World Bank management would like to thank the Independent Evaluation Group (IEG) for undertaking the evaluation of World Bank support to Public Financial and Debt Management (PFDM) in countries eligible for International Development Association support. Management appreciates the high-level recommendations, which serve to advance ongoing efforts undertaken by management. The evaluation is directly relevant to the recent policy commitments related to debt management, including the new Sustainable Development Finance Policy (SDFP) and the implementation of the Debt Service Suspension Initiative.

Management is pleased with the report’s conclusion that, from FY08 to FY17, the World Bank “invested significantly” to strengthen PFDM capacity in IDA-eligible countries and that these investments “have yielded many positive results,” though it is important to note that this was accomplished in an unfavorable operating environment. To strengthen the PFDM capacity in IDA-eligible countries, the World Bank provided $26.2 billion financing (amounting to $6.8 billion in investment lending and $19.4 billion in Development Policy Operations [DPOs]) and completed 598 pieces of advisory services and analytics from FY08 to FY17. Management is pleased to see that the report concluded that these investments have yielded positive results. It is important to note that these results were achieved amid the global financial crisis of 2008–09, the international oil and commodity price shock of 2014, and the Ebola outbreak in West Africa in 2014. These exogenous shocks, which could be further highlighted in the report, have adversely affected many IDA countries by worsening fiscal and debt outcomes and weakening progress in the implementation of ongoing PFDM reforms.

During 19th Replenishment of IDA, management expressed growing concerns that the composition of public debt had shifted toward costlier and riskier sources of finance and agreed to substantial steps to further enhance PFDM, particularly debt management, in client countries. As the report notes, management committed to “a multipronged strategy” that includes “agreement to improve monitoring of debt vulnerabilities, enhance early warning systems, improve debt transparency, and increase debt management capacity building.” These policy commitments made by management are well aligned with the findings of this evaluation and its overall direction. The commitments include the SDFP, which is intended to help IDA countries through a more proactive and systematic engagement on addressing debt sustainability at the country level with a focus on dealing with debt vulnerabilities while expanding creditor outreach.

Management is pleased that the evaluation acknowledges that IDA supports client countries in strengthening PFDM “through a variety of channels and using a variety of instruments,” while noting that the report focuses primarily on financing by technical Global Practices and so does not provide a full account for such variety. Although the report offers a good overview of World Bank engagement in this area, it does not fully analyze the spectrum of the World Bank engagements that supports PFDM outcomes. The assessment of World Bank support to the budget preparation process, for example, does not take into account key aspects such as transparency, allocation of resources toward policy priorities, and links to performance or outcomes, to which a significant part of the World Bank’s Public Financial Management (PFM) and Public Expenditure Management support is directed.

Management would like to highlight the contribution of procurement reforms and other capacity-building support to PFDM outcomes that are not covered in the report. Given the volume of expenditure through public procurement, performance in this area can significantly impact the fiscal space. Investment-lending projects with PFDM capacity-building components delivered by other Global Practices have not been assessed by the IEG review. These components are integral to the design of the project and are often carved out to develop implementation capabilities of the institution providing service delivery. Similarly, the range of grants and trust funds that have been used for PFDM capacity building in client countries are not analyzed. Finally, PFDM accomplishments in the evaluation period substantially benefited from a broad range of advisory services and analytics, which is not sufficiently analyzed. This includes technical assistance and capacity-building programs, papers, training and peer-to-peer learning, and coordination of upstream and downstream work.1

Management would also like to point out that recent initiatives beyond the evaluation cut-off date are already addressing suggestions made in the report. Since the report’s cut-off date, there has been an enhanced focus on programmatic engagement and downstream activities in public debt management (PDM). The third phase of the Debt Management Facility (DMF) launched in 2019 focuses on a country’s readiness to commit to such an engagement. World Bank and International Monetary Fund teams and country authorities jointly define a multiyear reform program, identify the needed support, and develop country-specific performance measures. These programmatic engagements focus on countries with significant debt vulnerabilities and a strong commitment to reform. It introduces capacity building in areas that support debt transparency such as in areas of debt reporting and monitoring, and debt-related contingent liabilities and other relevant fiscal risks; and enhances technical assistance related to debt management institutions. In addition, the monitoring framework for the third phase of the DMF was recently expanded to include non-Debt Management Performance Assessment indicators that allow for measurement of annual progress for all DMF-eligible countries. Eight indicators were added to better capture outcomes across five pillars.2

Management welcomes the informative analysis of DPOs and believes that country teams have used this instrument judiciously. It is not so much that DPOs have been relatively underused for PFDM reform areas but rather that DPOs are often most effective at “unlocking” upstream policy and institutional reforms. It is important to note that institutional reforms are more sensitive to political and capacity constraints. Although these reforms are difficult to achieve, they are also foundational in nature and critical for sustainable improvements in poverty reduction. The PDM assessment could have been better informed by the conclusions of the Non-Concessional Borrowing Policy review, undertaken in the context of the transition from that policy to the SDPF in FY21.

Management believes that the relationship between PFM and PDM is less linear than expressed in the report, particularly on the level and sustainability of debt. The objective of debt management is to help countries meet their funding needs at the lowest possible cost given an acceptable degree of risk. Although not meeting this objective can have severe implications for debt sustainability, debt management cannot guarantee debt sustainability, for example, when fiscal policy or public investment management (PIM) is weak. Even sound PDM and PIM operations are at best enabling factors when it comes to debt levels but never the main drivers. These are among the reasons behind management’s preference to use PFM and PDM as two separate terms rather than combining both into PFDM, in line with current professional conventions.

Management concurs with the need to upgrade PFDM monitoring to better improve the links across different PFDM dimensions and believes that the SDFP is an important platform to do so. As an umbrella instrument, the SDFP aims to (i) support IDA clients in strengthening policies, institutions, and practices for transparent and sustainable financing of development goals; (ii) enhance coordination among borrowers, creditors, and other development partners; and (iii) introduce a more robust monitoring and accountability framework. Given these objectives, management concurs with the report’s suggestion that the “SDFP can provide a platform for greater integration and reinforcement by including complementary PFDM actions in the performance and policy actions agreed with IDA-eligible countries” and that PFDM diagnostic assessments should inform the articulation of performance and policy actions.

Management agrees with the recommendation to regularly monitor the quality of the key pillars of PFDM for each IDA-eligible country and will do so building on existing diagnostics without creating new frameworks. Country teams use a wide variety of context-sensitive instruments such as the Public Expenditure and Financial Accountability assessment, the Country Policy and Institutional Assessment, the Public Investment Management Assessment, and the Supreme Audit Institutions Performance Measurement Framework. Debt management and debt sustainability are also monitored by World Bank teams using the Debt Reporting System at a global level and the Debt Management Performance Assessment and Debt Sustainability Analysis at the country level. A subset of key indicators from these reports will be annually reviewed by country teams, based on country specificities, to inform policy and programming discussions. Management believes that it is important to maintain country-specific monitoring as opposed to standard reporting across countries given that PFM reforms are context sensitive.

Management agrees with the recommendation to use the enhanced monitoring to prioritize and sequence World Bank support for PFDM capacity building and reform in IDA-eligible countries. Sequencing is at the core the PDM, PFM, and PIM reforms supported by the World Bank. For example, a typical PFM reform cycle includes a Public Expenditure and Financial Accountability assessment, other deep dives, and a PFM reform program or action plan by the government. Management will take a more integrated approach across PFDM, building on the experience of PFM strengthening and the enhanced monitoring. Management will continue developing approaches, such as FinHealth, that aim to identify the underlying causes of significant weaknesses in PFDM to better target reforms and build coalitions in support of their implementation. Finally, management places importance in sequencing with other development partners, including the International Monetary Fund, multilateral development banks, and bilateral donors as they also provide PFDM-germane capacity-building support.