Via IMF (Den Internationale Valutafond)

IMF Executive Board Discusses the Reform of the Policy on Public Debt Limits in Fund-Supported Programs

November 11, 2020

Washington, DC:
The Executive Board of the International Monetary Fund (IMF) discussed
on October 28, 2020 a staff paper on “Reform of the Policy on Public
Debt Limits in Fund-Supported Programs, which reviews the IMF’s policy
on the use of quantitative conditionality on public debt in Fund
supported programs (the “debt limits policy”) and proposes some
modifications. These proposed modifications build on those made in the

2014 review of the debt limits policy

The current review of the debt limits policy is taking place in a
context where a broad trend toward heightened debt vulnerabilities in
many countries was exacerbated by the COVID-19 shock. There have also
been changes in the credit landscape facing low income countries
(LICs), with concessional financing becoming scarcer relative to
countries’ investment needs and with an increasing number of LICs
beginning to access financing from international financial markets.
Against this background, the staff paper outlines a set of reform
proposals that would provide countries with more flexibility while
still adequately containing debt vulnerabilities.

The review finds that, for countries implementing IMF supported
programs, public debt vulnerabilities have been broadly contained.
However, experience points to a migration off-balance sheet of some
debt-related risks and to shortfalls in debt transparency more
generally. Among LICs that have started accessing international
financial markets on a significant scale, the form of debt
conditionality that has often been used does not align well with their
new credit landscape. It also appears that IMF supported programs have
at times been more restrictive on non-concessional borrowing than
anticipated. There have also been technical challenges in evaluating
the concessionality of some loans.

In response, the proposed reforms would: (i) better encourage adequate
debt disclosure to the IMF; (ii) allow for greater tailoring of debt
conditionality for LICs that have been accessing international
financial markets on a significant scale; (iii) encourage the broader
use of debt conditionality in present value terms, which provides
greater flexibility to countries on the mix of borrowing terms; (iv)
facilitate the utilization of the existing policy for accommodating
non-concessional borrowing (subject to safeguards); and (v) clarify the
definition and measurement of concessional debt.

Executive Board Assessment


Executive Directors welcomed the opportunity to revisit the Debt Limits
Policy (DLP), which guides the use of quantitative limits on public debt in
Fund-supported programs. They observed that this review is taking place
when many countries are experiencing heightened debt vulnerabilities,
aggravated by the COVID-19 shock, and a changing creditor landscape, with
concessional financing becoming scarcer relative to countries’ investment

Directors agreed that, since the last DLP review in 2014, the policy has
generally worked well, while noting that there is room to improve its
effectiveness. They noted that public debt vulnerabilities have been
contained within Fund-supported programs but recognized that challenges to
the effectiveness of the policy remain. These include: (i) the migration of
debt-related risks off balance sheet and general debt transparency issues;

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(ii) unwarranted impediments to a broader use of debt limits set in present
value (PV) terms by countries normally relying on concessional financing
that are at moderate risk of debt distress; (iii) some design weaknesses
for countries that normally rely on concessional financing but have
recently started accessing international financial markets on a significant
scale; and (iv) issues with the definition of concessionality. Directors
saw a need for reforms that would provide countries with more flexibility
to manage public borrowing to finance development needs, with appropriate
safeguards to preserve or restore debt sustainability. In this context,
they underscored the important role of capacity development (CD) and
encouraged continued collaboration with CD partners, including the World

Directors concurred with the need to enhance debt data disclosure to the
Fund to improve program design, including regarding the specification of
debt limits. They supported the introduction of an explicit expectation
that critical debt data disclosure gaps should be addressed in
Fund-supported programs upfront, premised on a risk-based approach.
Directors agreed that disclosure to Fund staff would only be expected to
lead to conditionality if the vulnerability revealed by such disclosure is
deemed critical for achieving the goals of the Fund-supported program or
for monitoring its implementation. They also noted that information on
creditor composition can help strengthen program design and contribute to
the broader goal of improving debt transparency. Directors therefore
supported the requirement that program documents include a table with a
profile of the holders of the country’s public debt, calling for the
provision of supporting technical assistance where needed. Many Directors
called for the table to include debt service in addition to debt stock,
wherever feasible. They also requested that debt subject to non-disclosure
agreements be included in a special line item in the table. In addition,
many Directors called for further work on clarity in defining the
distribution of “commercial” and “official” creditors in the context of the
upcoming review of the arrears policy. Directors agreed that missing
elements would be expected to be filled in, at the latest, by the time of
the second review of the program. Nonetheless, publication of such data
must be consistent with the Fund’s legal framework for the treatment of
confidential information as well as the Fund’s transparency policy. A few
Directors considered that additional debt conditionality could be
burdensome and underscored that it should be applied in an evenhanded
manner and only if it is deemed critical.

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Directors agreed that for countries that normally rely on concessional
financing but have access to international financial markets on a
significant scale, using a tailored approach and better alignment of
conditionality with the country’s financing mix and program design is
needed. They supported the reform proposal that, where such countries are
assessed to be at moderate or high risk or in debt distress, a performance
criterion on the accumulation of public and publicly-guaranteed external
debt, specified in present value (PV) terms, would be the default choice,
with the possibility of alternative formulations where warranted to better
address critical vulnerabilities. Directors agreed that, to be eligible for
such treatment, countries should meet the requirements specified in
SM/20/157 (page 29): having had significant access to international
financial markets in recent years or access to these markets being a key
element of the program, and also having a demonstrated capacity to manage
significant levels of market borrowing.

Directors agreed that broadening the use of PV limits should be expanded
for countries that normally rely on concessional financing and do not have
significant access to international financial markets, and that are
assessed at moderate risk of debt distress. In their view, most members can
be expected to have adequate capacity to monitor conditionality on
aggregate debt levels in a manner that allows use of debt limits specified
in PV terms.

Directors agreed that where the member’s capacity to monitor debt
conditionality on aggregate debt levels is not assessed to be adequate, the
specification of debt conditionality as a limit on non-concessional
borrowing (NCB) in nominal terms, and a memo item as a limit on
concessional borrowing in nominal terms, should be retained. They agreed
that capacity would be assessed in consultation with authorities and where
relevant, informed by past experience on the quality of the member’s debt
monitoring. Directors supported higher scrutiny of borrowing plans for
countries at moderate risk of debt distress with limited space as an
additional safeguard.

Directors concurred that the presumption of a zero NCB limit should be
retained for countries that normally rely on concessional financing without
significant access to international financial markets and that are assessed
to be at high risk of debt distress or in debt distress. They supported the
proposals for providing greater clarity on the circumstances under which
exceptions to the zero NCB rule would be accommodated. These include
proposals on: (i) use of the signal-based approach for determining when a
project is integral to the authorities’ national development program and
for which concessional financing is not available; (ii) debt management
operations; and (iii) repeated NCB exceptions. Directors agreed with the
requirement, in these circumstances, to include an indicative target on
public external borrowing specified in PV terms to safeguard debt
sustainability. Many Directors called for caution in granting exceptions,
indicating that these should be limited to projects that credibly generate
good social and economic return and contribute to reducing overall debt

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Directors supported the proposed adjustments to the definitions of
concessionality, including to help prevent circumvention of debt limits.
They concurred that blended financing arrangements that include the
provision of a financially significant amount of grants-in-kind be treated
as non-concessional. A few Directors urged staff to exclude grants-in-kind
where fair value has been assessed from this treatment. Directors agreed
that financing involving unrelated collateralized debt—e.g., general
budgetary borrowing collateralized with future commodity export
revenues—should be treated as non-concessional and many Directors
encouraged borrowers and creditors to carefully consider the hidden costs
inherent in these financing arrangements. They concurred that this reform
would address potential circumvention problems that could in turn lead to a
build-up of debt vulnerabilities. Directors generally supported the
application of a single definition of concessionality (35 percent) to all
cases, agreeing that a higher concessionality threshold would still be
allowed in cases when this is deemed to be an integral part of restoring
debt sustainability.

Directors agreed that the reform proposals would provide incentives to
improve debt management capacity. They encouraged the continued use of
structural conditionality when significant weaknesses in debt management
capacity are identified in consultation with authorities, in a manner
consistent with the Fund’s Guidelines on Conditionality. Directors noted
that, in some cases, timely capacity development support (including through
technical assistance provided by Fund staff or through other providers,
where available), will be needed to improve debt management capacity.

Directors underscored the importance of close alignment between the Fund’s
DLP and the World Bank’s Sustainable Development Finance Policy. They
agreed that the DLP should take effect following the issuance of a staff
guidance note as specified in the proposed decision, with expected
effectiveness in March 2021. Directors noted that a review of the
experience in implementing this new policy would be conducted no later than
five years after the entrance into effect of the new policy, with an update
to the Board on the implementation of this policy no later than two years
after the date of effectiveness. In addition, they called for an effective
outreach strategy to ensure that the reformed policy is clearly understood
by stakeholders. Many Directors encouraged all official creditors to engage
with Paris Club and to follow responsible and transparent lending


At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found

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