Overall

Management notes with satisfaction the overall finding of the report which is that the Sustainable Development Finance Policy (SDFP) is an improvement over its predecessor, the Non-Concessional Borrowing Policy (NCBP), on several fronts. This includes the expanded country coverage, broadened treatment of public debt, a mechanism for articulating performance and policy actions (PPAs), and incentives to address country-specific drivers of debt distress. Management acknowledges the report’s assertion that it is too early to evaluate the impact of the SDFP as well as its key aspects, such as the Program of Creditor Outreach (PCO) and the set-aside incentives of the Debt Sustainability Enhancement Program (DSEP). Management also appreciates the report’s recognition that staff and management have already recognized areas for improvement in design and implementation raised in this evaluation and are in the process of addressing them. Management has indeed prioritized learning and adaptation during the first year of implementation of the policy, and important lessons have been addressed in the updated SDFP Implementation Guidelines issued in May 2021. Due to the compressed timeline of this evaluation, these guidelines were not used to inform the findings and recommendations of this report. Following this evaluation, detailed guidance, templates, and other staff resources are being updated as needed in the intranet portal dedicated to the SDFP.

Context

Management underscores the extraordinary circumstances during the SDFP’s first year of implementation, and finds that the analysis could have been more context-sensitive. The first year of implementation took place amidst the coronavirus pandemic (COVID-19), which resulted in lockdowns and restricted mission travel that significantly affected the rollout of the policy. Eligible countries focused primarily on establishing crisis response plans and were affected by one of the largest exogenous economic shocks in decades. This context created a particularly difficult environment for policy dialogue and capacity building, making consultation, formulation, implementation, and verification of PPAs even more challenging. Although the report emphasizes the need to prepare PPAs on fiscal consolidation, many countries had to provide fiscal stimuli to cope with increased gross financing needs, with falling revenues and rising expenditures. Given the situation, management applied country-tailored approaches balancing ambition with realism, accounting for institutional capacities. Some PPAs have an immediate impact on reducing debt distress while many others will have medium- to long-term effects on the country’s debt sustainability. PPAs aiming at debt transparency potentially play a role in creating an enabling environment for future debt distress reduction.

Management emphasizes that PPAs should be understood in the context of other debt-related initiatives and instruments addressing debt vulnerabilities. The evaluation’s goal was to assess the effectiveness of the SDFP’s PPAs in addressing debt vulnerabilities and the rise in debt-related risks in International Development Association (IDA)–eligible countries. It is important to remember, though, that the SDFP is only one aspect of a range of global initiatives designed to deal with debt vulnerabilities. IDA plays a key role in the international effort to address debt vulnerabilities in IDA countries, together with the Group of Twenty (G20) Debt Service Suspension Initiative (DSSI) and the Common Framework, and in close collaboration with the International Monetary Fund (IMF). The DSSI, extended until end-2021, has provided 43 IDA countries with $5.7 billion in debt service suspension during 2020, creating liquidity and fiscal space to address the COVID-19 crisis. Beyond the DSSI, the G20 endorsed the Common Framework at the end of 2020 to provide debt treatment, including net present value reductions if necessary. These initiatives complement IDA’s ongoing support to countries to confront their debt vulnerabilities through a comprehensive policy tool kit comprising the World Bank–IMF Multi-Pronged Approach (MPA), IDA19’s interrelated policy commitments covering debt transparency, domestic revenue mobilization and infrastructure governance, and the PPAs being implemented through the SDFP, often in synergy with the World Bank’s development policy financing (DPF). During its first year of implementation, the SDFP supported the implementation of the DSSI, aiming at monitoring spending, enhancing public debt transparency, and ensuring prudent borrowing, as well as proactively contributing to efforts in the context of the ongoing Common Framework for debt treatment. In addition, for greater transparency, the World Bank launched the DSSI web page, which offers a country-by-country accounting of DSSI participants and the amounts they owe to creditors based on information from the World Bank’s International Debt Statistics (IDS) database.

SDFP Review

Management recognizes the potential tensions between PPA adherence and increased IDA commitments, and has, therefore, put a robust governance structure in place. Since implementation has just commenced and the tension exists, the World Bank has put in place a robust governance structure, combining technical and operational expertise on debt issues. The PPA review process includes collaboration with client countries and several thorough reviews during the formulation of PPAs to ensure the proposed actions are robust and realistic, given the countries’ implementation capacities. The review process also aims to ensure equity of treatment, taking into consideration the countries’ most pressing debt vulnerabilities. A multilayered approach was adopted systematically to enhance the relevance of the PPAs in addressing the countries’ key debt vulnerabilities over a medium- to long-term horizon. The annual assessment verification mechanism put in place by IDA ensures that countries are monitored for effective implementation of actions, within the agreed timeline.

Moving Forward

The suggested IDA20 debt policy commitments 1 further step-up support to countries to address debt vulnerabilities and rebuild from the economic crisis caused by the coronavirus pandemic to achieve sustainable outcomes. Enhancing debt transparency and improving fiscal risk assessments require recurring and programmatic assistance to ensure that capacity is built gradually, but sustainably, and that institutional and legal setups provide effective frameworks for progress. IDA19 built the foundation for transparency and fiscal risk assessments, focusing on supporting countries to build solid foundations. IDA20’s policy commitments advance the quality of expected outcomes, shifting the focus away from enhancing transparency through the publication of debt reports to strengthening their comprehensiveness by including additional subsectors of the public sector, including State-Owned Enterprises, and by focusing on comprehensive fiscal risk statements that help identify, assess and mitigate key risks and vulnerabilities.

Management will intensify activities under the Program of Creditor Outreach to support implementation of the SDFP, advancing dialogue on sustainable financing, and facilitating coordination with traditional and non-traditional creditors. The Program of Creditor Outreach will reach out to development partners to establish shared principles in three main areas: (i) transparency and information sharing; (ii) sustainable financing policies; and (iii) creditor coordination. Outreach initiatives with the IMF, multilateral development banks (MDBs) and international finance institutions (IFIs) on debt and financing policies will continue in the context of annual multilateral development bank meetings. Similar outreach initiatives are being planned with traditional and non-traditional creditors. As an example, IDA facilitated a High-Level Roundtable on Sustainable Development Finance at end-September 2021, which included Paris Club and Non-Paris Club creditors, multilateral development banks, and the private sector. Furthermore, country- and regional-level outreach will aim to promote dialogue on sustainable financing with development partners.

Management believes that the DSEP offers sufficient flexibility to expand country coverage when appropriate, and therefore, considers it to be premature to adjust parameters for the countries’ obligation to implement PPAs (recommendation 1). The DSEP is a dynamic program, illustrated by the fact that the number of countries preparing PPAs increased from 55 in FY21 to 60 in FY22. Management, therefore, does not find sufficient justification for the conclusion that the screening process for the DSEP coverage did not fully reflect the speed at which IDA–eligible countries have moved from lower to higher risk of debt distress. Although there have indeed been several examples of countries that experienced a rapid deterioration in debt distress, changes to the SDFP are not seen as warranted, since the annual Debt Sustainability Analysis (DSA) of all eligible IDA countries already encompasses measures for a wide array of financial, fiscal, and economic vulnerabilities. Furthermore, large debt accumulation could trigger PPAs in all IDA countries under the SDFP, even in countries currently at low risk of debt distress. A key principle of the SDFP is that criteria for countries to prepare PPAs should be clear and consistent. Including additional criteria for inclusion may increase unpredictability and risk unnecessarily complicating the process.

In line with its efforts toward greater outcome orientation, management fully adheres to the principle of placing PPAs explicitly within a longer-term reform agenda built on an up-to-date assessment of country-specific debt stress (recommendation 2). Given that this principle is foundational to the SDFP, FY21 PPAs were carefully calibrated to countries’ implementation capacity across the spectrum of client countries, including small states and fragile and conflict-affected states. Given the significant fiscal constraints faced by governments to cope with the coronavirus pandemic, many PPAs were focused on debt management (mainly debt ceilings) and debt transparency,2 both of which are critical to reduce debt vulnerabilities. Management finds non-concessional borrowing (NCB) ceiling PPAs for red-light countries (particularly those without significant market access) particularly warranted in the current context. Even if these countries have debt limit requirements (for example, through IMF programs), having an NCB ceiling PPA is important to advocate with creditors for more concessional terms, by highlighting the incentive of the set-aside mechanism. Management also clarifies that there is no requirement or incentive for countries to establish PPAs in more than one DSEP area and thus many did not. In forthcoming PPA cycles management will continue to target countries’ most important sources of debt vulnerability and will strive to set PPAs as programmatic engagements in relation with other Bank support, for example DPFs, over a medium-term horizon, all in close collaboration with country authorities and with due consideration to the context in individual countries.

Management agrees that, whenever possible, PPAs should aim for long-lasting institutional reforms rather than relying on one-time actions (recommendation 3). Management fully shares the view that PPAs formulated as one-time actions underutilize synergies for larger institutional changes, yet the unprecedented global context of FY21 made the promotion of institutional change untimely in many countries. Notwithstanding this constraint, about 80 percent of DSEP countries examined by the SDFP Committee had at least one PPA with programmatic actions, often with a view to ensuring sustainability of ongoing reforms, that are most often also supported by DPFs or other World Bank instruments. The programmatic PPAs facilitate engagement with government authorities by laying out a medium-term agenda progressively to tackle debt vulnerabilities. Compared with the past, policy discussions on debt and on actions needed to mitigate long-standing vulnerabilities are now a core component of country dialogue and of annual country programming. In the ongoing and forthcoming PPA cycles, management aims to deepen the reforms supported by PPAs and other Bank interventions in the previous years, so that over time, countries achieve lasting improvements in their outlooks toward fiscal and debt sustainability.