debt sustainability and the sustainable development...

Debt Sustainability and the

Sustainable Development

GoalsUNCTAD Summer School 2018

Daniel MunevarUNCTAD

Agenda• Motivation behind the research• Debt Sustainability Analysis: What is it and why it matters• Towards an alternative DSA framework• Policy implications

Motivation behind the research

Motivation behind the research• Goal 17.4

• Assist developing countries in attaining long term debt sustainabilitythrough coordinated policies aimed at fostering debt financing, debt reliefand debt restructuring, as appropriate, and address the external debt ofhighly indebted poor countries to reduce debt distress

• Despite relevance of other goals, focus on debt sustainability andits policy implications play a disproportionate role in decisionmaking.

Motivation behind the research• Official position of the IMF (2018) on debt financing and the SDGs:

• “For countries with low-to-moderate debt burdens and relativelyfavorable debt servicing profiles, the focus should be onmaintaining debt sustainability”

• “Countries that are approaching their debt-carrying capacity limitsneed to exercise extreme prudence in implementing their investmentprograms. Debt financing should be confined to projects with clearand large returns that would not tip the country’s debt indicators intodistressed levels or trajectories.”

Motivation behind the research• Research opportunity

• Current focus on SDGs relates to costs and funding needs• UNCTAD (2014), SDSN (2015), Greenhill (2015)

• Debt sustainability is acknowledged as a gap in research on theSDGs• SDSN (2015), AAAA (2015), UN (2018), IATF FFD (2018)

Key Messages• The hammer and the nail problem: DSA and fiscal policy

• Going beyond accounting: DSA as tool for developmental policy

• A country might ensure short term debt stabilization at the expense of systemiclong term underinvestment on development needs (Kregel, 2010).

• Holistic transformation envisioned in SDG agenda goes beyond GDP growthdynamics .

• Transformation requires long term investment horizon, that in some cases, wouldrequire breaching debt stabilizing primary surplus thresholds.

• A return to the approach of the UN First Development Decade (1949)

DSA: What is it and why does it matter• Debt Sustainability Analysis:

• Standardized framework designed to assess the risks of debt distress, takingaccount of a country’s capacity to carry debt and its projected debt burden underboth baseline projections and shock scenarios.

• Key facts about the IMF’s DSA:• Introduced as a core component of the IMF policy tool kit under the review of the

exceptional access lending framework of the IMF in 2002.• Two main versions:

• LIC DSF• MAC DSA

• Framework has undergone revisions in 2005, 2009, 2012, 2017.• DSA is now a basic component of Article IV country reviews• IMF strongly supports establishment of MTBF around DSA

DSA: What is it and why does it matter

A brief history of the IMF DSA• The 80’s debt crisis and the “exceptional circumstances” clause:

• Criteria to provide lending to countries experiencing “exceptionalcircumstances” which required financing over IMF quota.

• Left unspecified to provide Executive Board room of maneuver during a crisis.• Only used in a few cases between 1983 and 1995.

• The East Asia crisis and Argentina• Between 1995 and 2002, 11 countries made use of the “exceptional

circumstances” clause to borrow from the IMF.• Increasing concern regarding IMF exposure and limited resources:

discussions on the need for a transparent framework for orderly “orderlyadjustment, limiting moral hazard, strengthening market discipline, andhelping emerging market borrowers protect themselves against volatility andcontagion”. (IMF, 1999)

A brief history of the IMF DSA

A brief history of the IMF DSA• No more Argentina’s rule (2002):

• Reform of the exceptional lending framework with variousconcerns: moral hazard, transparency, and…• “Exceptional access to a few large members has led to a significant increase in

credit concentration in the Fund which increases the risks to the financial positionof the Fund in case the economic and financial situation of members does notimprove as expected.” (IMF, 2002).

• DSA is introduced as one of the key components in the decisionmaking process for IMF lending to protect the Fund resources

• IMF became required to conduct ”A rigorous and systematicanalysis indicates that there is a high probability that themember’s public debt is sustainable in the medium term.” (IMF,2009)

Theoretical origins of the DSA• DSA in textbook macro: Ramsey–Cass–Koopmans Model

• Public expenditure and resource allocation in standard DSGE models• Assumptions utility of public investment

• DSA in development policy• BIS World Banking Tables (1980s)• World Bank – Gerald Alter (1961)

• Keynesian BoP analysis of conditions required to meet external claims• Debt is considered sustainable as long as a country can suppress enough domestic

claims on domestic resources to meet external claims

• Classical Economists position on public debt• Montesquieu (1748)• David Hume (1752), William Blackstone (1753), Adam Smith (1776), Jefferson

(1904), Ricardo (1820), etc.• Public debt as a burden on nation – No positive impact on national wealth

• The path from classical economists to modern macro theory

An alternative approach to DSA• An alternative tradition on public debt:

• Charles Davenant (1710), Jean-Francois Melon (1734), Sir James Steuart (1767),Isaac de Pinto (1774), Hamilton (1790), Dietzl (1855), Von Stein (1860), Wagner (1855)

• Need to include impact of debt on national wealth and productive capacities!• UNCTAD and development finance: creating the conditions to earn development• Report of the Independent Expert on the effects of foreign debt and other related

international financial obligations of States on the full enjoyment of all human rights,particularly economic, social and cultural rights (2016)• “The financial resources required for a State to be able to sustain or fulfil core human

rights obligations are currently not considered when debt sustainability analyses are carried out.”

• UN Secretary General Report (2005)• Debt sustainability is defined as “the level of debt that allows a country to achieve the

Millennium Development Goals and reach 2015 without an increase in debt ratios”.

How to think about DSA and SDGs1.Estimate baseline macroeconomic scenario: business as

usual.2.Estimate total expenditure and investment needs associated

to SDGs3.Estimate fiscal impact in the medium term:

1. Domestic mobilization of resources2. Composition of public expenditure3. Available financing options4. Support from international community

Countries in the study• Based on regional & income group diversity: 2 per region, per income group

Income Level Region Country

Low Income Sub-Saharan Africa Ethiopia

Tanzania

Lower Middle Income Latin America Bolivia

Nicaragua

Sub-Saharan Africa Kenya

Cameroon

Asia Vietnam

Cambodia

Upper Middle Income Middle East & North Africa Algeria

Latin America Ecuador

Asia Thailand

SDGs included in the modelSDGCrosscutting

issues

SDGInfrastructure

SDGSocialCompact

• 17 goals, 169 targets and 227 indicators• Only 88 have an agreed definition

and data are available• Challenges

• Lack of an integrated assessment• SDG modelled individually /

differences in assumptions• Lack of economy wide assessments

• Cross cutting issues• Input co-dependency

• Breakdown of public and private funding

SDGs included in the model• Initial version of the model concentrates on 4 broad areas of the

SDGs for which estimations of costs are readily available:

Policy Area SDG Additional SDGsSocial Protection & Poverty SDG 1-3-4 SDG (2-5–6–10–11–16)

Food Security SDG 2 (2.1-2.2-2.3-2.4-2.5-2.a) SDG (1.1-1.3)

Health SDG 3

Education SDG 4

Poverty – SDG 1“End poverty in all its forms everywhere”

• Coverage: By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day (FAO, 2015)

• Annual costs (2015-2030): Additional spending of USD 67 billion (USD of 2013)• Country level targets for yearly Poverty Gap Transfer for USD PPP 1.75 (FAO, 2015):

• PGT Low and Middle Income Countries: 0.06 to 2.14% of GDP - Overlap with SDG2• Data available at individual country level

• Public / Private funding: Government is expected to fully fund PGT• Lack of robust models that allow to establish links between SDG investments, GDP growth

and long term poverty reduction (SDSN, 2015)• Data source: GSW, World Bank

Food security and agriculture – SDG 2“End hunger, achieve food security and improved nutrition and

promote sustainable agriculture” • Coverage: to achieve the objective of zero hunger worldwide by 2030, or eliminate the

prevalence of undernourishment, defined as chronically inadequate dietary energy intake (FAO, 2015)

• Annual costs (2015-2030): Additional spending of USD 198 billion (USD of 2013)• Two approaches for expenditure targets:

• 10% of government budget for Agriculture - Maputo Declaration (2003) – World Bank (2008)• Country level targets for yearly agricultural investment (FAO, 2015):

• AI Low and Middle Income Countries: 0.01 to 13.42% of GDP• Data available at individual country level

• Public / Private funding: For agricultural investment, government is expected to contribute to at least 60% of total investment needs

• Data source: GSW, FAOSTAT, National Budgets

Health – SDG 3“Ensure healthy lives and promote well being for all at all ages” • Coverage: Universal Health Coverage (UHC), defined as access for all people and

communities to services that they need without financial hardship, for low and middle income countries (WHO, 2017)

• Annual costs (2015-2030): Additional spending of USD 274 – 371 billion (USD of 2014)• Country group level targets for General Government Health Expenditure (GGHE) (WHO,

2017):• Population weighted means per country group• LIC: USD 71 – 91 per person • LMIC: USD 72 – 89 per person• UMIC: USD 303– 320 per person

• Public / Private funding: Even though private out of pocket expenditure is projected to remain relevant, universal access to health is expected to be funded mainly from public sources.

• Data source: Global Health Expenditure Database (WHO), National budgets

Education – SDG 4“Ensure inclusive and equitable quality education and

promote lifelong learning opportunities for all”

• Coverage: Achieving universal pre-primary, primary, lower and upper secondary education of good quality in low and lower middle income countries (EFA Global Monitoring Report 2015)

• Annual costs (2015-2030): USD 340 billion (USD of 2012)• Country level targets for education expenditure (Education 2030 Framework for Action):

• 4 to 6% of GDP• 15 to 20% of public expenditure

• Public / Private funding: Even though private out of pocket expenditure is projected to remain relevant, universal access to education is expected to be funded mainly from public sources.

• Data source: UIS Database (UNESCO), National budgets

DSA Methodology• Focus on public debt: External (Multilateral and commercial)

and Domestic (commercial).• Assumptions:

• Macroeconomic variables projections from IMF/Thomson Reuters (GDP growth, GDP deflator, FX, interest rates and fiscal variables).

• Debt structure and conditions:• Distribution of new issuance follows current debt structure shares. • Commercial debt:

• Issuance of new debt follows current maturity averages.• Fixed interest rate at period of issuance.

• Multilateral/Concessional debt:• Average terms for redemption of outstanding debt (IDA, IMF, Paris Club, Non-Paris

Club) .• Issuance of new debt under standard IDA conditions (grace period, maturity and

interest rates).• Standard discount rate (5%)

Base Indicators• Primary surplus – (PS)

• Observed indicator – WEO

• Debt stabilizing primary surplus – (DS PS)• Projected indicator – Primary surplus consistent with stabilization of

Gross Government Debt at current levels

• SDG consistent primary surplus – (SDG PS)• Projected indicator - Assumes base levels of government expenditure

and adds expenditure required to achieve SDGs

• Gross Government Debt

Resource gap and debt sustainability assessment• SDG Gap = (PS) – (SDG PS)• SDG DS Gap = (DS PS) – (SDG PS)• Debt sustainability assessment (2030 horizon)

• Base scenario follows IMF WEO• Scenarios:

• SDG Baseline: SDGs are funded through debt issuance on market terms.• SDG Domestic Mobilization of Resources: tax revenues of 15% GDP• SDG Financing:

• Concessional: SDGs are funded through new debt issuance on concessional terms.

• Grant: SDGs are funded through non debt capital flows.

How to think about DSA and SDGs1.Estimate baseline macroeconomic scenario: business as

usual.2.Estimate total expenditure and investment needs associated

to SDGs3.Estimate fiscal impact in the medium term:

1. Domestic mobilization of resources2. Composition of public expenditure3. Available financing options4. Support from international community

SDG investment needs - LIC

Source: UNCTAD Calculations

SDG investment needs - LMI


SDG investment needs - MI


Impact of SDG investments on expenditure composition


SDG DSA Analysis - Ethiopia


-12

-10

-8

-6

-4

-2

0

2016 2018 2020 2022 2024 2026 2028 2030

%ofG

DP

PrimaryFiscalBalance- GeneralGovernment

0%

20%

40%

60%

80%

100%

120%

140%

2016 2018 2020 2022 2024 2026 2028 2030%ofG

DP

GeneralGovernmentGrossDebt

SDG DSA Analysis - LMI


SDG DSA Analysis - MI


SDG Financing Gap


Policy implications and future research agenda• Policy tools, such as the DSA, must provide policy makers with a

comprehensive overview of key issues• Alternative DSA framework:

• Integrate in a single platform fiscal and financial analysis.• Promote ownership of the SDG agenda: targets for domestic mobilization of

resources and budget composition.• Improved allocation of scarce development aid funds• Strengthen partnership for the SDGs

• Future research agenda:• External debt DSA• Investment growth - nexus

Thank you!

Comments or questions: [email protected]

Disclaimer: This is a draft presentation based on ongoing research. Any views expressed in this presentation are those of the presenter and not necessarily those of UNCTAD

debt sustainability and the sustainable development...

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