Debt

Sustainable debt

Debt reduction alone cannot guarantee long-term debt sustainability. It is important for countries to be able to access the finance they need to meet their development objectives but at the same time, taking on new debts must be done in a responsible manner. The international community must ensure that new financing provided to countries is delivered in the right mix of loans and grants to avoid debt crises in the future, and borrowing countries must manage their borrowing well.

The main instrument to inform both borrowing and lending decisions in low-income countries is the Debt Sustainability Framework. This framework helps countries manage their debts. It does this by indicating which countries may be vulnerable to debt problems now and in the future, in order to encourage creditors to provide financing on appropriate terms. This can enable countries' continued development without accumulating unsustainable levels of debt in the future. The Multilateral Development Banks use the framework to decide whether their lending to low income countries should be in the form of grants, loans, or a combination of both.

The UK's role

The UK is at the forefront of international initiatives on responsible lending and borrowing, aimed to ensure that poor countries do not accumulate unsustainable debts in the future. We have worked closely with other donors, the World Bank, International Monetary Fund and African Development Bank to develop and refine the Debt Sustainability Framework which should be used consistently to inform both borrowing and lending decisions.

Find out more about the Debt Sustainability Framework. (610kb)

Export credit agencies aim to help their national exporters to win and complete overseas business, generally by providing insurance against non-payment and guarantees for bank loans to facilitate financing. The UK's agency, the Export Credit Guarantee Department (ECGD), takes the issue of debt sustainability very seriously. All of the UK’s export support to poor countries is carefully examined, taking into account a country’s debt position, the impact of the proposed new borrowing on this and what the funds will be used for. DFID works closely with ECGD and HM Treasury to ensure that all new UK lending to low income countries is consistent with a country’s debt position and will contribute to the social and economic development of a country.

On an international level, in 2008 the UK, along with the Netherlands, Italy, and Sweden, was successful in securing agreement at the Organisation for Economic Co-operation and Development (OECD) to a set of principles and guidelines to promote sustainable lending practices to low-income countries. (610kb)

These guidelines oblige members of the OECD to respect sustainable lending practices when they provide credits to public and publicly guaranteed buyers in poor countries (These are exports to “IDA-only countries”. IDA-only countries are those that can borrow from the World Bank on highly concessional terms. They must have a GNI/capita of less than $1065 and no access to credit on the international markets.) Such lending needs to "supports a country's economic and social progress without endangering its financial future and long-term development prospects".

Export credit agencies will thus try to ensure that their lending decisions do not contribute to future debt distress. They will report annually to the OECD Export Credits Division details of all export credits extended to IDA-only countries. This is to allow the OECD to monitor compliance with the guidelines.