📄 Global Economic Prospects, June 2023 p. 164 Open PDF ↗
"debt
treatment to DSSI-eligible countries with unsus-
tainable debt beyond the DSSI (IMF 2021). This
Framework has been hampered by implementa-
tion delays such that, by May 2023, only four
countries had requested debt relief under the
Framework and negotiations had stalled for several
of them. One reason may be the absence of private
sector participation. In addition, potential appli-
cants fear their access to commercial financing will
be cut off if they apply, while the slow pace and
uncertainty of restructuring also deter countries
from applying (Gill 2022). To improve the
Common Framework, it is crucial to bring
commercial creditors into the restructuring
negotiations and establish a standard mathemati-
cal formula for determining the size of debt relief
that all creditors will provide (Rivetti 2022).
In an effort to prevent the emergence of new fiscal
risks, the Sustainable Development Finance Policy
(SDFP) replaced the Non-Concessional Borrowing
Policy (NCBP) in July 2020. The SDFP, which
applies to client countries of the international
development association (IDA), aims to incentiv-
ize countries to move toward transparent and
sustainable financing. The policy also aims to
further enhance coordination between IDA and
other creditors in support of the countries’ reform
efforts toward sustainable development finance
(World Bank 2020). While it is too early to assess
the effectiveness of the SDFP, the increased debt
vulnerabilities arising from the pandemic encour-
aged most countries to look for ways to strengthen
debt management, enhance debt transparency,
and improve fiscal sustainability, supported by the
SDFP (World Bank 2021, 2022f).
CHAPTER 4
GLOBAL ECONOMIC PROSPECTS | JUNE 2023
143
11 Because of the lack of data on real exchange rate in LICs, the
framework here uses “other factors” to cover the contribution from
changes in real exchange rates rather than showing it as a separate
component.
*
(1
)(1
)
1
,
(1
)
1
t
t
t
t
s
RXR
+
+ π
=
+
+ π
dollar (U.S. dollar per local currency unit) and
RXRt is defined by:
with RXRt > 0 denoting a real exchange rate
appreciation and st denoting nominal exchange
rate appreciation. The original decomposition
equation is reorganized into equation (4.1.1) to
form the basis for decomposing the change in
public debt-to-GDP ratio into the following
attributable components: (1) the primary fiscal
balance net of seigniorage; (2) real GDP growth;
(3) the implicit nominal interest rate; and (4)
other factors.11
The last term, “other factors,” is the actual change
in the debt-to-GDP ratio minus the sum of
components (1) to (3). It includes privatization
receipts, the real exchange rate, government
support to banks and corporates or other ad hoc
sources of debt. Since this accounting identity is
highly nonlinear, decompositions of cumulative
changes are conducted recursively comparing
actual debt changes with these in counterfactuals
of zero output growth, constant primary balances,
zero inflation, or nominal interest rates that equal
nominal GDP growth.
Implicitly, this approach generates a lower bound
for the contribution of inflation and growth to
debt dynamics. Growth and inflation drive up
revenues and, thus, narrow deficits. Narrower
deficits, in turn, can lower pressures for rising
government debt. This indirect effect is not"