SUSTAINABLE DEVELOPMENT FINANCE POLICY OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION: FY25 IMPLEMENTATION UPDATE AND POLICY ENHANCEMENTS Development Finance, Corporate IDA & IBRD (DFCII) May 6, 2025 ACRONYMS AND ABBREVIATIONS Fiscal Year (FY) = July 1 to June 30 All dollar amounts are US dollars AfDB African Development Bank SRDSF Sustainability Framework for Market Access Countries AIIB Asian Infrastructure Investment MDB Multilateral development bank Bank MCDF Multilateral Cooperation Center for AsDB Asian Development Bank Development Finance CRDC Climate-Resilient Debt Clause NCB Non-concessional borrowing DPF Development Policy Financing OECD Organisation for Economic DSA Debt Sustainability Analysis Cooperation and Development DSEP Debt Sustainability Enhancement OP 7.30 Operation Policy 7.30 Program PBA Performance-Based Allocations FCV Fragility, Conflict, and Violence PCO Program of Creditor Outreach GDP Gross domestic product PPA Performance and Policy Action GSDR Global Sovereign Debt Roundtable PPG Public and publicly guaranteed IAN Implementation Assessment Note RECA Remaining Engaged in Conflict IDA International Development Allocation Association SACU Southern African Customs Union IDA21 21st Replenishment of IDA SDFP Sustainable Development Finance IFAD International Fund for Agricultural Policy Development SOE State-owned enterprises IMF International Monetary Fund SIEE Small Island Economies Exception LIC Low-income country SEE Small States Exception LIC DSF Debt Sustainability Framework for Low-Income Countries VAT Value-added tax MAC Sovereign Risk and Debt TABLE OF CONTENTS EXECUTIVE SUMMARY ........................................................................................................... i I. INTRODUCTION................................................................................................................... 1 II. DEBT SUSTAINABILITY ENHANCEMENT PROGRAM ............................................. 2 A. FY24 Implementation and FY25 Formulation of PPAs ..................................................... 2 B. Strengthening the SDFP...................................................................................................... 7 i. Review of FY24 Policy Enhancements ..................................................................... 7 ii. Transitioning from a Negative Set-Aside to a Positive Incentive.............................. 9 III. PROGRAM OF CREDITOR OUTREACH ...................................................................... 11 IV. CONCLUSION ..................................................................................................................... 15 LIST OF ANNEXES Annex 1. Global Debt Development ............................................................................................. 17 Annex 2. Implementation of DSEP .............................................................................................. 21 Annex 3. Additional Details on the New Incentive Mechanism .................................................. 28 Annex 4. Sustainable Development Finance Policies Across MDBs ........................................... 29 TABLE OF FIGURES, BOXES, AND TABLES FIGURES Figure 2. 1. Evolution of the PPAs Approved in FY21 – FY25 ..................................................... 3 Figure A1. 1. Public Debt Trends in IDA Countries: Median Public Debt-to-GDP Ratio by Country Groups ................................................................................................. 17 Figure A1. 2. Public Debt Trends in IDA Countries: Median Public Debt-to-GDP Ratio by Region ............................................................................................................... 17 Figure A1. 3. Evolution of LIC DSA Debt Risk for IDA Countries: External Debt Distress, Percentage Shares .................................................................................... 18 Figure A1. 4. Evolution of LIC DSA Debt Risk for IDA Countries: Change in Risk Ratings, 2019 - 2024 ...................................................................................... 18 Figure A1. 5. Fiscal Balance in IDA Countries ............................................................................ 19 Figure A1. 6. Gross Financing Needs for IDA Countries, percentage of GDP ............................ 19 Figure A1. 7. External PPG Debt Stock for IDA Countries ......................................................... 20 Figure A1. 8. External PPG Debt Composition in IDA Countries ............................................... 20 Figure A2. 1. Key Debt Vulnerabilities Addressed by Fiscal Sustainability PPAs ...................... 22 Figure A2. 2. Key Debt Vulnerabilities Addressed by Debt Transparency PPAs ........................ 22 Figure A2. 3. Key Debt Vulnerabilities Addressed by Debt Management PPAs......................... 23 Figure A2. 4. Implementation Rate, by Country, FY21-24 .......................................................... 24 Figure A2. 5. Total Number of Unmet PPAs in FY24 by DSEP Area ......................................... 24 Figure A2. 6. Percentage of IDA Countries with PPAs by DSEP Area, FY21 – FY25 ............... 27 BOXES Box 3. 1. Climate-Resilient Debt Clause ...................................................................................... 13 Box 3. 2. The Common Framework and Ongoing Debt Restructuring Efforts ............................ 14 Box A2. 1. New IDA-eligible Countries in FY25: Belize and Eswatini ...................................... 25 TABLES Table A2. 1. Number of PPAs by Country Characteristics and DSEP Area in FY25 .................. 25 Table A4. 1. Sustainable Development Finance Policy across MDBs ......................................... 29 EXECUTIVE SUMMARY i. This report presents the fifth annual implementation update of the International Development Association’s (IDA) Sustainable Development Finance Policy (SDFP). The SDFP, launched in July 2020, aims to incentivize IDA-eligible countries to move toward enhanced transparent and sustainable financing while fostering coordination between IDA and other creditors to support recipient countries’ efforts. ii. The SDFP achieves this through two key pillars, the Debt Sustainability Enhancement Program (DSEP) and the Program of Creditor Outreach (PCO). The DSEP incentivizes countries to move toward transparent and sustainable borrowing and investment practices by implementing Performance and Policy Actions (PPAs) that address debt-related vulnerabilities. The PCO strengthens collaboration with creditors, including non-traditional and private-sector lenders, to promote sustainable financing and enhance debt transparency, leveraging IDA’s global platform and convening role. iii. Since the last update, through the SDFP, IDA has supported IDA-eligible countries and engaged creditors to promote transparent and sustainable financing practices. More specifically, a. Under the DSEP, IDA has helped countries adopt transparent and sustainable borrowing practices by focusing on fiscal sustainability and implementing institutionalized and programmatic reforms. Building on the PCO outreach that emphasized the need for fiscal resilience to climate-related shocks and natural disasters, IDA has increasingly supported PPAs aimed at strengthening fiscal resilience to external shocks. b. Under the PCO, IDA has advanced a more inclusive, coordinated approach to debt transparency through sustained outreach efforts, strategic collaboration with multilateral development banks (MDBs), engagement with non-traditional creditors, and innovative information-sharing. Notably, IDA has strengthened cooperation with export credit agencies by sharing information on non-concessional borrowing (NCB) ceilings as anchors for debt sustainability. Additionally, IDA has deepened partnerships with MDBs and the International Monetary Fund (IMF) to enhance coordination in applying sustainable financing policies. iv. These efforts will contribute to achieving IDA’s commitment under the 21st Replenishment of IDA (IDA21), beginning in FY26, to support countries in strengthening debt and fiscal management. The DSEP aligns closely with the IDA21 policy commitment: “Support debt sustainability and debt transparency in all IDA countries at moderate or high risk of debt distress through technical assistance, knowledge, and/or financing engagements”. Additionally, it contributes to the Scorecard goals of increasing the number of countries in or at high risk of debt distress that implemented reforms towards debt sustainability and those with tax revenues as a percentage of gross domestic product (GDP) at or below 15 percent (including social security contributions) that have increased collections, considering equity. - ii - v. Since FY21, the implementation of the SDFP has provided valuable insights, leading to targeted policy adjustments to enhance its effectiveness. In FY24, the Board approved policy enhancements aimed to streamline processes and increase flexibility in PPA implementation while reinforcing the Policy’s incentive mechanism. Early results from FY25 demonstrate the positive impact of these changes, including faster access to set-asides, improved adaptability to evolving country contexts, and more efficient decision-making. To further strengthen implementation, the SDFP will transition from the current penalty-based set-aside mechanism to a reward-based approach in IDA21. This new incentive mechanism will provide an allocation top-up to countries with low debt vulnerabilities or those that are addressing them through the implementation of PPAs, fostering stronger engagement on critical reforms to address debt vulnerabilities. vi. Moving forward, IDA will deepen its commitment to transparent and sustainable financing by supporting IDA-eligible countries and strengthening engagement with creditors. IDA will continue to support countries to improve debt transparency, strengthen debt management, and enhance fiscal sustainability in close alignment with the IDA21 policy commitment. IDA will also strengthen partnerships with MDBs and expand creditor engagement through platforms such as the Global Sovereign Debt Roundtable (GSDR), which supports debt restructuring efforts under the Common Framework by fostering coordination among creditors and borrowers. Through these initiatives, IDA continues to advance transparent and sustainable financing practices across IDA countries. I. INTRODUCTION 1. On July 1, 2020, the International Development Association (IDA) launched the Sustainable Development Finance Policy (SDFP, or the Policy, hereafter). The Policy is part of a wider effort to support IDA countries to address increased debt vulnerabilities since the mid- 2010s that reflect rising debt levels and shifts in debt composition (see Annex 1 on the global debt development for detailed analysis). The Policy provides countries with incentives to move toward transparent and sustainable financing. It also aims to foster stronger collective action and closer coordination among creditors to mitigate debt-related vulnerabilities in IDA countries through transparent and sustainable financing. 2. The SDFP achieves this through two key pillars: (a) the Debt Sustainability Enhancement Program (DSEP); and (b) the Program of Creditor Outreach (PCO). The DSEP enhances incentives for countries to move toward transparent and sustainable borrowing and investment practices. The PCO utilizes IDA’s global platform and convening role by expanding its outreach to engage creditors and advocate for transparent and sustainable financing practices. Recognizing the growing role of non-traditional and private-sector creditors in the development finance landscape, IDA promotes an inclusive and coordinated approach to enhancing debt transparency. 3. The SDFP will also contribute to achieving IDA’s commitment under the 21st Replenishment (IDA21), beginning in FY26, to support countries in strengthening debt and fiscal management. The SDFP aligns closely with the IDA21 policy commitment: “Support debt sustainability and debt transparency in all IDA countries at moderate or high risk of debt distress through technical assistance, knowledge, and/or financing engagements”. Additionally, it supports the Scorecard goal of increasing the number of countries in or at high risk of debt distress that implemented reforms towards debt sustainability and those with tax revenues as a percentage of gross domestic product (GDP) at or below 15 percent (including social security contributions) that have increased collections, considering equity. 4. This report provides an update on the fifth-year implementation of the DSEP and the PCO under the SDFP by: a. Reviewing the results from implementation of FY24 Performance and Policy Actions (PPAs) and the preparation of FY25 PPAs; b. Assessing the revisions to the Policy and its implementation procedures introduced in FY24; c. Presenting the implementation arrangements for the new incentive approach, approved as part of the IDA21 replenishment process; and d. Presenting key outreach activities and post-outreach follow-ups, collaboration with creditors, and partnerships with multilateral development banks (MDBs). -2- II. DEBT SUSTAINABILITY ENHANCEMENT PROGRAM A. FY24 Implementation and FY25 Formulation of PPAs 5. In its fifth year of implementation, the DSEP continues to support IDA countries in addressing key drivers of debt vulnerabilities, aligning with IDA21 policy commitment. The DSEP focuses on identifying and supporting reforms in three critical areas: (a) debt transparency; (b) debt management; and (c) fiscal sustainability. These efforts will contribute to achieving IDA’s commitment to support countries in addressing their debt vulnerabilities. 6. All IDA-eligible countries undergo annual screening for debt-related vulnerabilities, along with reviews of debt data quality, which is key for credible debt risk ratings. Countries assessed under the joint World Bank–IMF Debt Sustainability Framework for Low-Income Countries (LIC DSF) facing moderate or high risks or already in debt distress—as well as those under the Sovereign Risk and Debt Sustainability Framework for Market Access Countries (MAC SRDSF)—are required to prepare PPAs. The number of countries preparing PPA Notes increased from 59 out of 75 IDA countries in FY24 to 61 out of 77 countries in FY25 (Figure 2.1).1, 2 However, the total number of PPAs declined slightly from 158 to 152 PPAs, reflecting fewer unmet PPAs carried over from the previous year (see Annex 2 for detailed analysis on PPAs). All approved FY24 and FY25 PPAs can be accessed via this link. 7. PPAs are designed through intensive dialogue with IDA countries, guided by strong analytical underpinnings, and are calibrated against countries’ capacity, ensuring they address key drivers of debt vulnerabilities. 3 The SDFP Committee evaluates these PPAs to ensure that they adequately address key drivers of debt vulnerabilities.4 Starting in FY25, approval of PPA Notes were split between the Region-led and the SDFP Committee-led review process, based on a risk-based approach (see Section II.B for policy enhancements that enabled streamlined and risk-based decision-making). However, the SDFP Committee continues to review all PPAs to ensure that they adequately address key drivers of debt vulnerabilities. 1 PPAs are required for all IDA-eligible countries except for the following: (a) countries that are at low risk of debt distress based on the LIC DSF and countries where the MAC SRDSF is applied and which are determined by Management to have limited debt vulnerabilities; (b) countries with loans/credits in non-accrual status to the World Bank; and (c) countries that are eligible for funding from IDA’s Remaining Engaged in Conflict Allocation (RECA). 2 Due to the reclassification of the IDA eligibility in February 2024—which extended the Small Island Economies Exception to eligible non-island Small States—Belize and Eswatini prepared PPAs for the first time in FY25 (see Box A2.1 for new IDA-eligible countries in FY25). Additionally, Guinea-Bissau and Niger, which had been exempted from preparing FY24 PPAs, prepared PPAs in FY25 following improvements in the conditions that led to their FY24 exemption. In contrast, Afghanistan, Haiti, Kosovo, and Sudan were exempted from preparing FY25 PPAs (as of early May 2025, Nicaragua’s request for exemption is under review). Haiti was exempted due to ongoing political uncertainties. Afghanistan and Sudan continued to be exempt due to limited engagement with governments that do not allow for proper dialogue on the preparation or implementation of PPAs. Kosovo, a MAC SRDSF country, remained exempt because of limited debt vulnerabilities. 3 Country teams are encouraged to conduct a brief analysis of poverty, social, or environmental impacts of PPAs when relevant and to list mitigation measures when social and poverty impacts are expected. 4 The SDFP Committee consists of Directors from IDA Mobilization and IBRD Corporate Finance (DFCII), Operations Policy and Country Services (OPSPO), Economic Policy (EMFDR), and Credit Risk (CROCR) and Deputy General Counsel (LEGVP). Corporate review and clearance are supported by the SDFP Secretariat hosted by DFCII. -3- Figure 2. 1. Evolution of the PPAs Approved in FY21 – FY25 FY21 FY22 FY23 FY24 FY25 Total PPAs 130 PPAs 141 PPAs (58) 147 PPAs (60) 158 PPAs (59) 152 PPAs (61) (55) Debt Transparency 42 PPAs (42) 42 PPAs (39) 27 PPAs (26) 28 PPAs (25) 17 PPAs (15) Debt Management 53 PPAs (45) 53 PPAs (45) 62 PPAs (48) 61 PPAs (47) 58 PPAs (45) Fiscal Sustainability 35 PPAs (30) 46 PPAs (33) 58 PPAs (40) 69 PPAs (45) 77 PPAs (50) Country Characteristics 25 FCV 24 FCV 23 FCV 21 FCV 23 FCV Status 23 Small States 20 Small States 20 Small States 21 Small States 21 Small States 34 IDA only 36 IDA only 36 IDA only 33 IDA only 37 IDA only Lending Eligibility 12 Blend 12 Blend 13 Blend 13 Blend 15 Blend 9 Gap 10 Gap 11 Gap 13 Gap 9 Gap 31 High & In 33 High & In 34 High & In 31 High & In 30 High & In Risk Level Distress Distress Distress Distress Distress 19 Moderate 20 Moderate 22 Moderate 23 Moderate 24 Moderate 5 MAC-DSA 5 MAC-DSA 4 MAC-DSA 5 MAC-DSA 7 MAC-DSA 1/ Figures in parentheses indicate the number of countries with approved PPAs in each FY against respective DSEP area. 2/ Approved PPAs each FY include carry-over PPAs that were not satisfactorily implemented in the previous FY. -4- 8. IDA countries are increasingly prioritizing fiscal sustainability PPAs to support post- pandemic fiscal consolidation efforts. In the first two years of SDFP implementation, many countries focused on reforms enhancing debt transparency and management, recognizing the need for fiscal stimulus to address the COVID-19 pandemic. Following progress in debt transparency, countries have expanded their focus to restoring fiscal space and enhancing fiscal sustainability. The number of countries preparing at least one fiscal sustainability PPA rose from 30 in FY21 to 45 in FY24 and 50 in FY25. To support post-pandemic fiscal consolidation, these PPAs focused on expenditure reduction reforms in FY23 and FY24, such as wage bill cleanup and public investment rationalization. In FY25, the emphasis has shifted to domestic resource mobilization through broadening the tax base, adjusting tax rates, and streamlining tax expenditures and exemptions. 9. Debt transparency PPAs have strengthened debt reporting by institutionalizing reforms, although further efforts are needed to identify and contain debt-related vulnerabilities. In the first three years of implementation, PPAs focused on initial administrative actions to ensure the timely publication of comprehensive debt bulletins. For example, PPAs supported the establishment or designation of units within Ministries of Finance to oversee data collection and expand data coverage. These efforts laid the groundwork for institutionalizing the publication of debt reports in the following two years, ensuring sustained improvements over the medium term. Such reforms are critical for effective debt management, maintaining access to financing and even seeking support for debt restructuring and relief. While the declining number of debt transparency PPAs reflects progress, further advancements are needed in areas such as sectoral coverage and information on recent loan contracts, as highlighted in the World Bank’s Debt Reporting Heat Map.5 For instance, the recent report by Senegal’s Court of Auditors on the underreporting of fiscal deficits and public debt underscores the need for further reforms.6 10. Debt management PPAs have moved forward to tackle advanced policy and institutional reforms, aiming to enhance transparency, accountability, and fiscal responsibility. Initially, debt management PPAs supported administrative measures such as installing new data recording systems, adopting risk assessment methodologies for public guarantees or on-lending to SOEs, publishing annual borrowing plans, or establishing debt management offices. Building on these foundations, recent debt management PPAs have focused on advanced reforms, including the adoption of legal framework for contracting public loans and guarantees and rules to limit domestic and external debts, and the establishment of institutions to create transparency and accountability around debt management. As IDA countries increasingly rely on non-traditional and private-sector creditors, debt management has become more challenging, underscoring the need for sustained reforms to enhance debt management capacity 5 The World Bank’s Debt Reporting Heat Map indicates that in 2024, 67 percent of IDA countries have improved the accessibility of debt data by publishing debt reports on official government websites, a remarkable increase compared to 47 percent in 2020. The coverage of debt instruments is also considered adequate in 53 percent of countries in 2024. The timeliness of debt reports has also shown improvement, with more countries publishing debt reports periodically but the time lag of debt reports deteriorated. The FY24 SDFP Board Update (Annex 3) provides detailed analysis on the association between debt transparency PPAs and the Heat Map indicators. 6 In February 2025, Senegal's Court of Auditors released a review confirming significant underreporting of fiscal deficits and public debt between 2019–2023. The report revised fiscal deficits upward by 5.6 percentage points of GDP, while central government debt was adjusted from 74.4 percent to 99.7 percent of GDP at the end of 2023. These revisions primarily reflect previously undisclosed liabilities, including hidden loans totaling 25.3 percentage points of GDP. -5- (see Annex 1 on the global debt development for the growing role of non-traditional and private- sector creditors). 11. As natural catastrophes and public health emergencies become more frequent, PPAs increasingly focus on strengthening fiscal resilience to external shocks. Climate change elevates debt-related risks by weakening economic productivity, raising debt service costs, and constraining fiscal space for climate adaptation and mitigation. More frequent and severe extreme weather events further disrupt economic activity and drive recovery costs up. Strengthening fiscal resilience is crucial—not only for effective disaster response and recovery but also for proactive investments in climate adaptation, resilience, and risk transfers. PPAs have helped countries enhance fiscal resilience against future shocks by incorporating climate-related risks into fiscal risk statements and embedding climate consideration in budget planning and project selection (see Chapter III on IDA’s engagement with Pacific and Caribbean countries to raise awareness for climate-related fiscal risks).7 12. Reflecting the growing complexity of reforms, with 60 percent of PPAs classified as complex—up from 52 percent in FY21—analytical underpinnings have played an increasingly important role in PPA formulation.8 The Debt Sustainability Analyses (DSAs) remain the foundation for identifying debt-related vulnerabilities. Excluding DSAs that underpin all PPAs, the share of met PPAs with at least one analytical underpinning rose from 70 percent in FY21 to 87 percent in FY24. In FY24, 88 percent of complex PPAs had at least one analytical underpinning, compared to about two-thirds of non-complex PPAs. The shift toward fiscal sustainability PPAs has increased the use of diagnostic tools such as Public Expenditure Reviews, Public Finance Reviews, Tax Administration Diagnostic Assessment Tools, and Country Climate and Development Reports.9 These tools provide more targeted recommendations to strengthen domestic resource mobilization and address fiscal sustainability challenges. 13. As PPAs increasingly address advanced reforms to mitigate debt-related vulnerabilities, adopting a programmatic approach over the medium term is crucial. This approach, grounded in strong analytical underpinnings and supported by technical assistance, facilitates incremental improvements in authorities’ capacity while strengthening institutional and legal foundations. While the share of programmatic PPAs has remained steady at around 50 percent, their focus has also shifted from enhancing debt transparency to promoting fiscal sustainability. For instance, in the first three years of SDFP implementation, programmatic PPAs on debt transparency played a key role in establishing legal frameworks and institutionalizing debt reporting. These efforts laid the groundwork for publishing more comprehensive debt reports and gradually expanding their coverage in the subsequent years. Similarly, programmatic PPAs on 7 In FY24, countries, such as Burkina Faso, Guyana, Micronesia, Pakistan, Rwanda, Senegal, St. Lucia, St. Vincent and the Grenadines, and Tanzania, implemented measures to enhance fiscal resilience to climate change and natural disasters. 8 To assess this increasing complexity, we examined three key dimensions: (i) whether PPAs required multi- stakeholder engagement, adding a layer of coordination; (ii) whether PPAs aimed for institutionalization to ensure sustainability; and (iii) whether PPA were programmatic, either by building on previous actions or proposing future reforms. 9 Previously, PPA design relied on core debt reports, such as Debt Management Performance Assessments or the Debt Reporting Heat Map, reflecting a focus on debt transparency and debt management. -6- fiscal sustainability have helped domestic resource mobilization through expanding the tax base, adjusting tax rates, streamlining tax expenditures and exemptions.10 14. As PPAs consistently emphasize institutionalizing policy reforms, monitoring systems are being enhanced to ensure their sustainability. Across all reform areas, the share of PPAs that institutionalize reforms through legal instruments have increased from 47 percent in FY21 to 55 percent in FY25, supporting sustained reforms. Fiscal sustainability PPAs hold the lion’s share, supporting post-pandemic fiscal consolidation efforts on domestic resource mobilization, such as revenue-generating reforms and improved tax collection mechanisms. 11 Countries that have institutionalized SOE fiscal risk assessments are now incorporating measures to limit SOE borrowing.12 To track the sustainability of these institutionalizing reforms and identify any policy reversals, an assessment questionnaire will be developed, with outcomes reported every other year in the SDFP Board Update.13 15. Unmet PPAs highlight the need for stronger operational support, alongside continued policy dialogue, stronger analytical underpinnings, and a programmatic approach. In FY24, 17 PPAs from 10 countries missed the June 30 deadline due to several factors: 14 (i) underestimating the time and capacity required for complex reforms; (ii) diverging views on PPA completion, leading to assessments that PPAs are not fully implemented; and (iii) limited stakeholder engagement, often due to shifting priorities by new governments. Continued policy dialogue, analytical underpinnings, and a programmatic approach are key to designing ambitious PPAs. However, successful implementation hinges on operational support including lending and capacity-building technical assistance. Nearly three-fourths of unmet PPAs—most of which were backed by analytical underpinnings—lacked sufficient operational support.15 Additionally, two- fifths followed a programmatic approach, indicating that this approach alone is not enough to ensure successful implementation. As PPAs advance toward more complex reforms, stronger synergy with Bank operations is essential to support timely implementation. 10 Examples include Ghana’s series of domestic resource mobilization reforms. In FY22, Ghana submitted a tax exemption bill to parliament, followed by the approval of comprehensive tax policy measures in FY23, including an increase in value-added tax (VAT), revisions to the income tax system, and the removal of import duty exemptions. In FY24, the country enacted the Tax Exemptions Act to regulate exemptions and amended the VAT law to eliminate certain exemptions. 11 Examples include Côte d'Ivoire’s non-tax revenue collection measures in FY23 and the implementation of digital platforms for non-tax revenue collection in FY24; and Fiji’s removal of concessional corporate tax rates and enforcement of the standard corporate tax rate in FY23, followed by an increase in the corporate tax rate in FY24. 12 Examples include Cabo Verde’s publication of a quarterly SOE bulletin with a risk assessment in FY22, followed by a revised State Enterprise Sector law in FY24 to tighten controls on SOE borrowing, clarify auditing requirements, and introduce risk management for SOE operations; and Kyrgyz Republic’s expansion of debt reporting to include its seven largest SOEs and first risk assessment published in FY21, which was later institutionalized through the FY22 PPA, along with the restructuring of energy sector SOE debt to the government and the establishment of terms for extending new on-financing to these SOEs in FY23. 13 The FY24 SDFP Board Update (Annex 2) provides a detailed assessment of the sustainability of institutionalized reforms. Over 95 percent of the reforms implemented between FY21 and FY23 have been sustained and remain effective. Those that have not been maintained in later years are primarily due to weak government capacity, leading to implementation delays, or external shocks such as climate-related disasters and cash flow pressures, which have forced policy reprioritization or postponement. 14 Subsequently, five of these PPAs from four countries were successfully implemented between July and December 2024 (see Section II.B for FY24 policy enhancements). 15 The share of PPAs supported through Development Policy Financing (DPF) was 27 percent in FY24 and 31 percent in FY25, respectively. -7- 16. Breaches of non-concessional borrowing (NCB) ceiling PPAs remain limited but persistent and recurring, underscoring the need for enhanced engagement with creditors to promote sustainable financing practices. NCB ceiling PPAs serve as anchors for debt sustainability, signaling a country’s commitment to preserving fiscal sustainability and advocating for concessional financing. Some IDA countries have also leveraged NCB ceilings in negotiating integrated financing packages with creditors to obtain better overall terms. Among 38 IDA countries that have established NCB ceiling PPAs, two countries—The Maldives and Djibouti— breached their ceilings in FY24. The Maldives, at high risk of external debt distress, breached its zero NCB ceiling PPA for the fourth consecutive year, leading to continued application of hardened financing terms.16 Djibouti breached its NCB ceiling for the second time since FY21, highlighting the need to strengthen creditor coordination and promote sustainable financing practices (see Chapter III on in-country creditor outreach and stronger partnerships with MDBs to coordinate sustainable financing policies). B. Strengthening the SDFP 17. Since FY21, the implementation of the SDFP provided key lessons, indicating that well-calibrated policy adjustments can better support its objectives. Countries recognize the SDFP’s crucial role in fostering dialogues on key drivers of debt vulnerabilities, even in complex and challenging country contexts. Management has explored ways to enhance the Policy impact through the IDA20 Mid-Term Review, the FY24 SDFP Board Update, and the IDA21 Replenishment Report. These changes aimed to streamline processes, expedite unmet PPA implementation, adapt PPAs to evolving country contexts, and reinforce the Policy’s incentive mechanism. i. Review of FY24 Policy Enhancements 18. To enhance the impact and effectiveness of the SDFP, the Board approved policy revisions and changes to implementation arrangements in FY24. The approved policy changes include: (a) allowing the release of set-asides within the year, provided that carry-over PPAs are satisfactorily implemented; and (b) permitting revisions to approved PPAs up to a fixed mid-point deadline to address implementation challenges. As part of the broader SimplifIDA effort, Management introduced the procedural changes to enhance policy implementation, including: (c) transferring decision-making for PPAs and IANs to the Regions, based on a risk-based approach, improving efficiency and risk management, while corporate units continue to provide advice; and (d) retaining Management’s flexibility to determine changes of governance—such as Accountability and Decision-Making—and implementation procedures to enhance efficiency further.17 16 Following repeated breaches in FY21 and FY22, the Maldives’ financing terms were hardened from 100 percent grants to a mix of 50 percent grants and 50 percent credits under IDA Small Economy terms. After another breach in FY23, its financing terms were further hardened to 100 percent credits in FY24, which remained in place for FY25. 17 For details, see: (i) IDA20 Mid-Term Review: Implementation Update and Issues for Discussion (Omnibus Paper), Washington, D.C., World Bank Group, and (ii) Sustainable Development Finance Policy of the International Development Association: FY24 Implementation Update and Proposal for Policy Enhancement (English). Washington, D.C., World Bank Group. -8- 19. Initial outcomes in FY25 highlight the positive impact of the policy revisions and the implementation procedures: a. Faster access to set-asides through timely implementation of unmet PPAs. By December 2024, Bhutan, Dominica, St. Lucia, and Tanzania successfully implemented their carry-over PPAs and received set-asides within FY25. 18 This policy adjustment incentivized timely completion of unaddressed reforms, facilitated country programming, and enhanced client dialogue. b. Improved flexibility in adapting PPAs to changing country circumstances. São Tomé and Príncipe revised an approved PPA to better align with its context. The original PPA required publishing a fiscal risk statement detailing contingent liabilities of two key SOEs. However, the authorities later informed the country team that the government holds only a minority share in one of the two SOEs, limiting data access. As a result, São Tomé and Príncipe requested a revision to replace this SOE with another, maintaining the PPA’s focus on debt transparency while ensuring feasibility. Similarly, the Maldives and Kiribati requested revisions to their approved PPAs to better align with their country contexts. c. Faster decision-making to reduce PPA approval time. Previously, approvals required concurrence from three Vice Presidents and approval from the Managing Director of Operations. By empowering the SDFP Committee to make final decisions on PPA Notes and IANs, processing time for steps taken by the SDFP Committee has decreased by almost 70 percent. d. Aligning decision-making with accountability through a risk-based approach. Countries subject to Committee-led reviews were determined based on various risk factors, including debt sustainability, past performance on PPAs, and first-time PPA preparation.19 Using these criteria, final decision-making on 30 PPA Notes and IANs was transferred to the Regions, while the SDFP Committee retained decision making over 31 of 61 countries preparing PPAs in FY25.20 By transferring final decision-making to the Regions—where substantial technical and country-focused expertise resides—PPAs can be more tailored to country circumstances and better aligned with ongoing lending operations or technical assistance. 18 PPAs in these countries remained unmet at the FY24 deadline (June 30) due to the following reasons: challenges in internal coordination and delays in government processes (Bhutan); the need to better align the PPA formulation with the country’s legal context (Tanzania); and legal evidence provided initially did not meet key PPA requirements (Dominica and St. Lucia). 19 The following criteria determined which countries remained under the SDFP Committee-led review: (i) countries under the Common Framework or undergoing debt restructuring; (ii) countries that breached their NCB ceilings or those facing a discount; (iii) countries preparing PPAs for the first time; (iv) countries with an unsustainable debt outlook; (v) countries at high risk of debt distress with elevated risks; and (vi) high-visibility countries (e.g., the Operations Committee reviewed countries’ DPF over the past 12 months). 20 In FY25, the following countries are reviewed by the SDFP Committee for the criteria in the preceding footnote: (i) Chad, Republic of Congo, Ethiopia, Ghana, Sri Lanka, and Zambia; (ii) Djibouti, the Maldives, Timor-Leste, and Uganda; (iii) Belize and Eswatini; (iv) Grenada, Lao PDR, Malawi, and São Tomé and Príncipe; (v) Burundi, Central African Republic, Dominica, Guinea-Bissau, Kenya, Mozambique, Samoa, Sierra Leone, St. Lucia, St. Vincent and the Grenadines, Tonga, and Vanuatu; and (vi) Nigeria, Pakistan, and Tajikistan. Additionally, the Committee retained flexibility to review other high-risk countries not captured in these criteria. -9- ii. Transitioning from a Negative Set-Aside to a Positive Incentive 20. To reward timely PPA implementation, the SDFP will shift from the current penalty- based set-aside mechanism to a reward-based approach starting in IDA21. The new incentive approach was introduced in the FY24 SDFP Board Update and approved during the IDA21 replenishment process. In this update, Management presents the key policy changes and implementation arrangements for the new incentive approach, with the policy changes set to be submitted for Board approval in time for implementation in FY26. 21. Under the current Policy, countries that fail to implement PPAs face set-asides of their annual country allocations in the next fiscal year. If PPAs remain unmet for two consecutive years, the set-aside is permanently lost (“discount”). This penalty-based mechanism has been perceived negatively by governments, affecting country dialogue and engagement. Unlike other World Bank lending instruments, which offer increased disbursements for reform implementation, this model only applies a “stick” through reduced allocations. 22. Under the new reward-based approach, countries that satisfactorily implement PPAs will receive additional allocations as part of their country allocations.21 The revised Policy will include the following: a. Incentive for implementation: If a country satisfactorily implements all PPAs in a given fiscal year, it will receive a top-up to its country allocation at the start of the next fiscal year. If implementation is not satisfactory in one fiscal year, the country may still qualify for the top-up if such a PPA is completed within the second fiscal year. b. Consequences for non-compliance: If a PPA that is unrelated to the NCB ceiling remains unmet for two fiscal years, or if an NCB ceiling PPA is breached within one fiscal year, the incentive is lost. c. Repeated non-compliance: Countries with repeated unsatisfactory PPA implementation may face restrictions on accessing the incentive, a hardening of their financing terms, or both, as determined by Management. d. Uniform incentive scale: The incentive will be the same for all countries, regardless of their risk rating. 23. Management has identified the following implementation arrangements to support policy implementation: a. Incentive: The incentive would be equivalent to 10 percent of the country’s annual Performance-Based Allocations (PBA) and will be awarded upon successful PPA 21 The SDFP Incentive under PBA is part of the Operational and Financing Framework for IDA21 and amounts up to US$5.8 billion: “IDA21 Replenishment Report: Ending Poverty on a Livable Planet: Delivering Impact with Urgency and Ambition”, World Bank, March 2025. - 10 - implementation. Implementation experience shows that this level is sufficient to incentivize timely PPA completion.22 b. Eligibility. All countries are eligible for the incentive: (i) countries under the LIC DSF with low risk of external debt distress or those with low overall risk of sovereign stress under the MAC SRDSF will automatically receive the incentive without implementing PPAs due to their limited vulnerabilities; and (ii) countries at moderate, high risk of external debt distress or in debt distress under the LIC DSF and those with moderate or high overall risk of sovereign stress under the MAC SRDSF would need to implement PPAs to receive the incentive. Remaining Engaged during Conflict Allocation (RECA) countries or those under the World Bank’s Operation Policy 7.30 (OP 7.30) will also have the option of receiving the incentive by implementing PPAs, designed with consideration to their capacity constraints.23 In addition, Management will have the discretion to award the incentive to countries that are unable to prepare PPAs or must cancel approved PPAs due to a sudden external shock (e.g., health emergency, natural disaster, conflict, or economic crisis) that significantly disrupts central government operations. However, countries that are unable to prepare PPAs due to lack of engagement with authorities or those in non-accrual status will not receive the incentive as rewarding non-implementation would distort incentives for countries that are implementing PPAs.24 c. Rules. Countries under the eligibility category (i) will receive the incentive at the start of each fiscal year as a reward for sustainable financing practices. Other countries will receive it based on implementation assessment of their previous year’s PPAs.25 If a country fails to comply with a PPA that is unrelated to the NCB ceiling by the June 30 deadline but fulfills it within the following fiscal year, it can still receive the incentive.26 Since NCB ceilings are set to promote sustainable financing, the new reward-based approach imposes a stricter penalty for breaches—resulting in a permanent loss of the incentive with no 22 Under the current Policy, a 10 percent set-aside applies to countries under the MAC SRDSF or those at moderate risk of debt distress under the LIC DSF, while a 20 percent set-aside applies to those at high risk of debt distress or already in debt distress. In FY25, 31 out of 61 countries would face a 10 percent set-aside if they do not meet their PPAs. Among countries with unmet PPAs over the past 4 years, 43 percent faced a 20 percent set aside, while 57 percent faced a 10 percent set-aside. 23 Currently, RECA countries are exempt from PPA preparation, whereas countries under OP 7.30 can request an exemption from PPA preparation. Neither is subject to set-asides or any other restrictions under the SDFP. 24 Countries exempt from PPA preparation in FY25 under the current rule will receive the incentive in FY26, subject to Management’s discretion. In subsequent years, the incentive will be contingent on successful implementation of PPAs. In FY25, the following countries are exempt from PPA preparation: Afghanistan and Sudan (limited engagement with governments); Yemen and South Sudan (RECA); and Haiti (political instability). As of early May 2025, Nicaragua’s request for exemption is under review. 25 PPAs for each country are assessed collectively as a package each year. To qualify for the incentive, a country must fully implement all PPAs (in FY26, countries will receive the incentive based on PPA implementation in FY25). 26 If a country fulfills unmet PPAs by the end of March (or by the end of December if it is the final year of the IDA cycle), it will receive the incentive within the same fiscal year. For PPAs completed after this deadline but before the end of June, the incentive will be provided at the start of the next fiscal year (countries that implement carry- over PPAs in FY25, between January and June 2025, will have their set-asides restored at the beginning of FY26). - 11 - opportunity for recovery.27 As before, the new incentive remains replenishment neutral (see Annex Table 3.1 for the detailed mechanism).28 d. Implications on resource allocation. PPA implementation will be delinked from a country’s eligibility to frontload, backload, receive reallocations and Shorter Maturity Loans through the Scale-Up Window. However, as a corporate priority, successful PPA delivery may be considered in the reallocation process when prioritizing scare resources. This will reduce the multiple “sticks” associated with unsatisfactory PPA implementation, which have previously hindered country programming and client dialogue. The previous approach created uncertainty not only for a country’s own allocation but also for others in the same region, as they may have had to absorb unexpected reallocations. Instead, introducing a single incentive for satisfactory PPA implementation will strengthen country engagement and foster a more conducive environment for dialogue. 24. Building on the FY24 policy enhancements, the new incentive mechanism will streamline implementation while preserving the Policy’s strong impact. It is expected to foster more constructive dialogue with IDA countries on critical reforms addressing debt vulnerabilities. Management will monitor policy implementation and propose further refinements, as needed, to improve the effectiveness and efficiency of the SDFP. III. PROGRAM OF CREDITOR OUTREACH 25. The PCO aims to address debt-related risks in IDA countries by strengthening creditor coordination and promoting transparent and sustainable financing practices. Since the launch of the SDFP in July 2020, IDA has partnered with multilateral organizations, particularly MDBs, to facilitate information sharing and develop sustainable financing principles. Recognizing the growing role of non-traditional and private-sector creditors in the development finance landscape, IDA has expanded its outreach to engage these stakeholders and advocate for transparent and sustainable financing .29 By hosting in-country outreach events, fostering dialogue through global and regional creditor networks, and introducing new information-sharing 27 This rule applies to breaches of NCB ceiling PPAs in FY25. However, if a country has other unmet PPAs unrelated to the non-NCB ceiling, it is not required to carry them over to the next fiscal year but may propose them again in the following fiscal year. 28 In the final year of an IDA replenishment, any unused resources from the SDFP Incentive will be added to the general Country Allocation resources and redistributed across all countries to ensure full utilization of resources within the replenishment cycle. An equivalent amount will then be deducted from the general Country Allocation resources in the next replenishment and reallocated to the SDFP Incentive to reward countries for implementing carry-over PPAs in the final year of the IDA cycle. This approach follows the replenishment-neutral set-aside mechanism approved in IDA19 (for details, see: IDA's Sustainable Development Finance Policy, Proposed Adjustment of the Set-Aside Mechanism. IDA/SecM221-0100, March 2021). 29 The share of non-Paris Club creditors and market-based debt in PPG external debt among IDA countries increased from 20 percent in 2010 to 46 percent in 2019 before slightly declining to 41 percent in 2023. - 12 - initiatives, IDA has promoted a more inclusive, coordinated approach to enhancing debt transparency.30 26. Since the last Update, IDA organized an in-country creditor outreach event in Burundi to rebuild borrower-creditor relationships and foster a shared understanding of the need for sustainable financing. Donor support to Burundi had been declining since 2015 due to concerns about the government’s ability to implement reforms, leading to a significant reduction in health and education expenditures. Requested by the country and with support from IDA Deputies, IDA co-hosted the event with the authorities to pave the way for a resumption of financing and to reinforce the importance of transparent and sustainable financing.31 The outreach event helped bridge the confidence gap between the authorities and the donor community. Many donors have since referred to the event as a positive milestone, particularly in recognizing recent progress in reform implementation. 27. IDA has strengthened its collaboration with export credit agencies by sharing information on establishing NCB ceilings as an anchor for debt sustainability. Through the ‘Lending to LICs’ mailbox, IDA has supported creditors in aligning their lending practices with NCB ceiling PPAs by providing ceiling limits and grant-element calculations before loan agreements are signed.32 For countries with non-zero NCB ceilings and that are making use of integrated financial packages, IDA has clarified the flexibilities embedded in the SDFP to support countries’ financing needs without exacerbating debt risks. Additionally, IDA has actively engaged with export credit agencies at the Organisation for Economic Cooperation and Development’s (OECD’s) Working Group on Export Credits and Export Guarantees meetings. The OECD’s Working Group meeting has brought together OECD member countries and non- member countries, including China, to discuss the importance of establishing and adhering to NCB ceilings.33 28. IDA further reinforced partnerships with MDBs and the IMF to ensure the coordinated application of sustainable financing policies. Several MDBs have adopted or closely aligned their sustainable financing policies with IDA’s SDFP to enhance the collective impact of measures aimed at mitigating debt-related risks (see Annex 4 on sustainable finance policies across MDBs). This partnership aims to deepen collaboration by fostering a shared understanding of key flexibilities within the SDFP framework and building consensus for coordinated actions toward transparent and sustainable financing practices. These include ex-ante exceptions and considerations for integrated financing packages tied to non-concessional borrowing for projects with high economic, financial, and social returns. 30 Interested readers may refer to the full list of creditor outreach events in “Sustainable Development Finance Policy of the International Development Association: FY24 Implementation Update and Proposal for Policy Enhancement”, World Bank, April 2024, Washington, DC. Available at: https://ida.worldbank.org/en/financing/debt/sustainable-development-finance-policy. 31 The closed-door conference brought together 77 in-person representatives of Burundi’s development partners, MDBs, international financial institutions, non-traditional creditors, and private-sector commercial banks. High- level government representatives from the Ministry of Finance, the Ministry of Foreign Affairs, the Central Bank of Burundi, the office of the Prime Minister, and the President’s office also participated. 32 So far in the IDA20 period, the ‘Lending to LICs’ mailbox, jointly managed by the IMF and IDA, has received over 62 inquiries and notifications regarding more than 40 IDA countries. 33 Non-member countries invited to attend the Working Party include Argentina, Brazil, Bulgaria, China, Croatia, India, Indonesia, Kazakhstan, Malaysia, Nigeria, Peru, Romania, Singapore, South Africa, Thailand, and Ukraine. - 13 - 29. As part of the PCO, IDA has continued to engage with Small States and Small Island Economies, focusing on enhancing fiscal resilience to climate shocks and natural disasters. As natural catastrophes and public health emergencies become more frequent, strengthening fiscal resilience is essential—not only for effective post-disaster response and recovery but also for proactive investments in climate adaptation, resilience, and risk transfers. In recent years, IDA has engaged with Pacific and Caribbean states, emphasizing the importance of debt sustainability and transparency as key to strengthening climate resilience. IDA has supported these states through PPAs to enhance fiscal resilience to climate shocks and natural disasters, which reinforces the World Bank’s enhanced crisis toolkit. In line with these efforts, the World Bank introduced the Climate-Resilient Debt Clause (CRDC) in 2023, allowing countries to temporarily defer debt repayments on their IBRD and IDA loans during qualifying climate disasters. This mechanism helps reduce debt pressures during crises, freeing up domestic resources for disaster response (see Box 3.1 on CRDC for details).34 Box 3. 1. Climate-Resilient Debt Clause To tackle the interrelated climate and debt vulnerabilities, the World Bank introduced the Climate-Resilient Debt Clause (CRDC) in 2023. As originally approved, CRDC allowed eligible borrowers the option to defer principal payments on their IBRD loans and IDA credits for two years following severe natural disasters that meet pre-specified trigger thresholds. In November 2024, CRDC was expanded to cover all natural catastrophes, including droughts, floods, and public health emergencies caused by biological events. Eligibility • IBRD and IDA-eligible Small State Economies, the Small States Forum members, and Small Island Developing States as defined by the United Nations. • New loans and existing loans with a remaining repayment period greater than five years. The feature may be activated once per loan life during the deferral eligibility period. • Borrowers not undergoing debt restructuring with other lenders at the time of the amendment. • Borrowers current on World Bank debt service at the time of CRDC inclusion and activation. Covered Disasters • Natural catastrophes, including earthquakes, tropical cyclones, floods and droughts. • Public health emergencies caused by a biological event (e.g., pandemics, epidemics). Deferral duration • Borrowers may defer principal, and/or interest payments for a period of up to two years, once per loan life. • The deferral can be exercised anytime from the first scheduled repayment date until five years before the final repayment. 34 As of January 2025, 18 countries have CRDC provisions in their loans: The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Guyana, Grenada, St. Lucia, and St. Vincent and the Grenadines (all LCR); Fiji, Samoa, the Solomon Islands, Tonga, and Vanuatu (all EAP); Eswatini and Lesotho (both AFE); Montenegro (ECA); and Bhutan (SAR). One country—St. Vincent and the Grenadines—exercised the deferral option after Hurricane Beryl. - 14 - 30. IDA remains actively involved in global fora on sustainable development finance. In FY24, IDA co-hosted a series of workshops on sustainable finance with the Multilateral Cooperation Center for Development Finance (MCDF) and the Asian Infrastructure Investment Bank (AIIB). These workshops facilitated knowledge exchange, strengthened collaborations, and built partnerships with creditors. Building on this momentum, MCDF organized a four-day workshop in November 2024 with the Central Asia Regional Economic Cooperation Institute, further advancing debt sustainability efforts and deepening engagement between creditors and borrowers.35 Additionally, IDA has participated in the Global Sovereign Debt Roundtable (GSDR), which serves as a platform for advancing creditor coordination. The GSDR supports existing debt restructuring mechanisms under the Common Framework and alternative approaches by fostering a shared understanding of key concepts and principles, ultimately facilitating individual debt restructuring (see Box 3.2 on the Common Framework and ongoing debt restructuring efforts).36 Box 3. 2. The Common Framework and Ongoing Debt Restructuring Efforts The Group of Twenty’s Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative, launched in November 2020, aims to strengthen the international debt architecture for the world’s poorest countries. It provides a structure for official creditor coordination to ensure timely, orderly, and durable debt treatment while promoting fair burden-sharing across official and private sector creditors. Initially part of broader debt relief efforts by the Group of Twenty during the pandemic, it also brought official and commercial creditors together for the first time. The framework considers debt treatment requests from eligible countries on a case-by-case basis, addressing solvency challenges with a long-term perspective. Progress in debt restructuring: • All four countries under the Common Framework made substantial progress. Chad reached an agreement with its main creditors in November 2022. Zambia agreed to a state-contingent debt treatment with official creditors in October 2023 and completed a bond exchange in June 2024. Negotiations with private creditors are in the final stage. Ghana also settled negotiations with its official creditors in June 2024 and implemented a bond exchange in October 2024. Earlier, Ghana closed a domestic debt exchange in 2023 with 95 percent participation, significantly reducing refinancing needs. These restructuring efforts enabled the IMF to conclude financing programs and allowed IDA to extend large concessional loans or grants. Despite delays due to internal conflict, Ethiopia’s negotiations are ongoing. • Beyond the Common Framework, Sri Lanka undertook a domestic debt restructuring in 2023 and finalized a debt restructuring agreement with official creditors and China in June 2024, followed by a bond exchange in December 2024. Malawi outlined a debt restructuring strategy in July 2022 and is negotiating with commercial and bilateral creditors, including China, to ease debt service obligations. 35 The workshop successfully brought together a diverse group of participants, including representatives from borrowing countries in Central and West Asia, as well as financiers and financial institutions such as the Asian Development Bank, the AIIB, the China Development Bank, the Export-Import Bank of China, the Eurasian Development Bank, the Eurasian Fund for Stabilization and Development, the Industrial and Commercial Bank of China, and the World Bank. 36 The GSDR, co-chaired by the World Bank, the IMF, and the Group of Twenty Presidency, includes participation from traditional and non-traditional creditors, private-sector creditors, and borrowing countries. It began its work in February 2023 and meets biannually at the principal level during the IMF-World Bank Spring and Annual meetings. - 15 - 31. Building on these accomplishments, IDA remains committed to strengthening creditor coordination and advancing transparent and sustainable financing practices to address debt-related risks in IDA countries. Through enhanced collaborations with creditors and innovative information sharing initiatives, IDA aims to mitigate debt vulnerabilities and empower countries to achieve long-term development goals through sustainable financing. As the role of non-traditional and private-sector creditors grows in the development finance landscape, IDA will continue to adopt a coordinated, inclusive approach, promoting transparent and sustainable financing practices in IDA countries. Specifically: a. Hosting Outreach Events: IDA will continue organizing in-country outreach events while refining selection criteria to maximize its convening power. This approach aims to unite creditors in a fragmented landscape where debt-related risks can escalate. b. Engagement with Export Credit Agencies: In collaboration with OECD, IDA will deepen engagement with export credit agencies to ensure compliance with NCB ceilings, supporting sustainable financing practices. c. Coordination with MDBs: IDA will hold biannual technical meetings with MDBs alongside the Annual and Spring Meetings to coordinate the application of sustainable financing policies. Options for engaging with emerging and non-traditional creditors in a similar manner will also be considered. d. Engagement with Creditors at global fora: IDA will continue to engage with creditors through platforms such as the GSDR to deepen engagement with creditors to promote transparent and sustainable financing practices. IV. CONCLUSION 32. As the DSEP enters its fifth year, its continued emphasis on debt transparency, debt management, and fiscal sustainability remains crucial to addressing debt vulnerabilities in IDA countries. Through a focus on fiscal sustainability, institutionalized reforms, and programmatic approaches, IDA has helped countries adopt transparent and sustainable borrowing practices. Growing recognition of the need for fiscal resilience to climate-related shocks underscores the importance of sustained engagement with IDA countries, building on outreach through the PCO. Moving forward, IDA will continue strengthening its commitment to transparent and sustainable financing, helping countries improve debt transparency, strengthen debt management, and enhance fiscal sustainability. 33. The enhancements to the SDFP in FY24, combined with the transition to a reward- based incentive mechanism under IDA21, mark a significant step toward improving the Policy’s effectiveness and impact. Early implementation outcomes in FY25 demonstrate that the revised processes have enabled faster access to set-asides upon completing previously unaddressed reforms and provided greater flexibility in adapting ongoing reforms to evolving country circumstances. The shift from a penalty-based set-aside mechanism to a positive incentive approach is expected to further strengthen country ownership and facilitate more constructive dialogue on critical reforms. Management will closely monitor the implementation of the new - 16 - incentive mechanism and remain responsive to evolving country needs, ensuring that the SDFP continues to serve as a key instrument in addressing debt vulnerabilities in IDA countries. 34. IDA remains committed to strengthening creditor coordination and promoting transparent, sustainable financing practices to mitigate debt-related risks in IDA countries. Through sustained outreach, strategic collaboration with MDBs, engagement with non-traditional creditors, and innovative information-sharing initiatives, IDA has fostered a more inclusive and coordinated approach to debt transparency. Looking ahead, IDA will further enhance engagement with creditors and deepen partnerships with MDBs to reduce debt-related risks through promoting transparent and sustainable financing practices. - 17 - ANNEX 1. GLOBAL DEBT DEVELOPMENT 1. Despite recent declines, public debt in IDA countries remains above pre-pandemic levels. In IDA/IBRD-blend countries (hereafter ‘IDA-Blend’ or ‘Blend’), median public debt peaked at over 80 percent of GDP in 2020 before declining to 75 percent in 2023 (Figure A1.1). Across all IDA countries, the median public debt-to-GDP ratio rose from 52 percent in 2021 to 55 percent in 2023, despite post-COVID fiscal consolidation. While debt ratios are expected to stabilize in 2024, regional disparities persist, with AFE, AFW, and ECA facing higher debt levels (Figure A1.2). Figure A1. 1. Public Debt Trends in IDA Countries: Median Public Debt-to-GDP Ratio by Country Groups 100 IDA IDA only 90 Gap Blend Small states FCV 80 Percentage 70 60 50 40 30 20 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: World Bank, World Development Indicators and International Debt Statistics, staff computation. Figure A1. 2. Public Debt Trends in IDA Countries: Median Public Debt-to-GDP Ratio by Region 120 AFE AFW EAP ECA 110 LCR MNA SAR 100 90 80 Percentage 70 60 50 40 30 20 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: World Bank, World Development Indicators and International Debt Statistics, staff computation. - 18 - 2. The shift in debt risk levels among IDA countries from 2010 to 2024 highlights rising fiscal vulnerabilities. Most are now classified as either at high risk or already in debt distress. The share of IDA countries under the LIC DSF at high risk or in debt distress rose from 52 percent in 2019 to 59 percent in 2021, before declining to 55 percent at end-October 2024 (Figure A1.3). This fluctuation reflects rising external debt arrears and ongoing debt restructuring negotiations. Between 2019 and 2024, 17 IDA countries saw their debt distress risk downgraded, while 7 countries experienced an upgrade (Figure A1.4). Figure A1. 3. Evolution of LIC DSA Debt Risk for IDA Countries: External Debt Distress, Percentage Shares Low Moderate High In debt distress 6 5 6 6 6 10 11 10 12 15 12 13 15 16 18 19 22 21 24 28 27 24 33 37 37 43 46 43 38 37 45 39 45 35 35 52 46 42 36 31 32 37 37 32 34 28 29 31 31 28 21 19 18 15 15 13 9 9 9 9 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: WB IMF LIC DSA Database, October 2024. Note: As of October 2024, for 68 IDA countries (excluding Moldova). Figure A1. 4. Evolution of LIC DSA Debt Risk for IDA Countries: Change in Risk Ratings, 2019 - 2024 2019 2020 2021 2022 2023 2024 Downgrades Madagascar, Rwanda, Senegal L M M M M M Tanzania, Timor-Leste, Uganda L L M M M M Kenya, Papua New Guinea M H H H H H Comoros, Guinea-Bissau M M H H H H Vanuatu M M M M M H Malawi M M H ID ID ID Lao PDR, Zambia H H H ID ID ID Djibouti, Ghana H H H H ID ID Ethiopia H H H H H ID Upgrades Cabo Verde H H H M M M Mauritania H H H H M M Micronesia H H H H H M Gambia, South Sudan ID H H H H H Mozambique ID ID ID H H H Somalia ID ID ID ID M M Others Chad H H ID H H H Source: LIC DSA database (as of end October 2024). Note: L: Low, M: Moderate, H: High, ID: In distress. - 19 - 3. Debt challenges continue to pose significant risks to IDA countries, limiting their ability to achieve sustainable development. The surge in public debt following the COVID-19 pandemic has driven a focus on fiscal consolidation, often requiring difficult policy decisions amid tight global financial conditions and economic constraints. While declining since the pandemic, fiscal deficits in IDA countries remain a major concern, especially for Blend and Small States struggling with mounting debt and limited fiscal capacity (Figure A1.5). Additionally, IDA countries continue to face large gross financing needs, with the outlook remaining high (Figure A1.6). As a result, constrained fiscal space has restricted investment in critical sectors such as healthcare, education, and infrastructure. Meanwhile, debt sustainability concerns have intensified as tighter global financial conditions make it harder to service rapidly accumulated debt, particularly from the pandemic years. Fragility, conflict, and violence (FCV) further exacerbate debt servicing challenges due to limited fiscal space from security-related expenditures or difficulties in mobilizing resources in areas beyond government control. Figure A1. 5. Fiscal Balance in IDA Countries 1 Percentage of GDP, Average 0 -1 -2 -3 -4 -5 -6 -7 -8 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 IDA average IDA only Gap Blend small states FCV Source: IMF WEO and staff computation Figure A1. 6. Gross Financing Needs for IDA Countries, percentage of GDP 11 10 Percentage of GDP 9 8 7 6 5 4 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025f 2026f Source: World Bank LIC DSF database and staff computation Note: f = forecast - 20 - 4. Over the past decade, IDA countries have increasingly shifted from concessional loans to non-concessional and commercial borrowing, heightening financial vulnerabilities. Reliance on non-Paris Club creditors and market-based sources, including international bonds, grew significantly.37 Their share in public and publicly guaranteed (PPG) external debt rose from 20 percent in 2010 to 46 percent in 2019, before declining slightly to 41 percent in 2023 due to increased multilateral financing during the COVID-19 pandemic (Figure A1.7). Meanwhile, total PPG debt volumes have expanded from US$264 billion in 2010 to US$726 billion in 2023, reflecting growing development financing needs (Figure A1.8). The changing debt composition and rising volumes have increased debt servicing costs and market vulnerability, complicating debt management and restructuring.38 Figure A1. 7. External PPG Debt Stock for IDA Countries 100 IDA Percentage of GDP, Average 80 IBRD IMF 60 Other multilaterals 40 Bilateral - PC Bilateral - Non PC 20 Other private creditors 0 Bonds 2010 2015 2019 2023 Source: World Bank International Debt Statistics, and staff computation. Figure A1. 8. External PPG Debt Composition in IDA Countries 800 IDA 700 IBRD Volumes, US$ billions 600 IMF 500 Other multilaterals 400 Bilateral - PC 300 Bilateral - Non PC 200 Other private creditors 100 Bonds - 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: World Bank International Debt Statistics, and staff computation. 37 Since 2013, 19 IDA countries have issued Eurobonds to private creditors for development financing and debt servicing. While IDA-Blend and IDA-Gap countries accounted for most issuances, some IDA-only countries also accessed international markets. Market access has been volatile due to shifting conditions and economic fundamentals, peaking at ten countries issuing sovereign bonds in 2021 but dropping to zero in 2023. 38 The median public debt servicing cost for IDA countries has risen since the COVID-19 pandemic, increasing from 26.5 percent of revenue in 2019 to 30.2 percent in 2022. - 21 - ANNEX 2. IMPLEMENTATION OF DSEP 1. In FY24, 59 out of 75 IDA countries prepared PPAs. Based on the SDFP eligibility criteria, 64 countries were required to prepare PPAs.39 Exemptions were granted to five countries: Afghanistan, Niger, and Sudan (limited engagement with governments); Guinea-Bissau (political uncertainties); and Kosovo (a MAC SRDSF country with limited debt vulnerabilities). Sri Lanka prepared PPAs for the first time in FY24 following its reverse-graduation to IDA in December 2022 due to a protracted macroeconomic and debt crisis. 2. Management approved 158 PPAs, all informed by sound diagnostics to address key drivers of debt vulnerabilities.40 In terms of the DSEP areas, 76 percent of the IDA countries (45 countries) prepared at least one PPA supporting fiscal sustainability, focusing on domestic revenue mobilization or fiscal risk management; 42 percent (25 countries) prepared at least one PPA to address weaknesses in public debt transparency, while 80 percent (47 countries) prepared at least one PPA on debt management. Of these, 66 percent (39 countries) agreed to comply with an NCB ceiling. All approved FY24 PPAs can be accessed via this link. 3. Most fiscal sustainability PPAs focused on domestic resource mobilization through policy and administrative measures (Figure A2.1). On the policy side, PPAs supported broadening the tax base or adjusting tax rates (Benin, Bhutan, Central Africa Republic, Côte d’Ivoire, Djibouti, Ethiopia, Fiji, Mauritania, and Somalia) and streamlining tax expenditures and exemptions (Ghana, Liberia, Mali, Nigeria, Sri Lanka, and Togo). On the administrative side, PPAs supported the digitalization of revenue systems to enhance domestic revenue collection and improve tax compliance (Benin, Côte d’Ivoire, Mali, Senegal, and Zambia). 39 Eleven countries were exempt from the preparation of FY24 PPAs. These countries include Bangladesh, Cambodia, Honduras, Myanmar, Nepal, and Uzbekistan (all at low risk of external debt distress); Eritrea, Syrian Arab Republic, and Zimbabwe (in the no-accrual status); and South Sudan and Yemen (eligible for IDA’s RECA). 40 The approved PPAs include 10 PPAs that were not successfully implemented in FY23 and were carried over to FY24, as well as Haiti’s FY24 PPA on fiscal sustainability, which was canceled due to exceptional circumstances. - 22 - Figure A2. 1. Key Debt Vulnerabilities Figure A2. 2. Key Debt Vulnerabilities Addressed by Fiscal Sustainability PPAs Addressed by Debt Transparency PPAs 1 7 10 4 14 6 7 4 1 1 2 31 5 3 23 25 7 19 24 18 11 8 4 6 13 5 17 16 11 12 13 7 8 4 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Others Other Weak public investment management Poor timeliness/quality of debt data Poor expenditure management Limited coverage of debt data Low revenues Intitutionalizing debt reporting Lack of public financial management/fiscal rules Fiscal risks and SOEs 4. Other fiscal sustainability PPAs aimed at strengthening public financial systems and investment management. These included introducing expenditure controls (Burkina Faso, Fiji, Lao PDR, and St. Vincent and the Grenadines) and enhancing the efficiency of public investment (Malawi, Papua New Guinea, and Rwanda). Increasingly, PPAs also addressed fiscal resilience to climate change and natural disasters by incorporating climate-related risks into fiscal risk statements and embedding climate consideration in budget planning and capital project selection (Burkina Faso, Guyana, Micronesia, Pakistan, Rwanda, Senegal, St. Lucia, St. Vincent and the Grenadines, and Tanzania). 5. While the total number of debt transparency PPAs declined, an increasing number supported institutionalizing timely and comprehensive debt reporting (Figure A2.2). 41 Several consistently published debt bulletins (Kyrgyz Republic, Mauritania, Nigeria, Togo, Tonga) or annual borrowing plans (Pakistan, St. Lucia, São Tomé and Príncipe, Tajikistan, and Tanzania). Many also expanded the coverage of public debt to include SOEs and key statutory bodies. More than one- third of the countries went further by institutionalizing improvements in debt reporting through government orders or decrees, enhancing the scope, details, frequency, and timeliness of debt publications. 6. Due to elevated risks of external debt distress, most debt management PPAs focused on ensuring compliance with an NCB ceiling. Per the SDFP Implementation Guidelines, a zero 41 Public debt transparency refers to the availability of comprehensive, detailed, timely, and consistent PPG debt data for parliaments, the media, and the public, including information on the terms and conditions of debt. PPG debt includes both external and domestic debt of: (i) the public sector, which comprises central, state, and local governments, social security funds, extra budgetary funds, the central bank, and public enterprises; and (ii) private-sector debt guaranteed by the public sector. - 23 - ceiling on NCB should, in principle, be included among PPAs in countries under the LIC DSF at high risk of external debt distress or in debt distress. 42 These ceilings signal a country’s commitment to debt sustainability and help advocate for more concessional lending terms. In FY24, 29 countries at high risk or in debt distress set an NCB ceiling, including 22 that adopted a zero NCB ceiling PPA and seven that set a non-zero ceiling. Additionally, nine countries at moderate risk of external debt distress and one MAC SRDSF country (Sri Lanka) prepared an NCB ceiling Figure A2. 3. Key Debt Vulnerabilities PPA to prevent downgrading their risk Addressed by Debt Management PPAs classification. Of these, six countries set a non- zero NCB ceiling.43 2 4 7 1 6 5 7. Other debt management PPAs focused on strengthening legal and administrative frameworks (Figure A2.3). Some countries 38 39 adopted legal frameworks for contracting public 31 35 loans and guarantees (Comoros, Papua New Guinea, Senegal, and Tonga) and introduced rules 8 to limit domestic and external debts (Lesotho and 10 12 8 Republic of Congo). Others operationalized debt 10 3 5 5 recording systems (Chad, Dominica, and Kyrgyz FY21 FY22 FY23 FY24 Republic) and established institutions to enhance transparency and accountability in debt Other management (Burundi, Comoros, Côte d’Ivoire, Weak debt policy framework Risk of debt distress (NCB ceilings) Guinea, Malawi, the Maldives, Pakistan, Samoa, Poor debt management and Sri Lanka). Additionally, some countries Guarantees, on-lending and contingent liabilities institutionalized debt management strategies (Chad and Lesotho). 8. The satisfactory implementation rate for PPAs remained high at 90 percent in FY24 since the inception of the SDFP (Figure A2.4). In FY24, 49 out of 59 countries satisfactorily implemented PPAs by June 2024.44 Per the FY24 policy enhancements, additional four countries (Bhutan, Dominica, St. Lucia, and Tanzania) submitted evidence of delayed implementation of five PPAs by December 2024. As a result, 53 countries satisfactorily implemented 146 PPAs in FY24. Unlike FY21 and FY22, when most unmet PPAs were performance-based (e.g., NCB ceilings) or delayed due to procedural reasons, unmet PPAs in FY23 and FY24 were policy or institutional reforms related to debt management and fiscal sustainability (Figure A2.5). Nicaragua, Timor- Leste, and Uganda failed to implement their carryover PPAs from FY23, resulting in a discount. Implementation was particularly challenging in Timor-Leste due to a change in government and 42 For countries at high risk of external debt distress with a sustainable outlook, an exception may be considered: (i) for critical projects with strong development impact and high financial and social rates of return when concessional financing is not available; and (ii) when an operation financed with non-concessional resources is needed for debt management purposes and aligns with the Medium-Term Debt Management Strategy and the Medium-Term Fiscal Plan (if it exists). 43 For countries in this group, there should be no baseline-breach of thresholds for the LIC DSF debt burden indicators. 44 In FY21, 51 out of 55 countries satisfactorily implemented their PPAs; 52 out of 57 countries did so in FY22; and 53 out of 60 countries in FY23. - 24 - in Nicaragua and Uganda due to IDA’s limited engagement. The Maldives repeatedly breached its zero NCB ceiling PPA. Figure A2. 4. Implementation Rate, by Figure A2. 5. Total Number of Unmet Country, FY21-24 PPAs in FY24 by DSEP Area FY24 FY23 4 FY22 2 2 7 FY21 10% 12% 9% 7% 93%91% 1 4 1 8 2 88% 2 90% 4 3 2 FY21 FY22 FY23 FY24 Debt Management Debt Transparency Fiscal Sustainability Satisfactory Not Satisfactory 9. In FY25, 61 out of 77 IDA countries are preparing a total of 152 PPAs.45 Based on the SDFP eligibility criteria, 66 countries were required to prepare PPAs.46 Exemptions were granted to four: Afghanistan and Sudan (limited engagement with governments); Haiti (political uncertainties); and Kosovo (a MAC SRDSF country with limited debt vulnerabilities).47 Belize and Eswatini prepared PPAs for the first time in FY25 following their reclassification as IDA- eligible in February 2024, which extended the Small Island Economies Exception to eligible non- island Small States (see Box A2.2 for new IDA-eligible countries in FY25). 48 Table A2.1 summarizes the characteristics of the IDA countries implementing PPAs in FY25, disaggregated by the DSEP area, IDA lending eligibility, external debt distress risk, and country classifications such as FCV and Small States. 45 The approved PPAs include seven PPAs that were not successfully implemented in FY24 and were carried over to FY25. All approved FY25 PPAs can be accessed via this link. 46 Eleven IDA countries were not required to prepare PPAs in FY25: Bangladesh, Cambodia, Honduras, Myanmar, Nepal, and Uzbekistan (at low risk of external debt distress); Eritrea, Syrian Arab Republic, and Zimbabwe (in no-accrual status)); and South Sudan and Yemen (eligible for RECA status). 47 As of early May 2025, Nicaragua’s request for exemption is under review. Nicaragua faces legal and operational constraints that made policy dialogue with the appropriate authorities challenging. 48 Suriname was reclassified as an IDA-Blend country effective on October 18, 2024, after the annual screening exercise cut-off point in May 2024. As per the SDFP implementation guidelines, the country is not required to prepare PPAs in FY25. - 25 - Box A2. 1. New IDA-eligible Countries in FY25: Belize and Eswatini In February 2024, the Board approved the extension of IDA’s Small Island Economies Exception (SIEE) to qualifying non-island Small States, resulting in a broader Small States Exception (SSE). While IDA has long recognized the challenges faced by non-island Small States, they were previously ineligible for the exception, which applied solely to small island economies. The extension of the SIEE to qualifying non-island Small States provides a straightforward way to acknowledge the higher vulnerability of qualifying Small States. Under the SSE, three new IBRD countries gained access to concessional IDA Financing: Belize and Eswatini in July 2024 and Suriname in October 2024. As IDA- eligible, these countries are also subject to the SDFP. Per the SDFP implementation guidelines, which set the cut-off point each May, Belize and Eswatini are implementing PPAs for the first time in FY25, while Suriname will begin preparing PPAs in FY26. As Small States, they are required to prepare two PPAs annually. Belize, a Small State in the Caribbean, is highly vulnerable to natural disasters and long-term climate change. With persistent fiscal deficits, low growth, and elevated public debt, the country has undergone four debt restructurings in the past 15 years. In FY25, the country has committed to implementing PPAs focused on fiscal sustainability. These PPAs will support the Cabinet approval of: (i) a policy requiring the Ministry of Finance to annually prepare and publish on its website a Fiscal Strategy Plan, which will include a Medium-Term Fiscal Framework; and (ii) a Disaster Risk Financing Policy aimed at strengthening Belize's fiscal resilience and enhancing the Government’s capacity to manage disaster- related risks. Both actions are expected to be prior actions in a forthcoming DPF, with follow-up reforms supported through programmatic PPAs over the medium term. Eswatini, a Small State in Southern Africa, has a relatively low level of public debt (41 percent of GDP at the end of 2023) but faces fiscal challenges due to high expenditure arrears, reliance on volatile and procyclical revenues from the Southern African Customs Union (SACU), and vulnerability to exchange rate fluctuations (foreign-currency denominated debt accounts for a third of the total debt stock). In light of these challenges, the Government has agreed to implement PPAs focused on enhancing fiscal sustainability. FY25 PPAs aim to improve: (i) the management of SACU revenues by implementing revenue stabilization regulations; and (ii) the efficiency of public investment through new guidelines for public investment management. These reforms are informed by strong analytical underpinnings, including the 2024 Public Finance Review and the 2019 Public Investment Management Assessment, and will also be supported by an upcoming DPF and technical assistance. - 26 - Table A2. 1. Number of PPAs by Country Characteristics and DSEP Area in FY25 Countries Countries with at least one PPA by DSEP Area required to Debt Debt Fiscal prepare PPAs transparency management sustainability Number of IDA countries 61 15 45 50 IDA-only 37 10 30 28 FCV 18 5 16 11 High risk of debt 12 3 12 7 distress Moderate risk of debt 6 2 4 3 distress Small States 13 2 12 8 High risk & in debt 10 2 10 6 distress Moderate risk of debt 3 0 2 2 distress Gap 9 2 7 9 Small States 1 1 0 1 Moderate risk of debt 1 1 0 1 distress Blend 15 4 8 14 FCV 5 1 4 5 High risk & in debt 3 0 3 3 distress Moderate risk of debt 1 0 1 1 distress MAC-DSA 1 1 0 1 Small States 9 2 3 8 High risk & in debt distress 3 2 1 2 Moderate risk of debt 2 0 2 2 distress MAC-DSA 4 0 0 4 10. In FY25, the DSEP areas continued shifting from debt transparency to fiscal sustainability (Figure A2.6). The number of countries preparing at least one PPA to support fiscal sustainability has steadily increased, reflecting a stronger focus on fiscal risk management and post- crisis recovery. In FY25, 85 percent (52 countries) prepared at least one PPA on fiscal sustainability. The shift is evident across all IDA lending categories. - 27 - Figure A2. 6. Percentage of IDA Countries with PPAs by DSEP Area, FY21 – FY25 82% 84% 76% 78% 80% 80% 76% 73% 67% 67% 55% 57% 43% 42% 26% Debt ceiling 56% Debt ceiling 60% Debt ceiling 63% Debt ceiling 64% Debt ceiling 63% At least 1 PPA on Debt At least 1 PPA on Debt At least 1 PPA on Fiscal Transparency Management Sustainability FY21 FY22 FY23 FY24 FY25 11. More than a quarter of the countries focused on improving debt data quality and consistency, including several FCV and Small States seeking greater sovereign data transparency. These efforts include institutionalizing the publication of PPG debt data and the comprehensive coverage of SOE debt. Given rising debt challenges in IDA countries, greater debt transparency can help create fiscal space, attract external financing, or even support debt restructuring and relief efforts. 12. Strengthening regulatory and institutional frameworks for debt management remains a priority for IDA countries. In FY25, 10 countries committed to implementing debt management policies and focusing on fiscal risk management related to government guarantees. Several countries adopted a programmatic approach, building on progress from previous years. For example, the approval of a medium-term debt management strategy in FY24 provided a strong policy foundation for FY25. Additionally, 39 countries established an NCB ceiling on external PPG debt, including five with zero ceilings and 14 non-zero NCB ceilings, demonstrating a commitment to sustainable borrowing practices. - 28 - ANNEX 3. ADDITIONAL DETAILS ON THE NEW INCENTIVE MECHANISM Replenishment 1 Replenishment 2 Replenishment 3 Year 1 Year 2 Year 3 Year 4 Year 5 PPA met Incentive awarded PPA not met Carry-over PPA met by end- March of FY (incentive awarded in Year 2) PPA met between April-June of Incentive awarded FY Non-NCB ceiling Carry-over PPA not met Incentive lost PPA not met NCB ceiling PPA not Incentive lost met PPA met Incentive awarded PPA not met Carry-over PPA met by end-March of FY (incentive awarded in Year 3) PPA met between April-June of FY Incentive awarded Non-NCB ceiling PPA not met PPA not met Incentive lost NCB ceiling PPA not met Incentive lost PPA met Incentive awarded PPA not met Carry-over PPA met by end- December of FY (incentive awarded in Year 4) PPA met between January- Incentive awarded June of FY Non-NCB ceiling PPA not met PPA not met Incentive lost NCB ceiling PPA not met Incentive lost Note: (a) Each country’s PPAs are assessed as a package annually. To receive the incentive, all PPAs must be satisfactorily implemented. A breach of the NCB ceiling results in losing the incentive, regardless of other PPA implementation. (b) During the transition from IDA20 to IDA21, the following rules will apply: (i) countries facing set-asides in FY25 for unmet FY24 PPAs will recover set-asides at the beginning of FY26 if carry-over PPAs are met in FY25; (ii) in FY26, countries will receive the incentive based on PPA implementation in FY25; (iii) countries exempted from PPA preparation in FY25 will receive the incentive in FY26. In subsequent years, the incentive will be subject to successful PPA implementation; (iv) NCB ceiling breaches in FY25 disqualify countries from the FY26 incentive, with no recovery option; (v) repeated breaches of NCB ceilings may lead to a possible hardening of financing terms; (vi) countries breaching NCB ceilings with unmet non-NCB ceiling PPAs will not have to carry them but may propose them again in the following fiscal year; and (vii) in the final year of an IDA replenishment, unused resources from the SDFP Incentive would be added to the general country allocation resources and redistributed to all countries. The same amounts will be deducted from the general country allocation resources in the following replenishment and added to the SDFP Incentive to reward countries for carry-over PPA implementation in the last year of the IDA cycle. - 29 - ANNEX 4. SUSTAINABLE DEVELOPMENT FINANCE POLICIES ACROSS MDBs 1. Several MDBs have adopted or closely aligned their sustainable financing policies with IDA’s SDFP to enhance the collective impact of measures aimed at mitigating debt- related risks (Table A4.1). For instance, the Asian Development Bank (AsDB) directly adopted IDA’s SDFP to encourage member countries to prioritize policy actions related to public financial management. The African Development Bank’s (AfDB) Sustainable Borrowing Policy, approved in February 2022, emphasizes complementarity, harmonization, and coordination with IDA and the IMF. Similarly, the International Fund for Agricultural Development (IFAD) introduced its Sustainable Lending Policy in December 2024, replacing its previous non-concessional borrowing policy to harmonize taxonomy among MDBs. Additionally, the SDFP is closely aligned with IMF’s Debt Limit Policy, particularly in its approach to non-concessional borrowing ceilings for countries under its program to complement other conditionalities designed to achieve macroeconomic sustainability. Table A4. 1. Sustainable Development Finance Policy across MDBs Institution IDA IMF AsDB AfDB IFAD Name of Sustainable Debt Limits Sustainable Sustainable Sustainable policy Development Policy Development Borrowing Policy Lending Policy Finance Policy Finance Policy Year 2020 2020 (dates back to 2020 2022 2024 the 1960s) Eligible All IDA-eligible IMF membership Developing Recipients of the Countries eligible Countries countries (189 countries) Member Countries African for funding on (DMCs) receiving Development Fund concessional terms grants from the (AfDF) resources from IFAD’s core Asian resources. Development Fund Objective Create incentives Establish the By aligning with Support recipients Promote: (i) to move towards framework for IDA’s SDFP, of the AfDF in sustainable transparent, using quantitative create incentives to following borrowing sustainable conditionality to move towards sustainable debt practices by financing and to address debt transparent, practices, with a incentivizing the promote vulnerabilities in sustainable view to achieving implementation of coordination IMF-supported financing and to inclusive and policy actions that between IDA and programs. promote sustainable growth. enhance fiscal other creditors in coordination sustainability and support of between AsDB and prudent and countries’ efforts. other creditors in transparent debt support of DMCs’ management; and efforts. (ii) coordination between creditors in support of recipient countries’ efforts to achieve these practices.