V Concluding Remarks

Bergljot Barkbu, Marie-Helene Le Manchec, and Christian Beddies
Published Date:
February 2009
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History has shown that debt sustainability matters for sustained development. LICs have struggled with large external debts and destabilizing macro-economic outcomes, and ultimately development has been constrained. Now many LICs' debt burdens have been reduced as a result of debt relief, raising new challenges. As described above, the DSF has been designed to help guide countries and donors in mobilizing resources to finance LICs' development needs while reducing the chances of an excessive buildup of debt.

The financial landscape has and will continue to change. With the menu of financing options expanding and its composition changing, LICs face an array of challenges the DSF can help address. The DSF can help guide the borrowing decisions of LICs in a way that matches their financing needs with their current and prospective repayment ability, provide guidance for creditors' lending and grant-allocation decisions to ensure that resources are provided to LICs on terms that are consistent with both progress toward their development goals and long-term debt sustainability, improve World Bank and IMF assessments and policy advice in these areas, and help detect potential crises early so that preventive action can be taken.

The DSF facilitates information sharing, can serve as a coordinating device, and can help assess alternative borrowing strategies. The introduction of the DSF has improved access to information and emphasis on the debt situation in LICs, hence increasing borrowers', donors', and lenders' capacity to make informed decisions, ultimately reducing the risk of renewed debt problems. For most LICs, concessional flows will remain the most appropriate source of external financing for some time to come. But some LICs will develop faster and become more mature market economies. Nonconcessional financing then will play a more prominent role given the scarcity of concessional resources or a country's desire to tap international capital markets. The DSF is well placed to guide such decisions by showing the impact of such borrowing on overall debt sustainability.

Nonetheless, the DSF does not provide insurance against future debt difficulties. It should not be misconstrued as the silver bullet solution to future debt problems. Despite the framework's detailed analysis and its built-in safeguards, it rests on assumptions and a fair amount of judgment. In a nutshell, the DSF is not the only possible answer to the question of LIC's default risk, but so far LIC DSAs offer the most detailed analysis in the public domain.

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