for debt service indicators) New thresholds = 10% lower than old Conditions needed to pursue modified or in-depth analysis: Remittances represent a reliable ( large and stable) source of FX Not protracted breaches 32 16

17 The new treatment of SOEs debt The old rule was that all SOEs external debt was included in the DSA. The new treatment allows for the exclusion of those SOEs that can borrow without government guarantee and whose operations pose a limited fiscal risk. The latter is a judgment call based on the analysis of, for instance, the SOE s managerial independence, pricing and employment policies, relations with the government, auditing practices, publication of annual reports, etc. Operational Procedures Full DSAs are expected to be prepared every three years and updated annually (risk ratings need to be provided annually), unless circumstances change significantly This change will take place only after we return to normal or tranquil times Full DSAs should reflect the authorities views. DSAs should be discussed with the authorities and the final DSA templates provided to them. The authorities views should be presented in a separate short section if a disagreement occurs

18 Last Remarks A DSA is only as good as its underlying baseline scenario. It is important not to evaluate the risk of debt distress in a mechanistic manner Economic analysis/rationale is far more important than data crunching A good DSA must clearly discuss the logic of the classification and the main sources of uncertainty The DSF is not the only response to the question of the risk of excessive debt in LICs. However, it is the only detailed and standardized analysis that is publicly available. 35 Introduction Presentation Outline Why assessing debt sustainability in LICs? Why LICs? What makes LICs different? Nexus between risk of debt distress and the quality of a country s policies and institutions The DSF: how does it work The three pillars of the DSF (how the DSF works or what it is) Shortcomings and challenges The use of the DSF by IDA and the IMF Grant/Loan allocation and NCBPs 36 18

19 IDA s use of the Debt Sustainability Framework DSF a tool to assess a country s risk of debt distress is used to determine IDA s grant/loan eligibility among it s borrowers. Grant allocation is based on external debt distress risk ratings determined under the DSF. Risk ratings are translated into a traffic light system for each country: Green Low Risk of Debt Distress Yellow Medium Risk of Debt Distress Red High Risk/on Debt Distress IDA s use of the Debt Sustainability Framework Green Low Risk of Debt Distress 100% standard IDA credit highly concessional terms (0.75%; 40 & 10 yrs) Yellow Medium Risk of Debt Distress Mix of grants and loans 50%-50% Red High Risk/on Debt Distress 100% grants For medium and high risk of DD countries: grants are subject to a 20% discount from grant allocation. 19

20 IDA: The Non-Concessional Borrowing Policy In place since July 2006; applies to countries that are grant-recipients or benefited from MDRI. Objective e is to reduce the risk that non-concessional financing could lead to a re-accumulation of debt. Relies on a two-pronged strategy aimed at both creditors and borrowers: Enhance creditor coordination using DSF (collective action); Discourage non-concessional borrowing (moral hazard issue). It consists of a case by case application of waivers of the min. concessionality requirement (of 35% or more) or, if not complied with, more stringent lending conditions. IDA: The Non-Concessional Borrowing Policy IS NOT a ban on non-concessional borrowing: specific criteria for a case-by-case assessment of potential exceptions to the policy: Country-specific criteria: Overall borrowing plan Impact of borrowing on macro framework Impact on risk of Debt Default Strength of policies and institutions Loan-specific criteria: Development content Estimated returns Other potential additional costs associated Reporting requirement: enhance dialogue with borrowing countries regarding projects before borrowing occurs. 20

21 Use of the DSF by the IMF Fund surveillance: The LIC DSA is important for the Fund s overall assessment of macro-stability, the long-term sustainability of fiscal policy, and debt sustainability. The DSF integrates debt issues into and enriches Fund analyses and policy advice through its annual frequency, greater comparability of analyses across countries and inclusion of DSAs in country staff reports. Fund programs: DSA is important to determine the grant element required for a country Fund-supported programs for low income countries incorporate limits on non-concessional external borrowing IMF Debt Limit Policy Background information on debt policies in IMF-supported programs in LICs: zero-limits on non-concessional borrowing (Grant Element 35%) concessional financing is usually not restricted although flexibility has been applied on a case-by-case basis 21

22 IMF New Debt Limit Policy Capacity to man nage public resources Extent of debt vulnerabilities (DSF based) Lower Higher Lower Minimum concessionality requirement Maintain minimum based on the current system, but with concessionality requirement added flexibility on non-concessional based on current system, external debt (e.g., higher and untied likely higher than 35 percent, nonzero limits, if consistent with with limited or no room for maintenance of low debt non-concessional borrowing vulnerabilities) Higher Minimum i average concessionality Overall lllimit iton the PV of requirement applied to external or total public borrowing; for most advanced LICs, no concessionality requirements and overall nominal debt limit if needed 43 external or total public debt; for most advanced LICs, ceilings on nominal external or total public debt IDA s response IDA s NCBP will require revision though changes on how the policy is implemented: Countries would be evaluated every year based on the two criteria, and an annual waiver for some countries would be provided as opposed to the current practice of waivers for specific loans. Countries that violate the aggregate concessionality or present value ceilings would be subject to the existing NCBP disincentives. 22

23 For Further Information Information on the DSF and country DSAs can be found: Write direct questions on DSAs and concessionality issues: THANK YOU The Country Policy and Institutional Assessment (CPIA) Index calculated by the World Bank that evaluates the quality of a country s present policy and institutional framework (late 1990s) Calculated annually for all countries Used by the Bank in the context of the allocation process and the DSF It comprises 16 criteria grouped in 4 clusters: Macroeconomic management Structural policies Policies for social inclusion and equity Public sector management and institutions 46 23

24 The Country Policy and Institutional Assessment (CPIA) Countries are rated under each criterion (1 to 6) The overall rating is the simple average of the rates for all the criteria Since 2001 several improvements have been introduced to strengthen comparability across countries: Detailed guidelines 2-phase approach (benchmarking and rest of the countries) Since 2005 CPIA overall rates for IDA-only countries are publicly available 47 24