After debt relief – what next?

Child in Abidjan's Abobo District, Côte d'Ivoire.

Ensuring that debt remains sustainable over the long term in the low-income countries is a joint challenge for debtors and creditors alike. This is important to ensure that the debt burden of these countries does not again pose an obstacle to de­vel­op­ment.

Specifically, this means:

  • Debtor countries, creditors and financial institutions must ascertain that measures proposed for financing are of high quality, and they must base their lending/borrowing activities on realistic economic growth forecasts for the debtor country. This includes taking account of potential crises.

  • Lenders and borrowers must work together to achieve greater transparency and to improve the exchange of information. Only in this way can the danger of over-indebtedness be recognised early.

  • Debt management in the borrowing countries has to be further improved. Developing countries must be assisted in devising responsible debt strategies that are consistent with national de­vel­op­ment strategies. Internal control mechanisms should also be strengthened.

  • Support must be given to building trans­pa­rent and efficient public finance systems along the lines of good financial governance so that in future the actual borrowing requirement can be assessed and risks in the revenue and expenditure structure pinpointed.

  • More trans­pa­rent payment flows in the raw materials sector and greater transparency in sectors of the economy that are largely publicly financed (health, infrastructure) are crucially important for good governance and sustainable economic growth.

  • It is incumbent on all lenders to take debt sustainability aspects into account before extending loans. The debt sustainability analyses of the World Bank and the IMF provide a source of valuable guidance in this respect.

  • Markets must be opened up to products from developing countries. At the same time developing countries must diversify their range of export products so as not to be dependent on the export of just a few raw materials.

Debt Sustainability Framework

In 2004, the IMF and the World Bank set up a debt sustainability framework (DSF). The framework serves to guide IDA, the concessional lending arm of the World Bank, and the African De­vel­op­ment Fund (ADF) in their decision-making on lending to low-income countries. The essence of the framework is that any new lending to low-income countries must be in line with the debt situation in the specific country in question.

Debt sustainability is assessed, for example, on the basis of the quality of a country’s institutions and policy-making as well as on other key indicators. Its vulnerability to shocks impacting on the country from the outside is also measured. A country that is rated as being at risk of external debt distress receives grants in place of loans.

Lending guidelines

Common minimum standards used by all providers of official credit could help ensure high-quality lending. Discussions are currently under way in various in­ter­na­ti­o­nal bodies with a view to achieving that goal.

To supplement the DSF, in January 2008 OECD member states brought out a set of principles and guidelines to promote sustainable lending practices in the provision of official export credits and credit guarantees to low-income countries. The aim of the guidelines is to ensure that taking account of debt sustainability aspects becomes even more systematic in decision-making processes. The United Nations Conference on Trade and De­vel­op­ment (UNCTAD) is also currently developing principles for responsible lending and borrowing.

However, it is not enough for lenders to simply to draw up guidelines. It is vital that borrowing countries establish their own strategies for responsible borrowing.

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