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Governance and public sector management

ADB Framework for Debt Sustainability Analysis

  • Project Name: ADB Framework for Debt Sustainability Analysis
  • Region/Country: Global
  • Sector and Themes: Governance and public sector management
  • Year: 2020-Present
  • Project Leaders: Kaukab Naqvi and Benno Ferrarini
ADB Framework for Debt Sustainability Analysis
ADB needed a new framework to conduct debt sustainability analysis reflecting the COVID-19 environment.

With timely support from Economic Research and Regional Cooperation Department, we were able to process the COVID-19 pandemic response operations in time to meet our clients’ needs for financing.

—Rommel Flores Rabanal, public sector economist, Pacific Department, ADB

Development challenge

The resulting lockdowns and containment measures from the COVID-19 pandemic have had economic and social costs. Panic over the crisis has led to financial market meltdowns. Financial institutions are facing a marked rise in nonperforming loans from a combination of declines in consumption, investment, tourism, and exports. Many of ADB’s DMCs have seen a substantial decline in foreign direct investment and free falls in remittances. Tax systems seem to be collapsing; and with prolonged economic contractions, limited and deteriorating economic buffers, and heavy debt burdens, DMCs have little room to provide a proper response. With weak financial and capital markets, most governments, unlike developed countries, are not able to introduce huge fiscal and monetary stimulus packages, consequently increasing their reliance on external borrowing.

Solution

ADB provided loans through its countercyclical support facility. This lending modality requires that the additional lending from ADB and from other development partners not jeopardize the debt sustainability of the borrowing countries. This required ADB’s regional departments to conduct debt sustainability analysis to process the loans. Before the pandemic, regional departments used to rely on debt sustainability analysis from the International Monetary Fund (IMF). However, with the severe disruption of the pandemic on the DMCs, the IMF’s analysis, based on the prospects of economic growth and fiscal situation, became obsolete. ADB needed a new framework to conduct debt sustainability analysis reflecting the COVID-19 environment.

A team of economists from ADB’s ERCD prepared a debt dynamic tool to analyze debt sustainability. In recognition of the uncertainty facing both ADB and its DMCs, ERCD adopted a more flexible scenario-based approach that has minimal data requirements, but still produces valuable insight about the likely debt trajectory in the medium term.

Calculator and money

Knowledge products and services delivered

The debt dynamic tool framework enables ADB to carry out debt sustainability analysis using a methodology that is vetted by the IMF to ensure rigor and alignment with previous analyses. The new framework produces projections of debt-to-GDP ratios under different scenarios. It can estimate the baseline scenario that presumes no external lending, an alternate scenario based on lending from ADB and other development partners, and a total loan scenario that captures external lending from all the sources.

Azerbaijan's Public Debt Dynamics

Impact and results

The flexibility with which the framework can be used enables ERCD to meet the demands of the regional departments and help process the much-needed financing to DMCs well on time. As a result, while initially ADB announced a $6.5 billion package to address the immediate needs of the DMCs, by early September 2020, it enabled ADB to provide an additional $13 billion. ADB’s timely response and assistance has helped its DMCs to mitigate the impact of crisis and plan for the post-COVID future.

Lessons for Replication

The success of the project highlights the importance of teamwork and active cross-border engagement and collaboration. Agility was imperative for the framework to work; the “One ADB” approach was vital to help ensure timely processing of the loan documents.

The timely inputs and the debt sustainability analysis prepared by ERCD has helped us to process $500 million in COVID-19 pandemic response loans for Uzbekistan, $100 million in loans for Azerbaijan, and $100 million in grants for Afghanistan.

–Cigdem Akin, senior public management economist, Central and West Asia Department, ADB

ERCD has closely worked with Southeast Asia Department as a One ADB Team during the preparation of the Philippines: Second Health System Enhancement to Address and Limit COVID-19 with Asia Pacific Vaccine Access Facility (HEAL2). ERCD provided timely support to prepare the debt sustainability analysis as part of the documents for the project report.

—Sakiko Tanaka, principal social sector specialist, Southeast Asia Department, ADB
Hashtags:
#CovidResponse #DebtSustainabilityAnalysis #DebtSustainability #PostCovidFuture #ERCD #OneADB
Find out more: https://youtu.be/eK6h8UXp9JY
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