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This paper was prepared during an internship by Ms. Baduel with the IMF Finance Department. The authors wish to thank Robert Powell, Patrick Njoroge, for their guidance of the project, and members of the African, Finance, and Strategy, Policy and Review Departments of the IMF for many helpful comments. Special thanks to Ivetta Hakobyan for additional work on the database and preparing charts and tables.
World Bank (2006) defines external public debt as being sustainable “when it can be serviced without resort to exceptional financing (such as debt relief) or a major future correction in the balance of income and expenditures”. The DSF includes country ratings in terms of debt sustainability. In this paper, we consider external debt to be sustainable when debt ratios are below their respective benchmark thresholds in the baseline scenario and thus when countries risk of debt distress is considered low or moderate (See Box 1).
The HIPC Initiative was launched in 1996 by the IMF and the World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. It has led to debt relief in 36 out of 39 countries eligible for HIPC Initiative assistance. HIPC debt relief is granted following a two-step process. Countries must meet certain criteria in terms of macroeconomic track-record and commitment to poverty reduction. The Fund and Bank provide interim debt relief in the initial stage (the “decision point”) and, when a country meets its commitments, the full amount of debt relief on eligible debt is provided (the “completion point”).
The MDRI complemented the HIPC initiative from 2005 by providing full debt relief on eligible debt from the IMF, the International Development Association (World Bank) and the African Development Fund (African Development Bank). To qualify for debt relief, eligible countries must be current on their obligations to the IMF and demonstrate satisfactory performance in macroeconomic policies, public expenditure management and poverty reduction strategy implementation. Reaching the HIPC completion point is a requirement for debt relief under the MDRI.
See IMF/World Bank (2004a), (2005), and (2012). The last paper proposed, among other things, revisions to some policy-dependent thresholds, strengthening the analysis of total public debt and fiscal vulnerabilities, greater use of models developed by IMF and World Bank staffs to better capture investment-growth linkages, and simplifying the template. See also IMF (2009b).
The choice of two-year, rather than annual, intervals reflects i) a need for a sufficiently large dataset, as in some cases DSAs were not issued during one of the three chosen years, in which case a one-year earlier or later DSA was included (see Table 1, first footnote); and ii) the need to work with a tractable dataset (individual DSA files are large).
Countries that did not reach HIPC completion point between 2006 and 2010 may have still benefited from debt reduction during this period however, through for example a Naples flow treatment, or through interim relief following HIPC decision point.
Unless specified otherwise, all aggregated series in this study are calculated as the simple mean of the total sample. Debt refers to public and publicly guaranteed external debt in present value terms.
Due to lags in data capture, DSA preparation and issuance, the effects of the global crisis and the food/fuel shocks would not be captured until later DSAs.
DSA projections span 20 years; thus the 2006 DSA projections extend from 2006–2026, 2008 projections from 2008–2028, and 2010 vintage DSAs from 2010–2030.
Ratios of debt and debt-service-to government revenues are not included in the figures for 2006, as the denominator (government revenues) was not systematically included as a specific output in LIC DSAs at that time.
Between 2008 and 2010, only two countries in the dataset experienced downgrades in staff’s assessment of their risk of debt distress.
In the external DSA, financing needs refers to the country’s gross external financing needs: debt and debt service falling due plus the non-interest current account deficit.
Bolivia (until 2017), Burkina Faso (2016), Cameroon (2024), Ghana (2016), Guyana (2013), Honduras (2014), Lesotho (2018), Mozambique (2015), Tajikistan (2016), Tanzania (2017), Tonga (2012), Vietnam (2013), and Yemen (2016).
HIPC-eligible countries included in the sample are: Bolivia, Burkina Faso, Cameroon, Chad, Comoros, Ghana, Guyana, Honduras, Kyrgyz Republic, Mauritania, Mozambique, and Tanzania.
Fund programs for LICs typically stipulate minimum concessionality for new disbursements of 35 to 50 percent.
As noted in Box 1, the DSA assigns each country a risk rating based on the results of the external DSA analysis. The four categories are low-, moderate-, and high-risk, or in debt distress. In the 2010 sample, 8 countries were judged low-risk, 13 moderate-risk, and 8 as high-risk or in debt distress. The observations in this paragraph are especially tentative owing to the small subsamples.
This result seems to be driven mainly by the following countries: Burkina Faso, Comoros and Djibouti.
Defined in the DSA as current-year interest payments divided by previous period debt stock.
The alternative scenario of less favorable financial conditions assumes a nominal interest rate 200 basis points higher than in the baseline scenario (see Box 1).
Bolivia, Burkina Faso, Cambodia, Comoros, Djibouti, Georgia, Guyana, Lesotho, Mauritania, Mozambique, Myanmar, Tanzania, Tonga, and Vietnam.
Angola, Cambodia, Comoros, Georgia, Lao PDR, Mauritania, Mozambique, Nepal, Tajikistan, Tonga, and Vietnam.