In brief

Debt sustainability

The IMF's Executive Board has approved a framework intended to bring greater consistency and discipline to the IMF's analysis of external and public debt sustainability-an integral part of its crisis prevention initiatives. Judgments about a country's ability to service its debt without increasing its revenues and cutting spending to unrealistic levels are the basis for the IMF's decisions on whether to provide financing (and how much) to the country and whether the country's debt needs to be restructured. These judgments are especially critical in cases where a country is expected to meet its financing needs in international financial markets.

In developing the framework, IMF staff considered whether the assumptions underlying medium-term scenarios for both external and fiscal sustainability were realistic. An IMF report found that staff projections of economic growth erred on the optimistic side in a number of cases, while there were also cases of excessively pessimistic projections. This points to the need for a careful assessment of how much adjustment is realistically feasible and a clear statement of the assumptions underlying projections. The new framework is not meant to replace the articulation of alternative scenarios, which has been, and continues to be, a feature of many IMF staff reports but rather to help place some upper bounds or "standard errors" on the projections of debt dynamics.

Fewer secrets

IMF members' use of side letters has fallen significantly since the IMF introduced procedures governing the use of side letters in 1999-from an annual average of 14 letters during 1997-99 to 5 during September 1999-February 2002-according to an IMF review. When a country applies for an IMF loan, it submits a letter of intent, spelling out its policy intentions. In exceptional cases, a member may submit a confidential side letter containing policy commitments in sensitive areas if publication would cause adverse market reactions or undermine the member's efforts to lay the groundwork for a measure. Side letters typically deal with exchange rate or intervention policies, bank restructuring or closures, contingent fiscal measures, or measures affecting key prices.

The IMF members' willingness to make their policy undertakings public-part of a greater, general commitment to transparency-may have contributed to the...