| September 20, 2004—The World Bank and the International Monetary Fund (IMF) are working on a framework to prevent lending to low-income countries from sparking a new debt crisis. Maintaining debt sustainability has been identified as a prerequisite to achieving the Millennium Development Goals (MDGs) - international targets to eradicate poverty in all its forms by 2015 - along with the pursuit of strong policies to promote economic growth. The proposed framework, which has been discussed by the boards of the Bank and IMF, is a forward-looking approach that will involve conducting a more systemic analysis of borrowing countries ability to repay debt before loans are approved. Vikram Nehru, director of the World Bank's new Debt Department, which oversees the World Bank's Heavily Indebted Poor Countries Initiative, said he hoped the new framework would be considered carefully by all multilateral and bilateral creditors to low-income countries. The Framework's Main Elements
In determining how much money can be lent to a country, the new framework will take into account: In countries where policies are sound, but the existing level of debt would mean new loans would jeopardize its debt sustainability, the framework calls for lending to be provided on more concessional terms or in the form of grants. Another key issue will be how to integrate the new debt-sustainability initiative into the IDA-14 negotiations which are currently underway with donor countries to the International Development Association - which provides finance to the world's poorest countries. Under the current IDA framework about 21 percent of its resources are distributed in the form of grants. Under the new debt sustainability framework, Governments in low-income countries will remain primarily responsible for maintaining their debt sustainability. This includes maintaining good policies in support of economic growth which improve a country's prospects of repaying a loan. Low-income countries should also take measures to increase their resilience to exogenous shocks by building reserves, using market instruments to hedge risks where possible and diversifying their production and export bases over the long term. The new initiative is separate from the Heavily Indebted Poor Countries (HIPC) Initiative, which will provide approximately $54 billion in debt relief to 27 poor countries with heavy debt burdens. The HIPC Initiative is a debt reduction program, whereas the debt sustainability framework is a proactive approach to help countries with their new borrowing strategy to maintain long-term debt sustainability. "The challenge that these countries face is how to ensure that debt remains sustainable while mobilizing the external resources needed to meet the MDGs," Nehru said The concept of debt sustainability differs between low and middle-income countries. Low-income countries tend to rely on official flows, so their ability to repay depends in large part on the willingness of official creditors to maintain support. Debt Continues to Rise in Developing Countries
The move comes as external debt in developing countries continues to rise. It stood at US$2.3 trillion at the end of 2002, compared with $1.4 trillion in 1990. External debt as a percentage of developing countries' Gross National Income (GNI) increased from 34 percent to 39 percent over the same period. Most of the increase was in middle-income countries, while the ratio fell slightly in low-income countries. Nehru said much of the increase in public debt in middle-income countries had been due to a rise in domestic debt, which now accounts for nearly half of total debt in emerging markets. He warned that Argentina, Russia and Turkey have shown that high levels of public debt could precipitate debt defaults and restructuring. However despite the recent increase in public debt levels, middle income countries had been awarded generally more favorable credit ratings - a sign of increased creditworthiness. This was largely the result of the excess liquidity in the global monetary system—which was partly the result of stimulatory monetary policy in the United States and other advanced economies. Nehru warned a reversal of monetary policy in the big economies could cause problems in middle income countries with high debt levels. New Debt Department At Bank
As part of its effort to strengthen the Bank's work on debt sustainability issues, the current HIPC unit will be expanded into a Debt Department. The new department will be charged with making debt issues a mainstream part of the Bank's work with low-income countries, including conducting reviews and analysis of debt issues confronting "blend" countries which are eligible for both International Development Association assistance and International Bank for Reconstruction and Development concessional loans. More on Debt Sustainability
Growth and Forgiveness Hold Key To Debt Debate
Helping Countries Overcome Shocks
Facts & Figures
10 Things You Didn't Know About the World Bank & Debt Issues
FAQs on Debt Relief
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