This paper proposes the creation of a "Stability and Growth Facility" (SGF) to be housed either at the IMF or the World Bank. It would be a long-term facility to help high-debt emerging market countries cope with and ultimately overcome what will otherwise remain a chronic structural weakness. The SGF would be an instrument providing a steady and predictable source of long-term funds as well as a strong policy signal to help high-debt emerging-market economies reduce their debt burden without having to forgo vital pro-poor social expenditures and growth programs. For the facility to have a significant impact on debt and income dynamics in the eligible countries, we estimate it would need to lend $10-20 billion a year. The financial cost to the donor community would be the interest subsidy built into the SGF; were the subsidy 200 basis points, the cost in the first year would be $20 million for every $1 billion of lending.
The rationale for the subsidy element is its catalytic role in facilitating a strong commitment to both prudent macroeconomic policies and pro-poor growth policies. The lower interest cost of the SGF, even if modest, would make it financially and politically easier for governments in eligible countries to address their long-term social (MDG) objectives, while maintaining a sound fiscal stance.