Discussion Paper: Risk-Informed Finance for Development

09 Jul 2015

Can GDP-linked official lending to emerging economies and developing countries enhance risk management and resilience?

This paper considers whether GDP-linked official external public debt can help address some of the challenges that developing countries face when managing international financial flows. GDP-linked official debt are financial instruments that make debt repayments contingent on economic conditions in the debtor nation. The paper builds on a growing body of research examining how state-contingent borrowing can help governments better manage their debt commitments and contribute to improved welfare outcomes, by linking debt repayment to their ability to pay, which is often shaped by external factors that are beyond their control. It argues that starting with a focus on external official lending, as opposed to other forms of sovereign debt involving private sector creditors (e.g. sovereign bonds), might offer a better chance of making inroads towards more widespread adoption of state-contingent financing, eventually extending to financial markets more broadly. It suggests doing so by involving actors (i.e. governments) that are in a position to take steps in this direction. In this regard, the paper asks whether governments of both lending and borrowing countries would consider this type of development finance modality, as a way of contributing to improved debt sustainability and debt management.

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