Debt Management and Debt Sustainability

Sovereign debt can be an important policy leaver for development. Sound debt management, which includes minimizing costs of debt, subject to an acceptable level of risk, is crucial to put debt to the service of development. Conversely, too much of the wrong sort of debt, can result in debt sustainability problems and undermine its potential for supporting economic growth. While it is not high debt per se that could hamper economic growth and development (as far as it is sustainable and deemed payable with high probability), the allocation of primary surpluses to debt payments in times of recessions makes debt a constraint for economic recovery and development. If debt becomes unsustainable, debt needs to be restructured in a timely and decisive fashion. Evidence shows that kicking the can down the road by ‘gambling for resurrection’, and restructuring ‘too little’, only results in the need of further restructurings a handful of years down the road.

Emerging Markets and Development Economies (EMDEs) need to command the skills they require to be able to ensure a sustainable debt path that fosters stable economic growth, thereby enabling development and the green transition. On the one hand, this entails having specific technical abilities, ranging from relatively simple tasks such as correct data recording, to more complex ones, such as the capacity of conducting a Debt Sustainability Analysis (DSA). On the other hand, public officials in EMDEs need to be attuned to the politics of sovereign debt management and sustainability. Sound debt management practices do not solely require a professional Debt Management Office, for instance, but need to be nested in a broader institutional environment which vests them with the required political authority to be able to fulfill their purpose of enabling debt sustainability. Similarly, DSAs are as much a probabilistic exercise, as they are a political one. It is the sovereign debtor who should be making the relevant decisions on what economic, political, and principle-based constraints should be included in the model. Finally, if debt needs to be restructured, it is of the essence for the debtor to understand the incentives of the various advisors they hire (and potential conflict of interests), as well as those of their creditors.