New Funding to Help Poor Countries Manage Debt
March 7, 2014
- A multi-million-dollar debt-management trust fund, the Debt Management Facility (DMF) II, is on track to launch April 3, 2014.
- The new program will bring in a new partner: The International Monetary Fund (IMF).
- The program will extend the successful work of the Debt Management Facility (DMF), which helps low-income countries better manage their debt.
A new phase of a successful multi-donor trust fund is on track to launch April 3, 2014, with a minimum of $10 million. The Debt Management Facility II (DMF II) program builds on previous success in debt-management advisory work and marks the beginning of a new partnership between the World Bank and the International Monetary Fund (IMF). The partnership will be dedicated to strengthening the capacity of low-income countries to manage their debt in a manner that is sustainable and encourages economic development.
The new pot of money will extend the work of the first DMF, a successful $22 million trust fund that the World Bank launched in November 2008. The initiative was born out of a recognition that low-income countries graduating from debt-relief programs, such as the Heavily Indebted Poor Countries (HIPC), might continue to struggle. There was a worry that they might fall into a vicious cycle of debt and assistance.
“Several countries had been provided debt relief by multilateral donors,” said Abha Prasad, a senior debt specialist at the World Bank who manages the trust fund. “The idea was: how to build capacity to manage debt effectively and avoid accumulation of unsustainable debt?”
The sovereign debt world can be complex, and the World Bank realized that low-income countries could improve their chances of staying on track with training on how to assess risks, better negotiate loan terms, and recognize the risks of borrowing from non-traditional creditors. This acumen, in turn, could help the recipient countries spend their money in more productive ways: building infrastructure, providing access to clean water, and performing other functions essential to economic growth and poverty-reduction. Indeed, details that may seem mundane or insignificant at smaller level – an extra year in the maturity of a loan or a fraction of a percentage point lower on an interest rate – can, for a country, make the difference between providing electricity to a village or funding a school.
It's targeted, it's versatile, and it's very accessible for our clients in developing countries.
In five years, the DMF has reached out to more than 70 countries. It has provided training to more than 600 country officials. The work of the trust fund ranges from technical trainings for debt managers to expert guidance on formulating debt management reform plans. It also funds country-based assessments of debt management performance and helps countries develop individual debt strategies.
"It's targeted, it's versatile, and it's very accessible for our clients in developing countries," said Jeffrey Lewis, director of the Economic Policy, Debt and Trade Department.
Through the DMF, which is currently funded by seven countries, the European Union, and the African Development Bank, qualified debt managers from developing countries work side-by-side with debt experts at the World Bank during three-month mentorships in Washington, DC.
Stella Rusine, a debt manager in the Rwandan government, has participated in several DMF-sponsored trainings, and was in the middle of the Washington, DC mentorship program in February, 2014. She said the training and tools offered through DMF have been useful for helping Rwanda to be disciplined about its level of debt and better prepared to answer investors’ questions. For example, the country issued a $400 million Eurobond in April, 2013, she said, and faced pressure from private investors to issue more. Because Rwanda’s debt managers had been through a specific planning process sponsored by the DMF, they knew the limits of what was sustainable for the country. She said they had the information to say, “this [what the investors were asking for] is not what we can really afford.”
Some tools also have helped coordinate the different departments involved in debt issuance and management, said Rusine. Through the DC-based program, she has traveled with World Bank debt experts to Madagascar, and she said learning about other countries’ experiences has been illuminating.
“You work with countries that might go through the same issues as your country, and you learn how they deal with them,” she said. “Being exposed to different cases helps broaden your view.”
In addition to improving the public officials’ technical skills, the training and exposure to experts also empowers them to avoid unreliable creditors and resist pressure from political leaders. One African debt manager told Prasad that DMF-funded training helped him systematically assess the costs and risks of a non-traditional loan from a high-profile creditor. The debt manager was well-armed to inform the country’s policy-makers that the loan terms were unfavorable. He was able to show the political leaders how the terms did not conform to the nation’s already-published debt management strategy, a document DMF-funded technical assistance helped them create. The country rejected the offer and avoided going down a path of unsustainable debt.
Through DMF II, the World Bank, in partnership with the IMF, will expand the program and offer new services. The landscape in which developing countries borrow money has changed a great deal since the beginning of the DMF, said Prasad. Developing countries now have access to many sources of credit, not just concessional loans from multilateral organizations. Increasingly, countries are issuing bonds on international capital markets, such as Eurobond markets, a process that brings with it a new level of complexity. Governments also are looking to borrow money domestically. In recognition of these trends, the DMF II will offer assistance and training on these processes and help debt managers execute them in a manner that benefits their countries.
The launch of the DMF II is scheduled for April 3, 2014 in Brussels, Belgium, where the World Bank will be hosting a forum for debt managers, finance officers and others from developing countries. The fund currently has contributions and commitments for up to $15 million, but is hoping to reach a goal of $40 million.
To contribute funding to the DMF II, contact Abha Prasad.
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