The World Bank’s Role in, and Use of the Low-Income Country Debt Sustainability Framework
Chapter 8 | Findings and Recommendations
The reforms to the LIC-DSF introduced in 2017 have been implemented as planned. There has been an increased use of country-specific stress tests covering market financing, natural disasters, commodity price volatility, and contingent liabilities. Application of judgment has followed agreed guidelines. The introduction of realism tools helped moderate the degree of optimism in medium-term growth projections underpinning DSAs.
The realism of long-term projections in DSAs was not routinely assessed. Realism tools were applied almost exclusively to medium-term projections, with the exception of one tool showing 10-year debt forecasts across various DSA vintages. At the same time, there has been some minor reduction in the optimism of long-term growth forecasts in recent years. On the other hand, long-term forecasts of primary balances showed increased optimism compared with historical averages. Case studies indicated a tendency for DSAs, since the implementation of the reforms in 2017, to have long-term growth assumptions more in line with historical averages but more optimistic primary balance forecasts.
Although the 2017 LIC-DSF guidelines assign the lead to the World Bank in producing long-term growth projections, there is significant variation from country to country in the extent and form of the World Bank’s contribution to long-term projections. Only 10 percent of World Bank economists who were surveyed reported leading work in this area, and another 30 percent reported having significant or shared responsibility with the IMF.
There has been an increase in attention to the implications of climate change for debt sustainability in DSAs, particularly for the most vulnerable economies. About 60 percent of all DSAs discuss climate change or natural disasters. For a subset of countries particularly vulnerable to climate shocks—Small Island Developing States (SIDS)—climate change considerations were incorporated in 13 of 18 baseline projections and in 15 of 18 tailored stress tests. Climate change was discussed in four of nine case study countries, but it was incorporated only in long-term growth assumptions for two countries. Country clients have expressed a desire to see greater attention to climate change impacts on long-term growth in DSAs.
Since the 2017 LIC-DSF reform, discussion of debt data coverage in the DSA has improved, and shortcomings are mentioned, including with respect to contingent liabilities and the activities of SOEs. However, DSAs do not regularly discuss data quality and do not consistently articulate concrete plans to address shortcomings in debt data coverage. There may be scope for DSAs to draw more directly on diagnostic tools such as the DeMPA in assessing the adequacy of debt reporting and recording and of related dimensions of debt management (for example, cash management and control of guarantee issuance).
Until recently, World Bank staff preparing DSAs did not consistently draw on the data contained in the World Bank–managed DRS or seek the views of the DRS unit on DSAs. DRS data, although having their own limitations, nevertheless form a valuable debt data resource, and compliance is legally required of World Bank borrowers. It was only in April 2021 that a formal requirement was introduced to have the staff overseeing the DRS comment on data quality and coverage in DSAs. Efforts to systematically draw on the data in the DRS and the expertise of the DRS unit in DSA preparation have helped improve the awareness of potential gaps in data coverage and should be sustained if not enhanced.
There is close collaboration between World Bank and IMF staff working on DSAs, although recent changes to World Bank internal clearance processes have slowed processing times, which (as World Bank staff have reported) stressed the relationship with the IMF. A majority of World Bank economists working on DSAs rated World Bank–IMF collaboration in the preparation of DSAs as “good” or “very good.” There were some differences of opinion between World Bank and IMF staff on assumptions in DSAs, which is to be expected as part of a robust process for an inherently complex analysis prepared across institutions, and almost all of these differences of opinion were resolved at the technical or managerial level. World Bank economists reported that the World Bank’s recent ADM, which formalized World Bank clearance and approval processes for DSAs, had strengthened the internal LIC-DSA preparation process and improved internal contestability and the quality of the World Bank’s inputs. However, they also indicated that the new ADM processes had created delays, stressed the relationship with the IMF, and made the World Bank less agile in reviewing and clearing DSAs. Although the World Bank’s stronger engagement in LIC-DSA preparation is positive, it is important to ensure that clearance processes do not make the World Bank less agile in supporting DSA production.
For the most part, World Bank operational priorities are appropriately influenced by the level of debt distress as determined by the LIC-DSF. This is reflected, for example, in the extent to which DPOs for countries at higher risk of debt distress have a higher share of fiscal and debt-related prior actions. However, the share of fiscal and debt-related prior actions has decreased since 2017, despite a worsening in country risk ratings. At the same time, fiscal and debt-related prior actions and SDFP PPAs often prioritize the major drivers of debt stress or reporting risks, but this is not always the case. Case studies indicate that DSAs regularly informed DPO reforms and the majority of SDFP PPAs. However, some SDFP PPAs targeted debt issues that had not been identified as problematic in DSAs.
Based on the above findings, there is scope to strengthen the World Bank’s contributions to the DSA and the extent to which the results of LIC-DSAs inform World Bank corporate and operational decisions:
- Expectations of the World Bank in taking the lead on long-term growth prospects should be clarified. Given the World Bank’s development mandate, current guidance is appropriate but comes with the expectation that the World Bank systematically take the lead in highlighting the country-specific factors that influence long-term growth, which is not currently the case. To do this effectively, the World Bank will need to strengthen its capacity to systematically identify country-specific determinants of long-term growth and fiscal prospects in DSAs. These should be more explicitly identified in DSAs and used to inform realism tools and stress tests, the horizon for which should be extended into the long term. Integrating long-term considerations into DSA projections will require enhanced awareness and use of tools to analyze long-term prospects.
- The recently increased attention to debt data coverage should be sustained and extended; greater attention is needed to assess data quality. Although DSAs routinely include a clear and up-front assessment of the coverage of the data on which DSAs are based, they do not always articulate concrete plans (if any) to address specific data shortcomings, particularly with respect to SOEs and associated contingent liabilities. The LIC-DSF guidelines do not explicitly require an assessment in the DSA of data quality, including with respect to requirements for timeliness of reporting and accuracy and identification of data sources. Strengthening these aspects of DSAs would bolster country incentives for timely, accurate, and comprehensive reporting of debt data and help channel technical assistance to entities within countries responsible for debt reporting. The World Bank’s stewardship of the DRS and its management of the DeMPA suggest that it has the comparative advantage among development partners to lead on this issue and can draw on its convening power to work with other partners to foster stronger debt data quality and coverage.
- The DSA should be more directly and consistently used to inform priorities for the identification of fiscally oriented prior actions in DPOs and SDFP PPAs. Drawing on the drivers of indebtedness and sources of risk identified therein, the DSA should be considered a core diagnostic that is routinely updated and systematically used to inform the articulation of priorities for Bank Group–supported strategies and operations (including prior actions in relevant DPOs and PPAs under the SDFP).
- The World Bank should continue to give increasing attention in the LIC-DSF to the long-term implications of climate change, in terms of both growth and fiscal requirements of adaptation and mitigation. The emergence of the CCDRs is a positive development, and efforts will be needed to ensure that the analysis they contain is adequately and systematically integrated into DSAs, with more forward-looking assessments of vulnerability to climate change for both the medium and long term. As part of this, the World Bank should consider extending the forecast horizon for DSAs to 20 years, at least for countries most vulnerable to climate change, to enable the incorporation of both medium- and longer-term impacts of climate change.
The upcoming joint World Bank–IMF review of the LIC-DSF offers several opportunities for strengthening the LIC-DSF more broadly. Among issues that could be considered in the context of the joint review, this evaluation points to the following:
- Although the World Bank has recently strengthened its participation in the LIC-DSF, the joint review provides an opportunity to review preparation and approval procedures to ensure that DSAs are produced on a timely basis.
- Given the changes to IDA20 financing arrangements, how best to incorporate financing assumptions in DSAs should be reviewed.
- The review could consider how to strengthen the use of realism tools for longer-term assumptions. In particular, the upcoming review offers the opportunity to assess how climate change impacts on long-term growth and finances can be better incorporated into the LIC-DSF, including with more forward-looking assessments of vulnerability to climate change.