Penny for your thoughts? Why coordination among creditors is key to sustainable debt

We know that when used wisely and transparently, debt is important to finance development. Prudent debt can power economies and pave the way for a resilient future-allowing countries to focus on important investments in people and economic growth.

Yet today, the poorest countries spend over $46.2 billion annually, equivalent to over 10 percent of their export revenues, to service long-term public and publicly guaranteed external debt. This marks the highest proportion since the year 2000. Amid this intensifying debt crisis facing developing countries, it is clear that a comprehensive approach is needed.

The World Bank's International Development Association (IDA) serves these 75 countries as a source of concessional financing (i.e., grants or loans that have low or no interest). While such financing in itself is a source of great respite and impact, we are aware that concessional financing is not adequate to meet the challenges of development, especially with overlapping crises pushing a growing number of countries into debt distress.

One other way in which IDA specifically supports countries efforts towards sustainable debt is through the Program of Creditor Outreach, which works proactively to break down silos in information and promote communication between countries and a range of creditors. This Program is part of IDA's Sustainable Development Finance Policy (SDFP), whose goal is to incentivize debt sustainability and transparency in the poorest and most vulnerable countries.

Since becoming the new director of IDA mobilization a few months ago, I have traveled to West Africa and the Eastern Caribbean to see the program in action -hearing from borrowing governments, lenders, ratings agencies, multilateral development banks and civil society organizations. I witnessed firsthand why such conversations are an important element of sustainably managed, responsible debt.

Most recently, I was in St. Kitts and Nevis, where IDA collaborated with the Eastern Caribbean Central Bank (ECCB) to organize a high-level conversation on debt sustainability. The event featured ministers of finance from Dominica, Guyana, Haiti, Saint Lucia, and Saint Vincent & the Grenadines, along with a range of stakeholders from across the Caribbean. Similarly, IDA joined forces with the governments of Sierra Leone and Uganda to host similar conversations last year. The dialogue was timely given the compound challenges facing these countries-with climate change, high indebtedness, high inflation, food insecurity, poverty and gender inequality chief among them.

Photo: Eastern Caribbean Central Bank

Across the board, there was resounding agreement that information sharing initiatives like the IDA Program of Creditor Outreach are essential to supporting reforms for debt transparency and sustainable debt. Here are four highlights from what we heard during creditor outreach events.

1. Conversation and communication have the power to proactively stop debt crises in their tracks: As Razia Khan, the Head Research for Africa at Standard Chartered reflected, the rising debt risk in Eastern and Southern Africa, for example, could have looked different if 10-15 years ago, "all actors involved had paid a lot more attention to the ability to mobilize revenue, the ability to pay back that debt."

1. Some developing countries-especially small island states-are dealing with debt risk that is compounded by concurrent challenges: As Timothy Antoine, the Governor of the Eastern Caribbean Central Bank, reminded us: "We are also dealing with a climate crisis, and for us in this region, it's an existential threat."

1. Transparency is not just nice to have; it's critical to debt sustainability and to the work of all stakeholders. As Elena Duggar, Moody's Chief Credit Officer for the Americas, noted, transparency informs Moody's assessment of " institutions and governance strength, and of government fiscal strength-which are two of the four big factors that we group our analysis of sovereign credit worthiness in.". The importance of debt transparency was also highlighted by Richard Francis, director of Sovereign Ratings at Fitch: "Countries with either poor debt management and/or issues with reporting tend to be much lower rated."

1. I heard the repeated affirmation that IDA is a valued source of concessional financing, and the World Bank is a trusted partner: Honorable Sheku Bangura (the current Sierra Leone's Minister of Finance) noted that concessional financing from IDA, combined with other sources, has been providing critical relief amid rising debt risk, inflationary pressures, and a series of overlapping challenges in the country. Furthermore, Julius Kapwepwe, head of Uganda's Budget Advocacy Network, brought in the deeply important voice of civil society, noting the extent of World Bank investment in "the road sectors, energy, and [literacy rates]" of his country.

So at every turn, I have been encouraged by the frankness of these conversations-and invigorated by the stakeholders' keen focus on solutions and the way forward. While the magnitude of debt risk is immense, strengthening country ownership and supporting open conversation are certainly essential steps in the right direction. IDA is committed to continuing this important work to help countries take the lead in ensuring no one is left behind on the road to resilient recovery.