1. A joint Bank-Fund workshop was organized in Washington, D.C. as part of a series of workshops on debt sustainability in low-income countries (see SM/03/185, Supplement 1, 7/10/03) intended to bring together policy makers in donor and recipient countries, and in the multilateral institutions, as well as representatives of NGOs, academia, and think tanks, to further understanding of the issues. The discussion at this workshop, as well as the discussions at earlier ones held in Paris, Berlin, and Accra during May-June, will inform the joint Bank-Fund paper on the policy implications of debt sustainability in low-income countries to be circulated for Board discussion later this year.

2. The work shop was designed to help improve understanding of the policy issues involved in making financing decisions and in assessing debt sustainability in post HIPC and low-income countries. Participants recognized that this is important to help ensure that the progress toward sustainability resulting from HIPC relief is not undermined, and that the financing of the Millennium Development Goals (MDGs) is provided on terms that do not create future sustainability problems. Some participants expressed concern that HIPC debt relief in some cases was not sufficient to bring countries to a sustainable position to begin with.

3. There was general acknowledgement that there is no strong basis in cross country experience to support a specific threshold for determining the margin between a sustainable and an unsustainable debt burden in low income countries. Participants agreed that in assessing sustainability it is important to employ a range of different indicators, reflecting both debt-service burdens and debt stocks relative to a number of denominators, including current and projected revenues, exports, and GDP. An important issue discussed was the trade-off between the clarity and simplicity of the framework for assessing sustainability and the need to tailor such assessments to take account of country-specific circumstances. A framework based on a single threshold, as in the HIPC Initiative, would offer clarity and simplicity, while a more complex, and perhaps subjective, approach based on several indicators would provide greater country-specific differentiation. The importance of including domestic public debt in an assessment of debt sustainability was also stressed by a number of speakers. However, the difficult issue of whether the debt of all public enterprises, including viable, profit-based enterprises, that have access to commercial loans and/or enclave projects, should be defined as part of public debt, remains to be resolved.

4. In defining debt sustainability for low-income countries, it was recognized that we need to move from a backward-looking approach used to provide debt relief under the HIPC initiative to a forward-looking approach for making judgments about financing, borrowing and debt management strategies. Such a forward-looking approach will need to be underpinned by an assessment of the fundamental determinants of a prudent debt bearing capacity that would take into account country-specific factors, such as the quality of a country's policies and institutions, its past and prospective growth performance, the degree of openness of the economy, the volatility of revenues and exports, and its vulnerability to shocks. The role of stress testing, to better factor in country-specific risks in determining the appropriate amount of new borrowing, was also discussed. However, a number of speakers cautioned that such an approach could result in more conservative approaches to financing decisions.

5. There is a growing recognition that exogenous shocks pose a major risk to sustainability and that we need to develop better tools to help countries deal with these shocks. There were some interesting proposals that will need to be explored further. Among these were the possibility of devising a scheme that would pool risk among the low-income countries by issuing IDA credits in local currency units and active support of the development of market hedging instruments.

6. Participants discussed preliminary results from research conducted at the World Bank on the effect of three variables on the probability that low-income countries will experience debt servicing problems (or "debt distress"): the country's debt burden, the quality of its policies, and its experience of exogenous shocks. This research has potentially important implications for assessing the appropriate composition of loans and grants in development assistance.

7. Participants discussed the challenge of how to mobilize additional finance to support stronger policies in attaining the MDGs and to help ensure that finance is provided on appropriately concessional terms. Participants stated that mobilizing sufficient grants will continue to be a major challenge.

8. The work on debt sustainability is only one element of the broader agenda to help contribute to higher growth outcomes in low-income countries and the attainment of the MDGs. This broader program aims at strengthening policies and institutions, and promoting growth and stability. These are of fundamental importance for debt sustainability, since they strengthen countries' capacity to service debt in the future. Important elements of the work program include:

· Making progress in the Doha Round on multilateral trade liberalization;

· Strengthening macro-policies, institutions, and governance, and their contributions to better growth outcomes;

· Increasing the volume of grants and streamlining the administrative burden and other inefficiencies associated with present delivery mechanism for ODA;

· Helping low-income countries to prepare better for exogenous shocks-including through export diversification-and to cope with them when they occur.

9. There were two more meetings on debt sustainability in low-income countries in Dubai: one to brief senior policy makers on the work so far and on the work program ahead, and one with civil society. There will also be another meeting with the MDBs in late October. In the meantime the IMF and the World Bank staff will be working on a joint paper for their respective Boards by the end of the year that will lay out a framework to guide policies in support of debt sustainability in the two institutions.