Good debt management is essential to economic development, and it has become ever more important as developing countries – particularly in Africa – find it easier to issue debt and are building it up at a fast pace. As World Bank Managing Director Sri Mulyani Indrawati pointed out recently, it matters how these resources are being used: Better to target long-term gains – addressing infrastructure gaps and deploying a mix of economic incentives and investments in countries’ human potential – than to engage in short-sighted spending in which few dividends are used to fight poverty.
The World Bank Group (WBG) is working globally to help ensure that developing countries' debt burdens don't overwhelm their ability to reduce poverty or provide essential government functions. While high-profile debt relief programs have helped Africa exhibit fiscal discipline and grow faster, as the WBG’s Macroeconomics and Fiscal Management Global Practice Senior Director Marcelo Giugale has argued, vital tasks remain: training civil servants in borrowing strategies, debt accounting, loan auditing, cash-flow forecasting, and data reporting. WBG experts, who oversee debt relief programs, also advise countries on these important elements of debt management.
Debt Sustainability and Debt Management
The WBG is helping low-income countries achieve their development goals without creating future debt problems.
- One essential initiative in this endeavor is the joint Bank-IMF Debt Sustainability Framework (DSF), which allows creditors to tailor their financing in anticipation of future risks and helps clients balance the need for funds with the ability to repay their debts.
- A second initiative is the Debt Management Facility (DMF). Now in its second phase of funding (DMFII), this 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 an accumulation of unsustainable, developing-country debt in the 1970s and 1980s. This was designed to reduce the debt burden that was stifling individual nations’ efforts to reduce poverty and calls for voluntary debt relief by all creditors. It gives eligible countries a fresh start on foreign debt that places too great a burden on fiscal revenues. Thirty-nine countries world-wide are eligible for HIPC. As of September 2014, 35 countries had reached the “completion point,” receiving the full irrevocable debt relief for which they qualify.
In 2006, recognizing that countries that had graduated from the HIPC Initiative were struggling to make progress towards the UN’s Millennium Development Goals (MDGs), the WBG and the IMF launched a second phase of debt relief to help them meet these goals: 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.
Finally, the WBG also helps low-income countries reduce their external commercial debt burden through the Debt Reduction Facility (DRF), which is administered by the International Development Association (IDA), the WBG’s fund for the poorest countries. The DRF provides grants to HIPC-qualifying countries so that they can develop comprehensive external commercial debt-reduction strategies and buy back eligible public and publicly guaranteed external commercial debt claims at deep discounts.