Here we go again: Debt sustainability in low-income countries
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Having cut my teeth on issues of debt sustainability in the mid-1990s working on the design and implementation of the Heavily Indebted Poor Countries Initiative (HIPC), I can’t help but have a feeling of déjà vu as concerns grow over debt sustainability in low-income countries (LICs). Unambiguously, the COVID pandemic has made things worse, but it is worth remembering that the resurgence in debt Show MoreHaving cut my teeth on issues of debt sustainability in the mid-1990s working on the design and implementation of the Heavily Indebted Poor Countries Initiative (HIPC), I can’t help but have a feeling of déjà vu as concerns grow over debt sustainability in low-income countries (LICs). Unambiguously, the COVID pandemic has made things worse, but it is worth remembering that the resurgence in debt stress in LICs was evident and under active discussion in policy circles well before February 2020.
Since 2013, the number of countries eligible for concessional financing from the World Bank at high risk of, or in, debt distress has almost tripled (from 13 to 35 (33 in 2019)) and the average debt-to-GDP ratio has increased from about 40% to 60%. This occurred alongside significant support from the international community (and the World Bank in particular) to improve the debt management capacity of LICs. Despite this, and against a backdrop of persistently low global interest rates, median interest payments from LICs rose 128% between 2013 and 2018.
Yes, hindsight is 20/20. This blog is not an attempt to claim that the current situation should have been easily anticipated (although that proposition is subject to debate) but rather to emphasize the urgency of learning from the past. It is true that many of the factors underpinning the rise in pre-COVID debt stress such as persistently low global commodity prices were not easily anticipated. The Independent Evaluation Group (IEG) recently completed the third in a series of macro-fiscal evaluations that consider, among other things, the evolution of debt stress in LICS, and offer insights to enhance the effectiveness of Bank Group support to strengthen fiscal resilience in LICs.
IEG’s February 2021 Evaluation of World Bank Support for Public Financial and Debt Management in IDA-eligible Countries, focusing on the decade following the 2008 global financial crisis, notes that many LICs sharply increased non-concessional and shorter-term borrowing to finance “growth enhancing" public investment to close infrastructure gaps and meet global development goals. Appropriately, development partners extended significant support to enhance debt management capacity over this period, with many positive results in terms of the number of countries that met minimum standards of good practice for debt management.
However, as the IEG evaluation demonstrated, this was not systematically accompanied by similar attention to the quality of public investment management (PIM), which includes the ability to systematically and transparently scrutinize the costs and benefits of public investment, in infrastructure as well as other sectors. Indeed, over the last decade, public investment management diagnostics were undertaken by the Bank for less than half of countries eligible for concessional resources from IDA, the World Bank’s fund for the poorest countries, with demand concentrated among higher-income LICs. Of the 32 IDA-eligible countries at high risk of, or in, debt distress in FY18, only 10 had received support over the previous decade from the World Bank to improve their public investment management capacity.
In July 2021, IEG released its evaluation of the World Bank Group Contributions to Addressing Country-level Fiscal and Financial Sector Vulnerabilities. This evaluation sought to assess the adequacy of the Bank Group support for macro-fiscal and financial sector crisis preparedness. It found that outside the context of stabilization efforts, the World Bank Group was less effective in working with clients to proactively expand buffers, strengthen institutions, and build capacity for better preparedness and economic crisis management. It also pointed to optimistic bias in the growth assumptions underpinning debt sustainability analyses (DSAs) as well as important gaps in the quality and availability of data on the contingent liabilities of state-owned enterprises.
IEG will soon release its Early Stage Evaluation of IDA’s Sustainable Development Financing Policy (SDFP). The SDFP was adopted in July 2020 to incentivize IDA-eligible countries to achieve and maintain debt sustainability by moving toward more transparent and sustainable financing. The core of SDFP incentives is the requirement for countries that, according to the DSA, are at moderate to high risk of debt distress (or in debt distress) to implement performance and policy actions (PPAs). PPAs are intended to enhance debt transparency, promote fiscal sustainability, and strengthen debt management. IDA-eligible countries estimated to be at low risk of debt stress using the DSA are exempt from the requirement to implement PPAs.
Noting that one-third of countries that saw an elevation in their risk of debt distress over the past decade also experienced a two-level deterioration in less than three years, the evaluation recommended that a DSA finding of “low risk of debt distress” should not be sufficient to exempt an IDA-eligible country from implementing PPAs. Given the rapidity with which debt stress can build, and the well documented optimistic tendency of the DSA, the evaluation recommended that the requirement to implement PPAs not be determined solely using the DSA. While IEG did not suggest what other criteria might be introduced for PPA exemption, LICs currently assessed at low risk of debt stress might also be required to demonstrate a minimum standard of data transparency, including with respect to contingent liabilities associated with state guarantees and state owned enterprises.
Where does that leave us now? Can we use the lessons from these three IEG evaluations to plot a path to a more resilient foundation for responsible and productive use of credit? The answer is an unequivocal “yes”.
The recent Development Committee communique shines a light directly on the importance of debt transparency and debt management capacity, calling for the World Bank Group and the International Monetary Fund “to continue coordinating efforts to strengthen debt transparency and debt management capacity, including a process to strengthen the quality and consistency of debt data and improve debt disclosure, while helping many LICs and Middle Income Countries achieve debt and fiscal sustainability“.
No one credibly disputes that greater transparency on the amounts, terms and conditions of sovereign borrowing is needed or that improvements in the ability of governments to manage their debt to minimize cost and risk is a sine qua non for responsible macroeconomic management. These are important initiatives that should continue.
But with the costs of a potential debt sustainability crisis running well into the billions, they are not enough, and IEG’s three evaluations provide some guidance on what more might be considered. First, we need to pay greater attention to the quality of spending that is financed with official sector borrowing. Indeed, this was clearly recognized by IDA Deputies in the context of the 19th Replenishment of IDA in their statement that “the first challenge is to assist IDA countries to ensure that the benefits [of borrowed resources] exceed the costs of servicing their debt. IDA and other partners can help by supporting initiatives that enhance capacity in areas such as public finance management, public investment management… and debt management”.
As a start, Multilateral Development Banks, including the World Bank, should routinely include in the set of core economic and fiscal diagnostics used to inform country strategies and set priorities, an assessment of the quality of public investment management, such as the IMF’s Public Investment Management Assessment (PIMA). Countries receiving concessional support from the World Bank and seeking to be exempt from PPA implementation might also be required to regularly conduct (e.g., every five years) a Debt Management Performance Assessment (DeMPA) to provide clarity on where greater attention is needed on debt transparency and management, with a presumption of DeMPA publication. There are other data transparency standards that could usefully be strengthened, including the World Bank’s Debt Reporting System (DRS), whose coverage could be expanded (to include borrowing by State Owned Enterprises) and incentives for compliance could be strengthened.
No one can say that the above actions would have prevented the pre-COVID resurgence of debt stress in IDA-eligible countries. But the intuitive appeal of proactive measures that promote higher quality public investment and better and more complete data about the borrowing behavior of governments, including state guarantees and state-owned enterprise debt, should not be controversial. And none of these actions are pro-cyclical, which means they can be implemented even in the midst of the COVID crisis (with donor support where capacity building is necessary). They might even enhance the resilience necessary to help avert the next hidden debt crisis or resurgence of debt stress.
Addressing Gender Inequalities in Countries Affected by Fragility, Conflict and Violence: An Evaluation of WBG Support (Approach Paper)
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The WBG recognizes that achieving gender equality is particularly challenging in those settings, but it is critical to make progress in peace building and resilience to crisis. Addressing gender gaps is a priority in FCV-affected countries because fragility and conflict disproportionally affect women and girls and exacerbate gender inequalities. The World Bank Group recognizes that effective Show MoreThe WBG recognizes that achieving gender equality is particularly challenging in those settings, but it is critical to make progress in peace building and resilience to crisis. Addressing gender gaps is a priority in FCV-affected countries because fragility and conflict disproportionally affect women and girls and exacerbate gender inequalities. The World Bank Group recognizes that effective responses to gender inequalities in FCV-affected countries need to be context-specific, country-owned, systemic, and sustainable. The goal of this formative evaluation is to provide lessons on what worked well, less well, and why, regarding the World Bank Group’s support to FCV-affected countries to achieve transformational change towards gender equality in two areas: women’s and girls’ economic empowerment and gender-based violence.
Impact Evaluations and Development: NONIE Guidance on Impact Evaluation
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This document discusses questions of what impact evaluation is about, when it is appropriate, and how to do it. The Network of Networks for Impact Evaluation (NONIE) was established in 2006 to foster more and better impact evaluations by its membership.NONIE uses the definition of the Organisation for Economic Co-operation and Development’s Development Assistance Committee (DAC), defining impacts Show MoreThis document discusses questions of what impact evaluation is about, when it is appropriate, and how to do it. The Network of Networks for Impact Evaluation (NONIE) was established in 2006 to foster more and better impact evaluations by its membership.NONIE uses the definition of the Organisation for Economic Co-operation and Development’s Development Assistance Committee (DAC), defining impacts as “[p]ositive and negative, primary and secondary long-term effects produced by a development intervention, directly or indirectly, intended or unintended” (OECD-DAC, 2002: 24). The impact evaluations that NONIE pursues are expected to reinforce and complement the broader evaluation work by NONIE members.
A Bridge to the Future
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Gambia, The - Integrated Fin. Mg't. Infor. System
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Population aging is no longer just a rich country phenomenon. Thanks to dramatic improvements in nutrition, sanitation, health, education, and—more generally—economic well-being, longevity has increased everywhere in the world, while fertility has decreased in most countries. This increasingly global demographic shift, unfolding in the developing world at a striking pace, brings a range of new Show MorePopulation aging is no longer just a rich country phenomenon. Thanks to dramatic improvements in nutrition, sanitation, health, education, and—more generally—economic well-being, longevity has increased everywhere in the world, while fertility has decreased in most countries. This increasingly global demographic shift, unfolding in the developing world at a striking pace, brings a range of new policy challenges, including critical implications for economic growth, inter- and intragenerational equity, and the inclusiveness of the development process.
IEG’s recent report, World Bank Support to Aging Countries, offers the first assessment of World Bank efforts to help developing countries think through the challenges associated with population aging, and adapting policies and institutions to prevent and address those challenges.
Demographic Transition Stage World Map
Population aging can put downward pressure on long-term economic growth through reductions in employment and labor productivity, higher dependency, and lower savings and investments. However, these negative impacts do not materialize if longevity is achieved by adding healthy years, which allows individuals to stay productive and independent for longer, and if the economy uses opportunities to produce higher savings and investments during the first demographic dividend (see box).
The Demographic Transition
The 2015/2016 Global Monitoring report classifies countries into four stages of demographic transition:
pre-dividend countries (where fertility is greater than 4 births per woman);
early-dividend countries (where fertility is lower than 4 births per woman, but there is an increasing working-age population);
late-dividend countries (with a shrinking working-age population but where fertility fell only recently); and
post-dividend countries (with a shrinking working-age population and where fertility fell below the replacement level, or 2.1 births per woman, three decades earlier).
The latter two stages characterize aging countries. The first demographic dividend is the accelerated economic growth that may result from a decline in a country’s birth and death rates and the subsequent change in the age structure of the population.
The report found that the World Bank’s understanding of aging has improved over time, from a narrow focus on the sustainability of pension systems to a much broader perspective that explores the interconnections among different sectors of the economy and calls for coordinated policy responses.
Yet there is still not enough attention paid to the profound distributional issues that population aging can cause. These include gender gaps, intergenerational disparities, and various types of inequalities: spatial, rural versus urban, and socioeconomic. A focus on gender is especially important, as there are multiple sources of gender inequalities in relation to aging. These are a result of gender differences in life expectancy, employment patterns, accumulation of pension entitlements, and care responsibilities.
The evaluation found good examples of World Bank’s analytical work providing a solid and substantial empirical base and directly influencing the policy discussion. Country aging reports have been in some cases instrumental in stimulating the need to act to address the many challenges of population aging and have generated concrete responses by governments. The Country Aging Report for Uruguay, for instance, generated a new sense of local urgency and led to a country development strategy strongly centered on aging.
In other cases, high-quality diagnostic work has helped countries to develop approaches to tackle specific issues, such as long-term care. Analytical work for China supported the design and implementation of the country aged-care system, with a strong emphasis on home- and community-based care, while promoting an efficient market for provision of care services.
While the evaluation identified good examples of analytical work, for the World Bank to better help its client countries address their aging challenges, it needs to focus more on preparedness and improve its cross-sectoral thinking.
Focusing on preparedness means promoting healthier behaviors for a healthy longevity, supporting productivity throughout the working life, and introducing incentives to save for retirement. It also means promoting financial awareness, age-friendly environments such as smart cities, or changing negative attitudes toward older people.
Thinking cross-sectorally means recognizing the linkages across issues and the broader impacts that sectoral interventions can have, some of them unintended. For example, elderly care interventions can deepen the occupational segregation of women in mostly informal and low-paid long-term care jobs; pension reforms that aim at making a system more financially sustainable tend to penalize women, who have more irregular working patterns, earn lower wages, and contribute less to a pension system.
The speed of demographic change requires new approaches to development that recognize the importance of supporting a healthier and more productive population to reduce the potential negative impact of population aging on future growth and prosperity. For the World Bank, this means articulating a clearer and more coordinated position with respect to population aging that will facilitate dialogue with client countries and improve the Bank’s capacity to provide support.
Pictured above: Old and young holding hands. Photo credit: Shutterstock/Africa Studio
What have we learned from the World Bank’s Support to Address Ebola Outbreaks?
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What have we learned from the World Bank’s Support to Address Ebola Outbreaks?
What have we learned from support for Ebola outbreaks? Over the past five years, Ebola has seized global interest in relation to the threat of widespread disease outbreaks. This video summarizes the findings from a rapid review of the World Bank’s support for Ebola outbreaks between 2014 and 2019, with the objective Show MoreWhat have we learned from the World Bank’s Support to Address Ebola Outbreaks?
What have we learned from support for Ebola outbreaks? Over the past five years, Ebola has seized global interest in relation to the threat of widespread disease outbreaks. This video summarizes the findings from a rapid review of the World Bank’s support for Ebola outbreaks between 2014 and 2019, with the objective of informing the coronavirus (COVID-19) pandemic response and future crisis responses.
Read more about the findings in IEG's Covid-19 Lessons Note: Findings for COVID-19 from the World Bank’s Support to Address Ebola Outbreaks
Guinea: Micro, Small and Medium Enterprises Development Project (PPAR)
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At the time of project appraisal, agriculture and mining were the main sources of economic growth in Guinea. The country’s mining sector contributed 20 to 25 percent of government revenues. However, Guinea’s economic performance was not proportionate with its natural resource endowment, since agriculture and mining performed modestly. After years of instability, Guinea’s first democratically Show MoreAt the time of project appraisal, agriculture and mining were the main sources of economic growth in Guinea. The country’s mining sector contributed 20 to 25 percent of government revenues. However, Guinea’s economic performance was not proportionate with its natural resource endowment, since agriculture and mining performed modestly. After years of instability, Guinea’s first democratically elected president assumed power in December 2010. Although the political transition was difficult, macroeconomic stability was restored, and debt sustainability dramatically improved with the attainment of the highly indebted poor countries completion point in September 2012. However, the private sector in Guinea was not able to contribute enough to growth and help realize the country’s potential because of several underlying constraints: weak legal and regulatory environment for paying taxes and protecting investors; weak access to finance; low human capital; weak governance; and weak infrastructure. The Guinea Micro, Small and Medium Enterprises (MSME) Development Project (P128443) was approved on January 28, 2013, restructured on February 2, 2016, and closed as scheduled on December 31, 2017. The project was financed by a credit from the International Development Association for $10 million. The objective of the project was to support the development of MSMEs in various value chains and to improve business processes of Guinea’s investment climate.
Ratings for this project are as follows: Outcome was moderately unsatisfactory, Overall efficacy was modest, Bank performance was unsatisfactory, and Quality of monitoring and evaluation was modest. This assessment offers the following lessons: (i) For effective public-private dialogue it is crucial to have (a) a champion at the highest government level who can bring the public and private sector together to identify and implement business environment reforms; and (b) agreement among various private sector associations to identify a private sector representative who can lead the dialogue on their behalf. (ii) Projects should include measures to ensure sustainability of support centers that provide capacity building to MSMEs after project closing. (iii) Design and implementation of credit registries should be based on international best practice standards. (iv) Integrating a rigorous impact assessment into the design of World Bank projects supporting MSMEs would help discern the causal effects of project interventions on MSME development.
Azerbaijan: ARP II Integrated Solid Waste Management Project (PPAR)
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This assessment seeks to identify what worked and what did not work under the Absheron Rehabilitation Program II Integrated Solid Waste Management Project in Azerbaijan. The project was designed in 2008 to support the reform of the Greater Baku area solid waste management. Its project development objective was to support (i) improving solid waste disposal management; (ii) increasing waste Show MoreThis assessment seeks to identify what worked and what did not work under the Absheron Rehabilitation Program II Integrated Solid Waste Management Project in Azerbaijan. The project was designed in 2008 to support the reform of the Greater Baku area solid waste management. Its project development objective was to support (i) improving solid waste disposal management; (ii) increasing waste collection coverage; and (iii) enhancing waste data information and financial management capacity in the Greater Baku area. The project closed in 2018,
after 10 years of implementation and $76.6 million disbursed under the two
International Bank for Reconstruction and Development loans.
Ratings for this project are as follows: Outcome was satisfactory, Bank performance was satisfactory, and Quality of monitoring and evaluation was modest. This project performance assessment offers the following lessons: (i) Significant spending on modern waste facilities alone is not sufficient to ensure an effective municipal solid waste disposal system. (ii) Closing illegal dumps is likely to be ineffective without complementary measures to strengthen institutional accountability and achieve behavior change. (iii) It is important to think through the sequencing of sector interventions in unreformed sectors to prioritize interventions that ensure a minimum threshold of viability and reforms that may enable meaningful progress.
Reducing Disaster Risk from Natural Hazards – An Evaluation of World Bank Support 2010-20 (Approach Paper)
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Disasters caused by natural hazards are a threat to development, and their costs are rising. Climate change is exacerbating the costs of disasters and putting more people at risk from more powerful, more frequent, and more severe storms, floods, and droughts. People in developing countries, and particularly the poorest and most vulnerable, are most at risk of losing their lives and livelihoods Show MoreDisasters caused by natural hazards are a threat to development, and their costs are rising. Climate change is exacerbating the costs of disasters and putting more people at risk from more powerful, more frequent, and more severe storms, floods, and droughts. People in developing countries, and particularly the poorest and most vulnerable, are most at risk of losing their lives and livelihoods from disaster-related events. Reducing disaster risk from natural hazards, the focus of this evaluation, can reduce the negative effects that disasters have on society and people’s lives. DRR is at the core of the World Bank’s approach to support green, resilient, and inclusive development. The purpose of this evaluation is to learn how the World Bank has helped client countries undertake DRR from natural hazards and how and how well it has achieved DRR outcomes. The evaluation will focus on disaster risks caused by natural hazards rather than other types of hazards or chronic stresses.
Addressing groundwater depletion: Lessons from India, the world’s largest user of groundwater
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India is home to 16% of the world’s population, but only holds 4% of the world’s freshwater resources.
Not only is water scarce in India, but the extraction of groundwater has been on the rise for decades. Since the 1960s, the government’s support for the “green revolution” to ensure food security has increased the demand for groundwater for agriculture. Rapid rural electrification combined Show MoreIndia is home to 16% of the world’s population, but only holds 4% of the world’s freshwater resources.
Not only is water scarce in India, but the extraction of groundwater has been on the rise for decades. Since the 1960s, the government’s support for the “green revolution” to ensure food security has increased the demand for groundwater for agriculture. Rapid rural electrification combined with the availability of modern pump technologies has led to an increase in the number of borewells to meet that demand. Over the last 50 years, the number of borewells has grown from 1 million to 20 million, making India the world’s largest user of groundwater.
The Central Groundwater Board of India estimates that about 17% of groundwater blocks are overexploited (meaning the rate at which water is extracted exceeds the rate at which the aquifer is able to recharge) while 5% and 14% , respectively, are at critical and semi-critical stages. The situation is particularly alarming in three major regions – north-western, western, and southern peninsular.
Groundwater pollution and the effects of climate change, including erratic rainfall in the drier areas, put additional stress on groundwater resources which serve about 85% of domestic water supply in rural areas, 45% in urban areas, and over 60% of irrigated agriculture. Current overexploitation rates pose threats to livelihoods, food security, climate-driven migration, sustainable poverty reduction and urban development.
The World Bank has been working with the Government of India to enhance groundwater management in affected areas. The lessons below stem from the experience of World Bank groundwater management projects in India, and are part of a broader IEG evaluation of the World Bank’s support for sustainable and inclusive natural resource management.
Integrated demand and supply side solutions offer the best option for sustainable use. IEG case studies in Rajasthan, Telangana and Andhra Pradesh showed that the success of supply-side measures, such as watershed management programs, aquifer recharging and tank rehabilitation activities, did not lead to sustainable use in the absence of demand-side action. Measures such as surface water harvesting through farm ponds and check-dams, the installation of water-efficient irrigation systems (e.g. more efficient drips and sprinklers) and growing less water intensive crops, need to be integrated on the demand side for improved management and reduced depletion.
Weak regulatory action to limit demand for groundwater can hinder the success of programs in reversing groundwater depletion. Weak regulations result in the expansion of groundwater irrigated areas and drilling of additional wells. This can more than offset water savings created by demand-side measures, or the water increases created by supply-side measures, leading to further depletion. The government of India regulates groundwater exploitation in water-stressed states through “notification” of highly overexploited blocks that restrict development of new groundwater structures (except those for drinking water). However, only about 14% of the overexploited blocks in the country are currently notified. Local level regulatory action in all threatened blocks before they reach the “overexploited” stage is vital to avert depletion.
Strengthening community participation and rights in groundwater governance can improve groundwater management. World Bank projects in peninsular India, where more spread out and specifically defined hydrological sites prevail, were successful on several fronts by implementing the Participatory Groundwater Management approach (PGM). The PGM approach empowers communities in a defined aquifer area by providing governance rights, community awareness, capacity development, and knowledge and motivation for social regulation and the implementation of coordinated actions.
However, there are limits to the success of the PGM approach. It did not work when local institutions were weak, supply-side interventions failed to replenish groundwater or when tanks failed to store water due to recurrent droughts, leading to increased overexploitation. The approach is also unlikely to work in areas with extensive alluvial aquifers that require coordination among large numbers of users.
World Bank interventions support local institutional capacity for groundwater governance, but such institutions are often not viable after the end of the project. Two local institutions are mainly involved in groundwater management in India: Water User Associations (WUA) and groundwater management committees (GWMC). WUAs are formal institutions with a wider mandate to manage irrigation systems (surface and groundwater) and have budget allocations for maintaining the systems and collecting user charges. In contrast, GWMCs are informal groups created through World Bank–supported projects to facilitate PGM. These committees become dormant and dysfunctional once projects close. The key institutional challenge for groundwater governance is strengthening local institutions and helping the informal groups to remain viable during the post-project phase.
Power subsidies for pumping groundwater accelerate the depletion of aquifers in stressed areas. Several states affected by depletion of groundwater provide free or heavily subsidized power (including solar pumps) for pumping groundwater for irrigated agriculture. This creates perverse incentives that enable overexploitation and depletion of scarce groundwater resources. In the long-run, sustainable groundwater management will depend on cross-sectoral reforms to address the water-energy-agriculture nexus and providing the right incentives to resource users. This requires better coordination of policy, market and regulatory measures as well as repurposing current distortive public support to more climate-smart solutions. Strengthening World Bank analytical support and investments in these directions would be useful for future.
Groundwater extraction has allowed rural families to reduce short-term vulnerability but may incur trade-offs and increase the risk of depletion and ultimately increase vulnerability in the long term. Increased access to groundwater resources and extraction allows households to boost agricultural production in the short term. Many farm households owning wells indicated that their vulnerability is lower partly because of income growth and diversification and buffers provided by social safety nets. However, without sufficient regulation or replenishment of aquifers, the increased access to and use of groundwater for irrigation could lead to declining water tables and increasing water scarcity, which risks escalating long-term vulnerability.
pictured above: Women draw water from a well in the drylands of Jaisalmer, Rajasthan, India. By Yavuz Sariyildiz via Shutterstock (November 9, 2014).