The World Bank’s Sustainable Development Finance Policy (SDFP) was conceived as part of 19th Replenishment of the International Development Association (IDA) to help IDA-eligible countries achieve and maintain debt sustainability by incentivizing their move toward transparent, sustainable financing and by promoting coordination between IDA and other creditors in support of countries’ efforts (World Bank 2020a). In the context of rising debt distress, which could jeopardize IDA-eligible countries’ ability to meet their development goals, the 19th Replenishment of IDA’s deputies asked for options for expanding and adapting IDA’s allocation and financing policies to support countries’ development agendas while minimizing risks of debt distress.

The SDFP responds to recommendations from reviews of its predecessor policy, the Non-Concessional Borrowing Policy, by expanding country coverage to include all IDA-eligible countries. It broadens the coverage of public debt to include domestic borrowing, which played a significant role in the rapid rise in debt stress over the past decade. It provides a mechanism for articulating performance and policy actions (PPAs) and incentives to address country-specific drivers of debt stress.

It is too early to evaluate several aspects of the SDFP and its implementation, not least because of challenges associated with rolling it out under adverse conditions due to the coronavirus (COVID-19) pandemic. The extent to which the set-aside incentives will influence country actions has not yet been tested, although questions about the design can be posed legitimately at this early stage. Similarly, there is little if any experience with the enhanced Program of Creditor Outreach. However, previous experience with creditor coordination, including in the context of the Non-Concessional Borrowing Policy, points to a need to clarify the Program of Creditor Outreach’s mandate and ambition.

Drawing on early experience with the implementation of the new policy provides an opportunity to improve both the design and the implementation of the SDFP. The Independent Evaluation Group identified several areas that may strengthen the SDFP in its objectives of promoting transparent, sustainable financing and improved coordination with creditors in IDA-eligible countries. The screening of IDA-eligible countries to determine which countries should implement PPAs needs to better reflect the speed at which many of these countries have moved to higher levels of debt distress and therefore help avoid the risks of excluding potentially vulnerable countries. The experience so far also shows that PPAs could target the most important country-specific drivers of debt stress more systematically and that the frequent use of one-time actions in PPAs may have bypassed opportunities to promote institutional changes that could have more enduring impact.

Recommendations

This evaluation has identified several opportunities to strengthen SDFP effectiveness:

1. Consideration should be given to expanding the countries covered by the Debt Sustainability Enhancement Program beyond those at moderate or high levels of debt distress or in debt distress. Countries at low risk of debt distress, which are currently not required to implement PPAs, can shift into higher levels of risk in a relatively short time. In fact, one-third of the countries that experienced an elevation in their risk of debt distress over the past decade experienced a two-level deterioration in less than three years. A low level of debt distress alone should not be sufficient for exclusion from the Debt Sustainability Enhancement Program, and the Independent Evaluation Group recommends applying an additional filter.
2. PPAs should emanate from an up-to-date assessment of country-specific debt stress and be set explicitly within a longer-term reform agenda. PPAs should target the main country-specific drivers of debt stress and risk. Standard PPAs applied across countries (including nonconcessional borrowing ceilings and requirements that PPAs be spread across multiple topics) should be avoided because they run counter to ensuring that actions target country-specific priorities and could crowd out more impactful actions. PPA notes should situate PPAs within a longer results chain and articulate complementary and subsequent actions needed to ensure impact. This should be done even when the World Bank does not provide support for next steps because the articulation of a results chain linking actions needed for impact can provide important signals to development partners and help build domestic support for future actions.
3. Where PPAs support actions that need to be taken regularly (for example, debt reporting to parliament), they should aim for long-lasting institutional reforms rather than relying on one-time actions. PPAs should seek to institutionalize good practice in fiscal and debt management by supporting the establishment of statutory requirements, the existence of which can help depoliticize future decisions. Inclusion of one-time measures that need to be repeated yearly should be avoided (even if supported by subsequent PPAs) unless they clearly bridge to more permanent solutions.