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The evolution of external and public debt levels of lower income countries over the last ten years.

This paper will provide a comprehensive overview of the evolution of external and public debt levels of lower income countries over the last ten years, the reasons behind it, and their consequences for debt sustainability and growth. Ten years after the international community provided large-scale debt relief to a number debt-ridden low income countries (LICs), which provided them with a close to clean debt slate, debt levels are again rapidly increasing in some of these low income countries: at least as many as 11 post-HIPCs countries are again experiencing a high risk of debt distress, with 3 additional ones already being in debt distress. These trends give renewed urgency in understanding recent debt trends and their drivers in lower-income countries. The paper will start by briefly summarizing the 4 pillars of the current international framework to keep debt sustainable (DSA/DSF, responsible borrowing/lending; sovereign; sovereign debt workout mechanisms, including ad hoc rescheduling and debt relief initiatives; debtor country debt management capacity building). Many low-income countries have taken advantage of the new borrowing space provided by their improved debt situation, in order to meet large financing gaps for infrastructure needs, poverty reduction and the realization of the Sustainable Development Goals (SDGs). Thus the paper then discusses, for all LICs together, as well as for individual HIPC countries/other important LICs, how these new borrowing strategies have impacted on the evolution of public debt levels and debt ratios during the last 10 years, to document but also to qualify this general renewed build-up for individual country experiences. Emphases will be placed on: 1) The drivers of these changes, especially in the case of more vulnerable and less diversified LICs 2) The changes in composition of these debt levels. The composition of debt has clearly changed in most LICs, with traditional external bilateral lending being replaced by emerging lenders and new types of commercial lending, namely through Eurobonds, and the growing role of domestic capital markets. On the side, we also try to assess whether changed DAC rules of ODA accounting have impacted the observed decrease of lending from these donors to LICs 3) The extent to which increased debt levels lead to problems of debt distress 4) The extent to which joint responsibilities between debtor and lenders (or lead managers of bond issues) can influence borrowing and lending practices.The concluding section will also reassess the current international framework to keep debt sustainable, with a view suggesting potential avenues for improvement to improve assessments and monitoring of debt sustainability.
Date:16 Jul 2018 →  30 Sep 2018
Keywords:FINANCE, DEBT CRISIS, DEBT MANAGEMENT, DEBT REDUCTION
Disciplines:Applied economics, Economic development, innovation, technological change and growth
Project type:Service project