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After debt relief – what next?
Ensuring that debt remains sustainable 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:
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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.
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Lenders and borrowers must work together to achieve greater transparency and to improve the exchange of information. For, only if reliable data on the debt situation are available can the danger of over-indebtedness be recognised early.
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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.
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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 debt requirement can be assessed and intrinsic risks in the revenue and expenditure structure pinpointed.
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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.
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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 International Monetary Fund (IMF) provide a source of valuable guidance in this respect.
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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) to guide IDA, the concessional lending arm of the World Bank, and the African Development Fund (AfDF) in their decision-making on lending to low-income countries.
The debt sustainability of low-income countries is assessed on the basis of the quality of a country’s institutions and policy-making and its vulnerability to exogenous shocks, alongside other important indicators. A country that is rated as being at risk of external debt distress receives grants in place of loans. In this way IDA and the AfDF make an important contribution to avoiding a return to over-indebtedness. The Framework also provides lenders and borrowers with valuable guidance for assessing the risk of debt distress.
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. It is also vital to further improve the exchange of information about new lending and borrowing, because enhanced transparency could help to alert players to the risk of renewed overindebtedness earlier on and enable them to respond in time.
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 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 still more systematic in decision-making processes.
In addition, borrowing countries need to establish their own strategies for responsible borrowing.
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