IMF Weighs Reforms to Debt Limits Policy

IMF reviewing its debt limits policy

Aim is to safeguard debt sustainability, give countries flexibility in borrowing

Preserving incentives for concessional financing is a key goal

According to the report, the debt environment in many parts of the world has changed significantly since 2009. In emerging markets and advanced economies, debt ratios have been rising, whereas many low-income countries now have welcome borrowing space, thanks to improved economic performance and debt relief initiatives. In all cases, the IMF seeks to ensure that its policies allow member country authorities to manage their borrowing in a prudent, sustainable way.

The IMF’s policy on debt limits places restrictions on how much and what kind of debt countries can contract under an IMF-supported program. The report examines recent experience under the policy, which was last modified in 2009. In this latest review, the institution also explores options for strengthening how its debt limits policy is implemented and ensuring that it is applied consistently across all member countries.

The initial report has been discussed by the IMF’s Executive Board, which has endorsed the notion of reforming the policy and given IMF staff the green light to develop a list of concrete proposals in the coming months.

In the following interview, Laurence Allain of the IMF’s Strategy, Policy, and Review Department discusses why the IMF is looking at changing its debt limits policy and what the potential reform could mean for member countries.

IMF Survey: Why has the IMF decided to review its policy on debt limits at this time?

Allain: Our broad policy on debt limits has been in place since the 1960s. The policy was reformed in 2009, so it is time to step back and take a look at how these reforms are working out in practice.

In low-income countries, debt numbers have been broadly stable on average, but this stability masks much disparity among countries. Since 2009, nine more countries have met the requirements for full debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). For these countries, debt ratios continue to decrease as debt is written off and their economies grow. But for countries that received debt relief earlier—and for countries that were not eligible for the initiatives—debt ratios have started climbing again, in some cases quite quickly.

Also, the array of financing that low-income countries can...