Debt sustainability challenges for low-income countries

 The debt crisis of the last two decades has proved extremely costly both for debtor countries and their creditors. To solve this crisis, the international community, and especially Paris Club creditors, has provided massive debt relief to low-income countries, especially through the frameworks of the Heavily Indebted Poor Countries initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI).

Preserving long-term sustainability remains a challenge, even after provision of debt relief.

Only nine post-completion point HIPCs (out of 23) have a low risk of debt distress. Risk distribution worsened from mid-2007 to mid-2008, while the number of countries at high risk of debt distress has increased fourfold (from one to four).

Debt sustainability in low-income countries is sensitive to a number of external factors, including export shocks and volumes and terms of new financing.

In about 60 percent of debt sustainability analyses for post-completion point HIPCs, less favourable terms for new borrowing (i.e. a 2% increase in the interest rate charged on new loans) caused the NPV of external debt to exports ratio to rise beyond the corresponding threshold, compared to 30% for non-HIPCs.

Paris Club creditors want to prevent risks of future debt crises, especially in countries that have benefited from the HIPC and MDRI initiatives. In this respect, Paris Club members aim to ensure that new financing to LICs is provided in accordance with the country’s long-term repayment capacity.

Paris Club members are committed to using the IMF and World Bank Debt Sustainability Framework (DSF) for low-income countries as a reference to inform their lending decisions in light of debt distress risk assessments.

However, all creditors, whether sovereign or private, also have an important role to play in this matter by adopting sustainable lending policies. Paris Club creditors consider that creditor coordination is key to ensure the protection of long-term debt sustainability in low-income countries.

Therefore the Paris Club invites all creditors to respect the minimum concessionality requirements set in the IMF and World Bank Debt sustainability analyses and derived from the DSF, with a view to preventing and limiting unsustainable borrowing.