Risk-Informed Finance for Development - Enhancing risk management and resilience through GDP-linked official lending
Managing external public debt constitutes one of the main tasks that governments around the world have to contend with on a daily basis. It is also a challenging one for many developing countries and emerging economies.
In a context where domestic financial resources are scarce, accessing international finance, private or public, is critical to fund developing countries’ development efforts. Yet, managing international financial flows can be a testing job. External shocks, to which developing countries are overly exposed and vulnerable, can easily undermine developing countries’ ability to pay back their debt and can potentially lead to costly sovereign debt defaults. Debt obligations, on the other hand, have a strong pro-cyclical component: they are easier to meet during times of economic growth when government revenues increase, while becoming relatively more onerous to service during recessions and economic slowdowns. This makes it harder for governments to pursue countercyclical fiscal policies to smooth growth and development trajectories.
In this context, indexing developing countries’ external public and publicly guaranteed (PPG) debt with official creditors to their GDP performance can help these countries improve external debt management and contribute to minimize the risks of debt default, thereby increasing their resilience to external shocks.