Debt Sustainability and Debt Management
The WBG helps low-income countries achieve their development goals without creating future debt problems.
- An essential initiative in this endeavor is the joint Bank-IMF Debt Sustainability Framework (DSF), which allows creditors to tailor their financing in a way that anticipates future risks, and helps clients balance the need for funds with the ability to repay their debts.
- A second initiative is the Joint Bank-IMF Debt Management Facility (DMF). Now in its second phase of funding (DMFII), this joint WBG-IMF multi-donor trust fund supports work that strengthens debt management capacity and institutions in developing countries to reduce their vulnerability to shocks and safeguard debt sustainability.
In 1996, the WBG and the International Monetary Fund (IMF) launched a debt-relief program, the Heavily Indebted Poor Countries (HIPC) Initiative, in response to accumulation of unsustainable, developing-country debt in the 1970s and 1980s. It called for voluntary debt relief by all creditors, and gave eligible countries a fresh start on foreign debt that had placed too great a burden on resources for debt service. Thirty-nine countries were eligible for HIPC debt relief, and by September 2014, 35 of them had reached the “completion point,” receiving the full amount of irrevocable debt relief for which they qualified.
In 2006, recognizing that countries that had graduated from HIPC were struggling to make progress towards the UN Millennium Development Goals (MDGs), a second phase of debt relief was launched to help meet these goals. It is the Multilateral Debt Relief Initiative (MDRI), which offers full debt relief for eligible debt held by low-income countries that have completed the HIPC process.
Another initiative is the Debt Reduction Facility (DRF), which focuses on assistance to countries in the buy-back of commercial debt. The WBG also helps low-income countries reduce their external commercial debt burden through the DRF, administered by the International Development Association (IDA), the WBG’s fund for the poorest countries. The DRF provides grants to HIPC countries to develop comprehensive external commercial debt-reduction strategies, and buy back eligible public, and publicly guaranteed external commercial debt claims at deep discounts. Since its establishment in 1989, the Debt Reduction Facility has helped IDA-only countries to reduce their external commercial debt considerably as part of a comprehensive debt resolution program.
Debt Sustainability and Debt Management
The WBG’s debt experts have developed a range of tools and guidelines for best practices in debt management and for helping to ensure that a country’s debt load is sustainable:
- Debt Sustainability Analysis (DSA), deployed in countries on a regular basis as part of the Debt Sustainability Framework to examine the country’s debt load and payment plans.
- Debt Management Performance Assessment (DeMPA), which evaluates strengths and weaknesses in public debt management in a “snapshot” of existing policies, practices, and capacity.
- The Medium-Term Debt Management Strategy (MTDS), which provides a framework for formulating and implementing a debt management strategy over approximately three to five years. It helps determine the appropriate composition of the debt portfolio, taking into account macroeconomic indicators and the market environment.
- The Debt Management Reform Plan, which lays out a detailed, country-owned, capacity-building plan for policy and institutional reform, based on a comprehensive analysis of public debt management operations. The goal of the plan is to alleviate the weaknesses identified by assessments of debt management performance.
- Domestic Debt Market Development: intensive technical assistance is provided to help clients develop and deepen their debt markets.
A team of debt management experts provides training in these tools, as well as on-site technical assistance and other support to debt managers in developing countries. The DMF, which recently formalized a partnership between the WBG and IMF, supports this work in the poorest countries. The work adjusts to meet countries’ needs, including developing programs to help countries develop domestic debt markets while maintaining sustainable debt levels, and formulating overall risk management plans for debt portfolios.