Sri Lankan railway workers: Reforms to the debt limits policy would help countries manage debt prudently while still allowing them to invest in much-needed development (photo: Newscom)
IMF LENDING
According to the report, the debt environment in many parts of the world has changed significantly since 2009. In emerging markets and advanced economies, debt ratios have been rising, whereas many low-income countries now have welcome borrowing space, thanks to improved economic performance and debt relief initiatives. In all cases, the IMF seeks to ensure that its policies allow member country authorities to manage their borrowing in a prudent, sustainable way.
The IMF’s policy on debt limits places restrictions on how much and what kind of debt countries can contract under an IMF-supported program. The report examines recent experience under the policy, which was last modified in 2009. In this latest review, the institution also explores options for strengthening how its debt limits policy is implemented and ensuring that it is applied consistently across all member countries.
The initial report has been discussed by the IMF’s Executive Board, which has endorsed the notion of reforming the policy and given IMF staff the green light to develop a list of concrete proposals in the coming months.
In the following interview, Laurence Allain of the IMF’s Strategy, Policy, and Review Department discusses why the IMF is looking at changing its debt limits policy and what the potential reform could mean for member countries.
IMF Survey: Why has the IMF decided to review its policy on debt limits at this time?
Allain: Our broad policy on debt limits has been in place since the 1960s. The policy was reformed in 2009, so it is time to step back and take a look at how these reforms are working out in practice.
In low-income countries, debt numbers have been broadly stable on average, but this stability masks much disparity among countries. Since 2009, nine more countries have met the requirements for full debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). For these countries, debt ratios continue to decrease as debt is written off and their economies grow. But for countries that received debt relief earlier—and for countries that were not eligible for the initiatives—debt ratios have started climbing again, in some cases quite quickly.
Also, the array of financing that low-income countries can tap into keeps expanding, including financing at market rates. This also makes it a good time for us to look at how the policy is being implemented so we can make sure it keeps up with the times.
IMF Survey: What are you trying to achieve with this review?
Allain: While the IMF’s debt limits policy applies to all member countries, the focus in recent years has been on responding to the changing borrowing environment for low-income countries. In particular, many have increased borrowing space thanks to debt relief and strong economic growth, and they also have expanded borrowing opportunities because more creditors are interested in lending to low-income countries. For emerging market and advanced economies, we have found that the policy has worked broadly as we expected it to, and we don’t see a strong need to change it.
We see three key objectives for our low-income members:
• Strengthen safeguards for debt sustainability. In low-income countries, the debt limits policy currently focuses more on the terms of the borrowing rather than on the volume of borrowing. We would like to strengthen the focus of the policy on safeguarding debt sustainability, which implies paying more attention to the amount of borrowing—a country’s overall debt. After all, regardless of the terms, if you borrow too much, you will eventually run into debt problems.
• Increase flexibility for countries to manage their borrowing. The first objective has to be balanced with the need to ensure that low-income countries are still able to secure adequate financing for their long-term development. So we need to ensure that there is enough flexibility in the debt limits policy to give countries sufficient leeway to manage the financing that they need. Within a sustainable borrowing envelope, they should be able—when appropriate—to tap the new sources of financing that are available to them, including non-concessional financing for projects with high rates of return.
• Preserve incentives for concessional financing. Any reform to the debt limits policy must preserve incentives for lenders to provide financing on very favorable terms to low-income countries, and we should also preserve incentives for low-income countries to borrow as cheaply as possible.
IMF Survey: How would member countries benefit from the proposed reforms?
Allain: For low-income countries that borrow, we see the start of a new era. The HIPC initiative is almost complete—35 out of the 39 eligible countries have benefitted from full debt relief. Going forward, we want to make sure the hard-won gains from debt forgiveness are preserved and that new debt accumulation doesn’t derail the implementation of these countries’ development agendas. At the same time, we recognize that countries have very large investment needs, so it’s important to balance these two objectives.
For countries and institutions that lend, the additional safeguards in the proposed reforms will help ensure that creditors are repaid. This, in turn, will strengthen the incentives for creditors to continue to offer development financing, which developing countries really need.
We also hope the reform will have some practical benefits. We are looking at how to streamline the policy and make it easier to implement. For example, as we develop the operational aspects of the reform, we will focus on strengthening the broad institutional framework for investment, while giving countries more leeway on individual loan decisions.
We’ll also try to simplify how concessionality is assessed to address concerns that our low-income country membership has raised.
These concerns have arisen because the degree of concessionality of a given loan can change over time in ways that are hard to anticipate. This is because concessionality is assessed using a discount rate which is periodically adjusted to reflect movements in interest rates in advanced economies. As a result, a loan that is concessional when it’s being negotiated may turn out to be nonconcessional later on, simply because the discount rate used to assess conditionality has changed in the meantime. As a result, investment can end up being delayed or cancelled for no substantive economic reason.
IMF Survey: What are the next steps?
Allain: The purpose of the debt limits paper was to lay out the findings of the review for discussion by the IMF’s Executive Board. We received broad guidance from the Board; we now plan to consult the other stakeholders—government authorities, lenders, other multilateral institutions, and civil society organizations—to get input on the design of the operational reforms. All this input will inform the policy reform proposal, which we intend to put to our Executive Board by the end of the year.
