Article

IMF will continue to keep a careful eye on debt sustainability

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2006
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Mark Allen, Director of the IMF Policy Development and Review Department, speaks to the IMF Survey about how the Multilateral Debt Relief Initiative will be implemented and why debt sustainability remains a priority.

IMFSURVEY: The IMF’s Board approved debt relief for 19 of the 20 countries identified as being eligible. What must Mauritania, which was left out, do to become eligible? And, how long will it take the countries that haven’t reached the HIPC [Heavily Indebted Poor Countries] Initiative completion point to qualify for full debt relief?

Allen: For Mauritania, the Board has asked for a six-month track record of sound economic policies, plus action to strengthen public expenditure management systems and deal with any outstanding data issues with the IMF. The 10 countries that are between the decision point and the completion point under the HIPC Initiative should reach the completion point and, therefore, get full MDRI debt relief sometime in the next couple of years provided that performance is satisfactory. In addition, there are about 13 countries that haven’t yet entered into the HIPC process, and thus haven’t yet established the track record for reaching the decision point. The process for those countries could take a little bit longer.

IMF SURVEY: How is the Fund financing the debt relief?

Allen: The IMF has largely used its own resources. We had resources in the special disbursement account from the IMF’s earlier gold transactions—the so-called off-market gold sales. This money, which belongs to the entire Fund membership, has been used to finance the debt relief for members whose annual per capita income is less than $380.

In addition, we have used resources that donor countries had previously put in trust to the Fund to provide subsidy resources for PRGF [Poverty Reduction and Growth Facility] operations. These donor resources—which can be used as the donors see fit—are being used to finance debt relief for those HIPCs whose per capita income is above $380 a year. Part of the agreement with donors was that any shortfall in our concessional resources would be made up. In fact, the G8 [Group of Eight] countries are contributing the subsidy resources we need to maintain our capacity to lend under the PRGF.

IMF SURVEY: What is the rationale for choosing a per capita income of $380 as the threshold level for automatically canceling countries’ debt to the IMF?

Allen: The rationale was largely a financial one: we had a pool of resources that we could use for the MDRI, and $380 per capita provided the optimal use of those resources and allowed us to implement a proposal that was very close to the initial G8 proposal without running through too many of our additional financial resources.

IMFSURVEY: Does the IMF’s approval of the MDRI mean that the World Bank’s IDA [International Development Association], and the ADF [African Development Fund] are now able to grant relief?

Allen: The IDA and the ADF are part of the same initiative, but we’re all working under different timetables with different considerations. The IMF had the bulk of the resources it needed to proceed with its role in the operation, and we’ve moved very quickly to put it in place. We’ve also been able to take a very recent cutoff date—the start of 2005—and that means we can cover a high percentage of the IMF’s claims on countries.

The IDA and the ADF have different issues related to financing and may have different cutoff dates, and later, different implementation dates. We are operationally independent as far as this is concerned. The speed with which the IDA gives its debt relief has no direct implication for our operation, nor does our operation, in any sense, open a door for the IDA. I trust that the judgments we make will be similar. Assessing the 20 countries discussed by the Executive Board has been an exercise in close IMF-World Bank collaboration. We obviously will continue to collaborate with the Bank.

IMFSURVEY: Are countries still responsible for the debt service on any debt incurred in 2005?

Allen: Yes, country borrowing from the Fund in 2005 will not be covered. This initiative covers only that debt owed to the Fund as of end-2004 and that is still outstanding as of the date the country reaches the HIPC completion point or otherwise qualifies under the MDRI.

IMFSURVEY: What is the next step for the IMF and its work in low-income countries?

Allen: We will continue to make the full range of our instruments available to low-income countries. For all member countries there is the Article IV consultation process, and the PRGF provides important support for a number of these countries that still have large balance of payments needs. Some have reached the point where their balance of payments needs are very small—certainly, the MDRI will have contributed to that situation—but we shouldn’t forget that the IMF’s debt claims are not the only claims. Low-income countries still have other debt. But for those that no longer require IMF resources, we may remain engaged through the new Policy Support Instrument, or we may just have the annual consultation. It will depend on what is most convenient for the country, bearing in mind the needs of the donor community, which continues to be heavily engaged in all these low-income countries.

We have also recently put in place the Exogenous Shocks Facility. If member countries that don’t have a PRGF arrangement are hit by an external shock and have a balance of payments need, we now have the capacity to lend under this new facility.

Together with the Bank, we will pay particular attention to these countries’ debt problems. We hope that the MDRI will have a substantial impact on countries’ debt sustainability, but debt sustainability is not something you gain once and for all. It’s something you need to work at regularly to ensure that you don’t move into another bout of unsustainable borrowing. That is something we are going to need to watch quite carefully, and, along with the Bank, we’ve been strengthening our analytical framework to do so.

Also, the IMF is currently undertaking a strategic review of its work, including its role in low-income countries. Obviously, we will be looking at the implementation and the impact of the MDRI and these other initiatives in the broader context of this strategic review. The Fund plays an important role—and will continue to do so—in helping these countries deal with their problems. We just hope we’re in a better position to do this now because of this debt relief operation.

New tools to help low-income countries

Over the past few months, the IMF has introduced several new instruments to expand the range of tools the organization has on hand to assist its low-income member countries. These include the Policy Support Instrument and the Exogenous Shocks Facility.

Policy Support Instrument (PSI). In October 2005, the IMF introduced the PSI, which is a new means to help low-income countries that do not need or want IMF financial assistance. In recent years, several low-income countries have made significant progress toward economic stability and have no longer needed financial assistance from the Fund. Nevertheless, they have often still sought Fund advice, monitoring, and endorsement of their economic policies.

The PSI is designed for countries that have achieved a reasonable growth performance, have low underlying inflation and adequate official international reserves, and have begun to establish external and net domestic debt sustainability. To be eligible, countries must be eligible for the IMF’s Poverty Reduction and Growth Facility (PRGF), have a poverty reduction strategy in place, and a policy framework focused on consolidating macroeconomic stability with a view to faster growth and poverty reduction. The PSI is voluntary, demand-driven, and supported by strong country ownership. Once approved by the IMF’s Executive Board, a PSI provides a visible signal of IMF endorsement of a member’s policies.

The PSI is intended to promote a close policy dialogue between the IMF and a member country, provide more frequent IMF assessments of economic and financial policies than are provided through the regular consultation process, and deliver clear signals on the strength of these policies.

Exogenous Shocks Facility (ESF). The ESF, approved by the Executive Board on November 25, 2005, is designed to enhance the IMF’s ability to assist low-income members that experience harmful economic shocks beyond their control. It will be established within the Poverty Reduction and Growth Facility (PRGF) Trust. Programs will range from one to two years, and disbursements will have the same interest rate (0.5 percent) and repayment terms (maturity of 10 years) as other PRGF arrangements.

External shocks can inflict serious damage on low-income countries, especially those with less diversified economies and a limited ability to build up reserves. Recent evidence suggests that foreign assistance can be particularly effective following a shock but must be made available quickly. Moreover, the assistance needs to be associated with sound adjustment policies, which would be set out in a program supported by the ESF.

Executive Directors chose not to predefine the shocks that would qualify for assistance under the ESF, although likely candidates are adverse terms of trade movements, natural disasters, and sudden and unexpected drops in demand for exports. The ESF is intended to provide financial support for temporary balance of payments needs, and Directors recognized that PRGF programs remain the main instrument to support members’ ongoing policy reforms.

More information about the Policy Support Instrument and the Exogenous Shocks Facility can be found on the IMF’s website (www.imf.org).

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