Publication: Making the Market Access Countries’ Debt Sustainability Framework Relevant for Emerging Markets
Loading...
Date
2024-07-01
ISSN
Published
2024-07-01
Author(s)
Pinto., Brian
Editor(s)
Abstract
The debt sustainability framework for market access countries has been designed by the International Monetary Fund for all market access countries, a set that includes emerging markets and advanced economies. The debt sustainability framework for market access countries was reviewed in 2021 and renamed the “sovereign risk and debt sustainability framework for market access countries.” A new public debt sustainability analysis template was rolled out in 2022 and became operational in 2023. This paper examines the framework from the perspective of emerging markets, which borrow from and have a policy dialogue with the World Bank. While the debt sustainability analysis template is based on government borrowing in both the home, or local, currency and foreign currency, advanced economies predominantly borrow only in the local currency. Emerging market governments are more likely to borrow in both currencies, are more vulnerable to crises, and have less fiscal and monetary policy space than their advanced economy counterparts. Therefore, a single framework for both advanced economies and emerging markets is unduly restrictive. The paper suggests changes to fit the emerging market debt context better, motivating the recommendations by a contrast between Japan and Sri Lanka. The recommended changes would require a composite real interest rate to be calculated for emerging markets as in the single-currency environment typical of advanced economies. This would facilitate an assessment of debt dynamics based on the debt-to-GDP ratio, primary deficits, and (r-g), or the difference between the real interest and the real growth rate. Further, the composite real interest rate could usefully be broken down into its local and foreign currency components to provide insight into debt dynamics and guide borrowing decisions. These modifications would facilitate a more transparent assessment of near-term risks and medium-term projections, for which the paper suggests that the set of comparator countries exclude advanced economies.
Link to Data Set
Citation
“Gill, Indermit; Pinto., Brian. 2024. Making the Market Access Countries’ Debt Sustainability Framework Relevant for Emerging Markets. Policy Research Working Paper; 10831. © World Bank. http://hdl.handle.net/10986/41807 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.Publication Economic Consequences of Trade and Global Value Chain Integration(World Bank, Washington, DC, 2025-04-04)This paper introduces a new approach to measuring Global Value Chains (GVC), crucial for informed policy-making. It features a tripartite classification (backward, forward, and two-sided) covering trade and production data. The findings indicate that traditional trade-based GVC metrics significantly underestimate global GVC activity, especially in sectors like services and upstream manufacturing, and overstate risks in early trade liberalization stages. Additionally, conventional backward-forward classifications over-estimate backward linkages. The paper further applies these measures empirically to assess how GVC participation mediates the impact of demand shocks on domestic output, highlighting both the exposure and stabilizing potential of GVC integration. These new measures are comprehensively available on the World Bank’s WITS Platform, providing a key resource for GVC analysis.Publication Participation in Pension Programs in Low- and Middle-Income Countries(Washington, DC: World Bank, 2025-04-24)Low- and middle-income countries are aging rapidly but stagnation of growth in participation in pension programs, due to widespread informal employment, presents a major fiscal challenge. Some claim that improving the design of pension program rules can encourage more pension contributions, while others push for universal non-contributory pensions. This paper reviews the recent academic literature on the determinants of active participation in pension systems in high- informality settings. An emerging body of evidence shows that participation responds significantly to financial incentives as well as nonfinancial obstacles. At the same time, pensions are imperfect substitutes for other strategies to cover longevity risk, including support through the family, which will remain crucial for many older people in fiscally constrained environments. Therefore, policy makers should integrate the design of contributory pensions, social pensions, and policies that facilitate other forms of elderly support and consider how all three interact. To inform such efforts, these interactions must be more systematically investigated, and the empirical evidence must be expanded beyond a small number of middle-income countries.Publication Capitalizing on Digital Transformation to Enhance the Effectiveness of Property Institutions(Washington, DC: World Bank, 2025-04-14)Property registries have long been a pillar of state capacity and a basis for private market activity. While registry establishment and operation traditionally were costly and time consuming, digital technology makes low-cost registry operation and wide outreach easier. To guide developing countries aiming to establish such registries and measure progress, this paper develops indicators (in terms of digital coverage, interoperability, and property taxation for local service delivery and public land management) of effective digital registry service provision. Data from 85 countries highlight vast differences and provide suggestions for strategic reforms as well as a basis for measuring progress over time. Expanding geographical coverage and collecting these indicators on a regular basis could provide guidance to improve the way in which, by protecting property, the state creates the basis for widely shared prosperity and a livable environment.Publication Bridging the Gap(Washington, DC: World Bank, 2025-04-21)This paper examines tax revenue shortfalls in South Asian countries. On average during 2019–23, South Asian revenues totaled 18 percent of GDP—well below the average 24 percent among emerging market and developing economies (EMDEs). Econometric estimates from stochastic frontier analysis, which control for tax rates and the size of potential tax bases, suggest that tax revenues in the region are 1 to 7 percentage points of GDP below potential, with shortfalls in five of the region’s eight countries larger than in the average EMDE. Even after controlling for country characteristics, such as widespread informal economic activity outside the tax net and large agriculture sectors, sizable tax gaps remain, suggesting the need for improved tax policy and administration. The paper discusses and provides evidence from international experience with reforms to raise government revenues.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Making the Low-Income Country Debt Sustainability Framework Fit for Purpose(World Bank, Washington, DC, 2023-11-14)The World Bank and the International Monetary Fund use the Low-Income Country Debt Sustainability Framework to assess the sustainability of sovereign debt in about 75 low- and middle-income developing countries. It is overdue for a review, and this paper recommends that it be replaced for three reasons. First, it was designed when official concessional external debt was virtually synonymous with public debt. Over the past decade, however, the marginal cost of borrowing for Low-Income Country Debt Sustainability Framework countries has been defined increasingly by domestic and external debt markets. This has rendered the framework largely obsolete. Second, the framework focuses mainly on external debt, but development outcomes in the framework countries are more closely related to overall public debt. The mission of the World Bank—and, increasingly, the International Monetary Fund—is to improve growth, stability and living standards. So public debt ought to be the principal focus of the revised Low-Income Country Debt Sustainability Framework. Third, causality in the framework countries flows from fiscal deficits to current account deficits rather than the other way around, and the public component constitutes the lion’s share of total external debt. To focus on external debt distress in these circumstances is tantamount to tackling the symptom—accumulated current-account deficits—instead of the fundamental cause: fiscal deficits, or the gap between government investment and saving. The experiences of Ethiopia, Ghana and Zambia illustrate the arguments. The paper recommends a framework based on nominal public debt and its dynamics, supplemented with a thorough analysis of international liquidity. Discarding the Low-Income Country Debt Sustainability Framework could well be disruptive in the short run. However, the alternative would be worse: retaining an obsolete framework that has failed to anticipate public debt crises and is poorly aligned with the Sustainable Development Goals.Publication Public Debt in Developing Countries : Has the Market-Based Model Worked?(World Bank, Washington, DC, 2005-08)Over the past 25 years, significant levels of public debt and external finance are more likely to have enhanced macroeconomic vulnerability than economic growth in developing countries. This applies not just to countries with a history of high inflation and past default, but also to those in East Asia, with a long tradition of prudent macroeconomic policies and rapid growth. The authors examine why with the help of a conceptual framework drawn from the growth, capital flows, and crisis literature for developing countries with access to the international capital markets (market access countries or MACs). They find that, while the chances of another generalized debt crisis have receded since the turbulence of the late 1990s, sovereign debt is indeed constraining growth in MACs, especially those with debt sustainability problems. Several prominent MACs have sought to address the debt and external finance problem by generating large primary fiscal surpluses, switching to flexible exchange rates, and reforming fiscal and financial institutions. Such country-led initiatives completely dominate attempts to overhaul the international financial architecture or launch new lending instruments, which have so far met with little success. While the initial results of the countries' initiatives have been encouraging, serious questions remain about the viability of the model of market-based external development finance. Beyond crisis resolution, which has received attention in the form of the sovereign debt restructuring mechanism, the international financial institutions may need to ramp up their role as providers of stable long-run development finance to MACs instead of exiting from them.Publication Orderly Sovereign Debt Restructuring : Missing in Action!(World Bank, Washington, DC, 2012-05)This paper takes a hard look at the experience with official intervention in sovereign debt crises, focusing on debt crises of the 1980s, Russia in 1998, Argentina in 2001, and Greece in 2010. Based on the track record, the authors argue that in situations where countries face a solvency problem, official intervention is more likely to succeed if official money is lent at the risk-free rate reflecting its seniority and private creditors receive an upfront haircut. Such an approach would limit the costs associated with procrastination and increase the chances of success by enabling a more realistic fiscal program to restore solvency. They examine the moral hazard implications for debtor countries of this proposal and find that these are unlikely to be severe. In fact, after their crises of 1997-2001, emerging market countries embarked on an aggressive and comprehensive program of self-insurance, indicating that they are weary of debt crises and their costs. However, the prospect of an upfront haircut for private creditors in the event of insolvency is likely to make them more diligent in their sovereign lending decisions.Publication Low-Income Countries’ Access to Private Debt Markets(2009-01-01)Private debt flows to developing countries surged to record levels over the period 2003-07. A few low-income countries have gained access to the international bond market but the bulk of the flows have continued to go to just a few large middle-income countries. Most low-income countries still heavily depend on concessional loans and grants from the official sector to meet their financing needs. The paper provides an overview of low-income countries' access to cross-border bank lending and bond issuance in the international market over the past few decades. It highlights some stylized facts that characterize salient features of low-income countries' experience in external borrowing from the private sector and discusses the various factors that influence governments' and corporations' decisions to seek external financing along with creditors' decisions to provide the financing. The paper concludes by assessing the prospects for low-income countries' access to private debt markets over the medium term.Publication Dealing with the Challenges of Macro Financial Linkages in Emerging Markets(Washington, DC: World Bank, 2013-10-11)The 2008 financial crisis has highlighted the challenges associated with global financial integration and emphasized the importance of macro financial linkages. In the financial sector, attention is being directed toward macro prudential regulations that are geared toward the stability of the financial system as a whole. The Third Basel Accord (Basel III) aims to dampen the pro-cyclicality of the financial sector and to reduce cross sectional systemic risks partly by introducing measures to address liquidity and issues of banks being too big to fail. In the macro arena, the facts that price stability was not sufficient to guarantee macroeconomic stability and that financial imbalances developed despite low inflation and small output gaps have highlighted the need for additional tools (macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets face different conditions and have key structural features that can have a bearing on the relevance and efficacy of the measures. The chapters in this volume discuss the challenges of dealing with macro financial linkages and explore the policy toolkit available for dealing with systemic risks with particular reference to emerging markets. This report is organized as follows: chapter one is adapting macro prudential approaches to emerging and developing economies; chapter two is adapting micro prudential regulation for emerging markets; chapter three presents capital flow volatility and systemic risk in emerging markets: the policy toolkit; chapter four presents monetary policy and macro prudential regulation: whither emerging markets; chapter five deals with macro prudential policies to mitigate financial vulnerabilities in emerging markets; chapter six presents sailing through the global financial storm; and chapter seven presents operation of macro prudential policy measures.
Users also downloaded
Showing related downloaded files
Publication Global Economic Prospects, June 2023(Washington, DC: World Bank, 2023-06-06)Global growth is projected to slow significantly in the second half of this year, with weakness continuing in 2024. Inflation pressures persist, and tight monetary policy is expected to weigh substantially on activity. The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth. Rising borrowing costs in advanced economies could lead to financial dislocations in the more vulnerable emerging market and developing economies (EMDEs). In low-income countries, in particular, fiscal positions are increasingly precarious. Comprehensive policy action is needed at the global and national levels to foster macroeconomic and financial stability. Among many EMDEs, and especially in low-income countries, bolstering fiscal sustainability will require generating higher revenues, making spending more efficient, and improving debt management practices. Continued international cooperation is also necessary to tackle climate change, support populations affected by crises and hunger, and provide debt relief where needed. In the longer term, reversing a projected decline in EMDE potential growth will require reforms to bolster physical and human capital and labor-supply growth.Publication State and Trends of Carbon Pricing 2024(Washington, DC: World Bank, 2024-05-21)This report provides an up-to-date overview of existing and emerging carbon pricing instruments around the world, including international, national, and subnational initiatives. It also investigates trends surrounding the development and implementation of carbon pricing instruments and some of the drivers seen over the past year. Specifically, this report covers carbon taxes, emissions trading systems (ETSs), and crediting mechanisms. Key topics covered in the 2024 report include uptake of ETSs and carbon taxes in low- and middle- income economies, sectoral coverage of ETSs and carbon taxes, and the use of crediting mechanisms as part of the policy mix.Publication 10 Years of Experience in Carbon Finance : Insights from Working with the Kyoto Mechanisms(Washington, DC: World Bank, 2010-05-01)Under the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), the industrialized countries adopted quantified emission reductions obligations. Marking the 10th anniversary of the establishment of the World Bank Prototype Carbon Fund (PCF) the world's first global carbon fund, this report seeks to take stock of the World Bank's experience of working with the Kyoto Protocol's project-based mechanisms over the past decade. The Clean Development Mechanism (CDM), as the much larger system in terms of projects, emission reductions and host countries, is the basis for much of the report's discussion. Joint Implementation (JI) is also discussed. Policy-makers and negotiators are working on advancing the policy framework and the regulatory structures to mitigate greenhouse gas (GHGs) at greater scale. Furthering the use of market instruments should incorporate the lessons of the past into future designs, making full use of the experience and learning that has been gained. This will mean building upon the successes of the current CDM and JI regulatory frameworks, addressing weaknesses, and abandoning what is not working. This publication seeks to make a constructive contribution to this debate, in full respect of the ongoing international climate change negotiations, by providing insights and recommendations from a practitioner's experience and perspective.Publication World Development Report 2023: Migrants, Refugees, and Societies(Washington, DC : World Bank, 2023-04-25)Migration is a development challenge. About 184 million people—2.3 percent of the world’s population—live outside of their country of nationality. Almost half of them are in low- and middle-income countries. But what lies ahead? As the world struggles to cope with global economic imbalances, diverging demographic trends, and climate change, migration will become a necessity in the decades to come for countries at all levels of income. If managed well, migration can be a force for prosperity and can help achieve the United Nations’ Sustainable Development Goals. World Development Report 2023 proposes an innovative approach to maximize the development impacts of cross-border movements on both destination and origin countries and on migrants and refugees themselves. The framework it offers, drawn from labor economics and international law, rests on a “Match and Motive Matrix” that focuses on two factors: how closely migrants’ skills and attributes match the needs of destination countries and what motives underlie their movements. This approach enables policy makers to distinguish between different types of movements and to design migration policies for each. International cooperation will be critical to the effective management of migration.Publication Global Economic Prospects, January 2025(Washington, DC: World Bank, 2025-01-16)Global growth is expected to hold steady at 2.7 percent in 2025-26. However, the global economy appears to be settling at a low growth rate that will be insufficient to foster sustained economic development—with the possibility of further headwinds from heightened policy uncertainty and adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Against this backdrop, emerging market and developing economies are set to enter the second quarter of the twenty-first century with per capita incomes on a trajectory that implies substantially slower catch-up toward advanced-economy living standards than they previously experienced. Without course corrections, most low-income countries are unlikely to graduate to middle-income status by the middle of the century. Policy action at both global and national levels is needed to foster a more favorable external environment, enhance macroeconomic stability, reduce structural constraints, address the effects of climate change, and thus accelerate long-term growth and development.