Creditors, including international financial institutions, play an important role in mitigating the risks associated with debt accumulation. They need to ensure that their own lending practices are prudent. More broadly, while country authorities have the primary responsibility to transparently report their debt data, international financial institutions work to support such transparency and sustainable lending practices in several ways. The IMF and the World Bank collect and disseminate debt statistics that are used by a wide range of stakeholders; produce reports of public debt data at the country level via joint debt sustainability analyses; support countries’ efforts to produce medium-term debt management strategies; publish information on countries’ borrowing capacity; and directly liaise with other multilateral, bilateral, and private creditors (World Bank and IMF 2009a, 2009b).

# 6.2. Macroeconomic policies

Notwithstanding substantial improvements since the 1990s, macroeconomic policy frameworks can be strengthened further in many EMDEs (World Bank 2019b). Monetary policy frameworks and exchange rate regimes can be strengthened to increase central bank credibility. Fiscal frameworks can ensure that borrowing remains within sustainable limits and borrowed funds are used well.

The benefits of stability-oriented and resilient monetary policy frameworks cannot be overstated. During episodes of financial stress, when EMDE currencies tend to depreciate sharply, strong monetary policy frameworks will be helpful not least because the exchange rate pass-through to inflation tends to be smaller in countries with more credible, transparent, and independent central banks; inflation-targeting monetary policy regimes; and better-anchored inflation expectations (Kose et al. 2019). Flexible exchange rates can provide an effective mechanism for macroeconomic adjustment and help avoid currency overvaluations, as well as preventing the buildup of large currency mismatches on balance sheets—a common precursor of crises.

Fiscal rules can help prevent fiscal slippages, ensure that revenue windfalls during times of strong growth are prudently managed, and contain and manage risks from contingent liabilities.<sup>17</sup> Strong fiscal frameworks have also been associated with lower inflation and inflation volatility, supporting the central bank in delivering its mandate (Ha, Kose, and Ohnsorge 2019). EMDEs have made important strides in the adoption and design of fiscal rules (Schaechter et al. 2012).<sup>18</sup> However, fiscal rules may be effective only once a certain degree of broader government effectiveness is achieved and sound budgetary institutions are in place.<sup>19</sup>

> 17 For detailed discussions of fiscal rules, see Cebotari (2008), Currie and Velandia (2002), Romer and Romer

> (2019), and Ülgentürk (2017).

> 18 Schaechter et al. (2012) create a fiscal rule index that captures both the number and characteristics of fiscal rules in operation in advanced economies and EMDEs and show how EMDEs have played catch-up to advanced economies since 2000. Ardanaz et al. (2019) find that well-designed fiscal rules can help safeguard public investment during downturns.

> 19 Calderón, Duncan, and Schmidt-Hebbel (2016) estimate that fiscal and monetary policy procyclicality is greater in countries with weak institutions. Bergman and Hutchison (2015, 2018) show that fiscal rules are effective only when government effectiveness exceeds a minimum threshold. World Bank (2015) discusses the circumstances and features that can make fiscal rules more effective.

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