Debt relief

After debt relief – what next?

Ensuring that debt levels remain sustainable over the long term in the world's poorest countries is a joint challenge for debtors and creditors. Specifically, this means:

  • Debtor countries, creditors and financial institutions must jointly ascertain, when a lending/borrowing decision is made, that the measures proposed for financing are of a high quality, and they must base the decision on realistic forecasts for economic growth in the debtor country. This includes taking account of potential crises.
  • In order to detect overindebtedness risks early on, lenders and borrowers must push for greater transparency and improve the exchange of information.
  • Debt management in the borrowing countries needs to be further improved. Developing countries must be assisted in devising responsible debt strategies that are consistent with national development strategies. Internal monitoring mechanisms should also be strengthened.
  • With a view to attaining good financial governance, transparent and efficient public financial management systems must be set up.
  • Transparency is crucial to good governance and sustainable economic growth. This applies, in particular, to payment flows in the extractive sector and to industries with high proportions of public finance (health, infrastructure).
  • It is incumbent on all lenders to take debt sustainability aspects into account before extending loans.
  • Markets must be opened up to products from developing countries. At the same time, developing countries have to diversify their range of export products, so as not to be dependent on exporting just a few key commodities.

Debt Sustainability Framework

In 2005, the International Monetary Fund (IMF) and the World Bank set up a Debt Sustainability Framework (DSF). It serves as a decision-making aid for granting loans to the poorest countries.

Debt sustainability is assessed, among other things, on the basis of the performance of a country's institutions and its policymaking. Another aspect that is included in the analysis is the country's vulnerability to external negative impacts. If a country is deemed to be at risk of overindebtedness, it receives grants rather than loans.

The Debt Sustainability Framework is subject to regular reviews. In September 2017, discussions on a new version of the DSF began. It entered into force in July 2018. Among other things, more comprehensive economic data is to be used in the debt sustainability analyses, and risk analysis is to become less standardised, taking into account more country-specific factors.

Lending guidelines

More transparency, increased exchange of information and common minimum standards used by all official lenders could help ensure high-quality lending and address debt distress risks at an early stage. Various international bodies have looked into this and drawn up relevant guidelines.

For instance, the members of the OECD adopted guidelines in January 2008 for sustainable lending in the context of official export credits and guarantees for low-income countries. A revised version was presented in 2016.

The United Nations Conference on Trade and Development (UNCTAD) also adopted principles for responsible lending and borrowing in 2012. The G20 countries, too, adopted Operational Guidelines for Sustainable Financing under Germany's Presidency in 2017, in order to ensure that creditor and debtor countries' lending and borrowing practices will facilitate sustainable public debt levels.

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