Good debt management is essential to economic development. 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.   It is more important  to target long-term gains – addressing infrastructure gaps and deploying a mix of economic incentives and investments into countries’ human potential – than to engage in short-sighted spending in which few dividends are used to fight poverty.

The World Bank Group (WBG) works to help ensure that the debt burdens of developing countries do not 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, vital-but-less-high profile 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 helps low-income countries achieve their development goals without creating future debt problems.

  • An essential initiative in this endeavor is the joint Bank-International Monetary Fund (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 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.

Debt Relief

In 1996, the WBG and the 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. Since its establishment in 1989, the DRF has helped IDA-only countries - the World Bank’s fund for the poorest - 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) which is 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.
  • 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, which provides intensive technical assistance 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 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. 

International Debt Statistics: The World Bank Group releases this annual report that looks at international financial flows, trends in external debt, and other major financial indicators for developed and developing economies. Net external debt inflows to developing countries fell 18 percent in 2014, driven by a sharp, 60 percent contraction in short term debt inflows. The combined stock of external debt of low and middle income countries rose 7 percent to $5.4 trillion at end 2014, but remained moderate in relation to Gross National Income (GNI), an average of 22 percent, and to exports, an average of 79 percent. Short-term debt constituted 28 percent of debt stock, but risks were mitigated by international reserves, equivalent to 114 percent of external debt stock at end 2014.

Lessons from International Experience on Subnational Debt Management and Restructuring: With subnational debt playing a major role in a country’s growth, this paper documents the lessons learned on how countries have successfully managed their subnational debt and also looks at how they undertook effective fiscal adjustment measures.

The Potential Role of New Financing Instruments in Addressing Debt Vulnerabilities in Small States: This paper explores two new financing mechanisms that development agencies could consider in addressing problems of debt sustainability in small states. Small states face high levels of indebtedness, and that reducing debt levels in the face of increasing climate resilience could sustainably reduce such vulnerabilities. Small state debt dynamics show that debt accumulation has largely been driven by large primary and current account deficits and slow economic growth. Debt reduction from new mechanisms can only be expected to be sustainable if countries simultaneously address the macroeconomic imbalances driving debt accumulation.