IPD AI

Reasons for Limited Sovereign Risk Management and How to Improve It?

12/01/2007
Working Paper

This paper takes stock of the issues involved in sovereign risk management, focusing on developing countries. It identifies the needs for risk management at the country level by briefly reviewing the various shocks developing countries are exposed to.

It then reviews the actual use of risk management tools by developing countries and tries to identify the reasons why risk management has been so limited in practice. It identifies the degree of incompleteness of international financial markets, weak incentives in international markets, poor incentives at the country level and a limited role to date of international financial institutions and international agencies as important reasons behind the lack of risk management. The paper sketches a way forward by analyzing possible actions at various levels to improve risk management.