Latest News

World Bank and IMF support changes to the debt framework for poor nations

Both the?World Bank & International Monetary Fund announced on Monday that their respective executive boards have approved reforms to their joint framework for evaluating debt in low-income countries. The proposed changes reflect a complex and riskier world.

The first joint review since 2017 recommended several changes, including a more thorough analysis of the domestic debt of poor countries and a broader consideration of challenges to long-term development, such as climate change. The review did not call for a complete redesign.

The reforms aim to improve the way IMF and World Bank assess a country's ability to carry debt and to provide new tools that will help differentiate between those countries who are at risk of debt distress and those whose debts have been deemed unsustainable.

The World Bank said it would work to improve the tools and stress-tests used to ensure consistency and accuracy in forecasts. They also encouraged countries to improve their reporting and transparency regarding debt data. The discount rate for making assessments was left unchanged at 5%.

"Overall, we have a very pragmatic goal." "Our goal is to help countries better identify vulnerabilities, earlier, and more accurately, so they can make better-informed decisions about financing and policy," said Allison Holland. She worked on the new framework for debt sustainability and is now the deputy director of the IMF’s African Department.

Holland stated that recent shocks have?reversed the improvements in the debtscape seen since 2021 and taken the number of high-risk or already in debt distress countries back to prepandemic levels.

Around?14% low-income countries are facing debt distress and another 33% are high-risk. She said that about 23% of emerging markets are at high-risk of sovereign stress.

The revised framework may help guide a debt restructuring that Senegal requested this month in exchange for an IMF bailout of $2.2 billion two years after it was pushed into crisis by a scandal involving hidden debt. IMF said that it would assess Senegal’s debt sustainability using its current framework "while also taking into consideration the implications" of the transition to the new framework.

The IMF did not provide details on how a revised framework, which takes into account domestic debt, could affect Senegal’s debt restructuring.

AFFECTED IN THE SECOND HALF 2027

IMF and World Bank say that the changes will be implemented in the second half 2027 and should allow countries to better determine how much money they can spend on development and climate adaptation while still limiting their debt vulnerability over the long-term.

The review, completed in July, confirmed that the debt-sustainability framework, introduced in 2005, was effective in identifying?debt stress episodes in advance and helping countries make informed lending and borrowing decisions.

It recommended, however, that the IMF and World Bank make changes to their framework to take into account the higher levels of debt in low-income countries. They also suggested a change in funding sources in order to include "more domestic and foreign borrowing on commercial terms". The IMF has a separate framework to assess the debt sustainability of emerging and advanced market economies. This will be reviewed by both institutions in the coming years.

IMF stated that the near-term and medium-term projections used in analyses were generally reliable. However, longer-term forecasts, especially for state-owned companies, showed an "optimism-bias" and had data gaps.

The new framework includes a module for long-term risk assessment, which adds more granularity. It also has specific thresholds to measure the overall stress of public debt.

The IMF board agreed to delay the publication of the models used to evaluate unsustainable debt for a period of time, to allow the new methods to be adjusted. It said that for the time being, data would be shared with the board using standalone staff notes.

(source: Reuters)