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The International Development Association's Sustainable Development Finance Policy

Chapter 5 | Findings and Recommendations

Findings

IEG’s early-stage evaluation of IDA’s SDFP focuses on the extent to which the SDFP, as designed and implemented to date, addresses the drivers of the rise in debt vulnerabilities in IDA-eligible countries over the past decade by incentivizing a move toward transparent, sustainable financing. The evaluation examined four critical dimensions of the policy: (i) country coverage, (ii) debt coverage, (iii) the incentive structure for actions by borrowers and creditors, and (iv) the relevance of the country-specific PPAs to the key drivers of debt stress.

The SDFP marks an important improvement over the NCBP in several ways. These include broadening of country coverage to more countries at risk of debt distress, inclusion of domestic and external debt, and closer attention to a wider range of risks from nonconcessional borrowing such as contingent liabilities and collateralization. The SDFP introduced a requirement for country-specific policy performance actions to address drivers of debt distress and the use of set-asides to incentivize implementation (the NCBP allowed for outright reductions in IDA allocations).

It is premature to assess several aspects of the SDFP, particularly given the adverse conditions under which the policy was rolled out. For example, it is too soon to assess the strength of the SDFP incentive of using IDA allocation set-asides to ensure implementation of PPAs; to date, no set-asides have been applied. It is also too early to assess whether the PCO will succeed in incentivizing creditor coordination. A fundamental question is whether the World Bank has sufficient leverage or persuasive power over the creditor community when IDA is not the dominant creditor in many IDA-eligible countries. The PCO represents a well-intentioned objective to engage the broader community of creditors, but objectives are only vaguely articulated and may lack realism regarding what can be achieved through dialogue and education. The review of the NCBP found that previous efforts at creditor coordination had a positive but limited impact on lending decisions; little was achieved with respect to coordination with non–Paris Club and private creditors. It highlights a need for the SDFP to function on two fronts: (i) to maximize coordination with like-minded multilateral and bilateral creditors with the capacity to lend on concessional terms, and (ii) to move the focus away from loan terms and on to building consensus with commercial creditors about the need to finance only viable projects with positive rates of return.

Drawing on the early experience with the implementation of the new policy and the insights from reviews of NCBP performance is an opportunity to improve the SDFP. IEG identified several aspects of the policy that could be adjusted to enhance its impact in support of IDA-eligible countries, as follows:

  • The SDFP screening process for DSEP coverage did not fully reflect the speed at which IDA-eligible countries have moved from lower to higher risk of debt stress. The current SDFP exempts IDA-eligible countries at low risk of debt distress from implementing PPAs. But one-third of IDA-eligible countries that experienced an elevation in their risk of debt distress over the past decade experienced a two-level deterioration within three years. This suggests some modification in the DSEP application. Although this does not have to require that all IDA-eligible countries participate in the DSEP, additional criteria for exclusion (reflecting a broader range of underlying fiscal or economic vulnerabilities) may be warranted.
  • PPAs did not always address the main country-specific drivers of debt stress, even though the SDFP provides a flexible mechanism for targeting country actions to the diverse sources of debt risks in IDA countries. About one-third of PPAs had limited additionality or value added. Analysis of eight case study countries suggests that although most PPAs focused on areas that were relevant for reducing debt stress, PPAs were not always grounded in a country-specific assessment of the main drivers of debt distress. In some cases, “standard” PPAs (for example, nonconcessional borrowing ceiling) or good practice reforms were included among PPAs, even when countries already had their own similar policies in place. In other cases, a desire to cover more than one category of PPA (for example, debt transparency, debt management, or fiscal sustainability) led to the selection of PPAs of secondary importance. These practices resulted in crowding out more critical reforms.
  • Only half of the PPAs were explicitly set in the context of a clearly articulated results chain linking the action to a reduction in debt stress. Moreover, clarity was often lacking on the subsequent or complementary actions required for the PPA to have impact. Although situating PPAs in the context of a longer-term theory of change is not required as part of the SDFP, having such clarity can signal to development partners and the public the concrete actions that are required to address the underlying causes of high and rising debt stress. Clarity can also provide a clear basis from which the World Bank can draw in articulating future PPAs or prior actions in DPOs.
  • Several PPAs were crafted as one-off actions (for example, publication of debt reports or submission of them to parliament). A majority of the PPAs from the country case studies are not institutionalized, meaning the actions are not embedded in legislation or in an institutional authority that could ensure the action’s continuation. Such a year-by-year approach does not create the institutional framework needed to depoliticize transparency. It also relies on using future external leverage to achieve the transparency objective on a longer-term basis.
  • SDFP’s first year of implementation revealed opportunities to strengthen the guidance and review processes. Clarity was lacking on several occasions, including regarding screening and the application of nonconcessional borrowing ceilings; the availability of guidance from core SDFP teams was instrumental for country teams to articulate appropriate PPAs. Except for PPAs that are prior actions in DPOs, there is no requirement for World Bank staff to identify indicators to monitor PPA impact, weakening the ability to assess the SDFP’s effectiveness at the global or country level. The SDFP secretariat initiated a seminar series in July 2021 to provide regular guidance to country teams on the policy. That and other efforts could help resolve remaining uncertainties. [i] There were also challenges with the timeline for implementation, intensified by a time-consuming review process. Simplifying the process of presenting PPAs for review could help alleviate a potential risk to implementation.
  • The ability of the SDFP’s second pillar—the PCO—to make a meaningful contribution to the SDFP’s goals remains uncertain. Despite several outreach events during FY21, PCO strategies and modalities remain vague more than a year after the SDFP’s approval. The PCO’s success hinges on its ability to improve coordination and foster collective actions with non–Paris Club and private creditors, something that the World Bank was unable to achieve in a meaningful way under the NCBP. It remains unclear whether the World Bank has the prospect of any greater traction with creditors under the PCO.

Recommendations

  1. Consideration should be given to expanding the countries covered by the DSEP 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 DSEP, and IEG 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.
  1. Updated Sustainable Development Finance Policy Implementation Guidelines were adopted in May 2021.