Executive summary
Debt sustainability The debt indicators of most developing countries improved in 2010 along with the recovery experienced after the global economic and financial crisis of 20082009. However, some countries have found it more difficult to emerge from the recession or are still coping with large deficits and reduced fiscal space, especially given the additional shocks of higher food and energy prices. The situation is acute in some lower-middle-income countries that already faced problems prior to the global crisis. In addition, uncertain forecasts for the global economy carry risks to debt sustainability, as a deterioration in economic performance could imperil smooth debt servicing. The continued emphasis on improving debt management capacities in debtor nations is crucial for sound fiscal management. Thanks to the recovery of world trade, the debt servicing-to-export ratios of developing and emerging countries have returned to pre-crisis levels, despite an increase in debt-service payments for low-income and lower-middleincome countries. However, the situation varies across countries and regions. For instance, the Caribbean, Oceania and Southern Asia recorded increases in their debt service-to-export ratios—to high levels of vulnerability in some cases. As at mid-May 2011, the International Monetary Fund (IMF) identified 19 countries that were in debt distress or at high risk of debt distress, including 8 countries that had completed the Heavily Indebted Poor Countries (HIPC) Initiative. Since June 2010, progress under the HIPC Initiative continued, with 4 countries reaching their completion points (thus becoming eligible for irrevocable debt relief under the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI)) and one country, the Comoros, reaching its decision point. As a result, as at end-March 2011, 32 out of 40 eligible countries had reached their completion points, while 4 remained between their decision and completion points. The main debt sustainability monitoring instruments are the joint IMFWorld Bank Debt Sustainability Framework for low-income countries and the IMF Debt Sustainability Analysis framework for market access countries. A review of these frameworks is currently under way, aimed at improving their analytics and thus their ability to help developing countries manage their debt situations. The international financial architecture should be better equipped to solve cases of debt distress as delays and inequities have high costs for both debtor Governments and their creditors. The existence of major gaps in the architecture for debt restructuring has been recognized in many intergovernmental agreements, including the 2010 MDG summit outcome document, where calls were made to enhance debt restructuring mechanisms. Steps need to be taken to move forward on this as appropriate debt workouts—and standstills, where needed—could ensure a fairer distribution of the burden among debtors, creditors and the population in the affected debtor country and could contribute to the achievement of the MDGs. At the same time, improvements in policy coordination are needed among international institutions, bilateral donors and recipient countries to ensure that ODA and debt relief decisions, as well as borrowing and lending decisions, keep the sustainability of debt in view.
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