Assessing Debt Levels in Poorer Countries

Comprehensive review of approach by World Bank, IMF

Framework to be adapted to changing circumstances n low-income countries

Analysis of total public debt, investment-growth linkages to be strengthened

In response to feedback from a range of stakeholders, the IMF and World Bank have determined that some enhancements are necessary to ensure that the framework adapts to changing circumstances in borrowing countries.

Used by borrowers and lenders

The framework is used by borrowing countries, lenders, and donors to assess how much debt is sustainable and to balance it against a country’s development needs. The World Bank relies on the DSF to determine the share of grants and loans in its assistance to low-income countries. Other lenders and donors similarly look to the DSF to inform their financing decisions.

Following the review, the two institutions have decided on a number of enhancements to the framework:

• Strengthened analysis of total public debt and fiscal vulnerabilities

• Adjustment of thresholds on external public debt

• Introduction of an additional risk rating to reflect the overall risk of debt distress

• Better capturing of investment-growth linkages; and

• Making the framework easier for countries to use.

Under the framework, the IMF and World Bank produce a joint debt sustainability analysis (DSA) for all low-income countries, generally on an annual basis. Each DSA yields a rating denoting the risk of external public debt distress. Since introduction of the framework in 2005, nearly 400 DSAs have been produced for over 70 countries, enabling the IMF and World Bank to integrate fiscal and debt issues more effectively into their policy advice and program design.

So far, the framework has worked reasonably well. Debt sustainability in low-income countries has been broadly maintained, and the tool is recognized and used by a growing community of lenders and donors. Nevertheless, as countries’ needs and opportunities evolve, the framework will be adapted.

Key enhancements

Strengthening the analysis of total public debt and fiscal vulnerabilities. Analyses of debt sustainability have traditionally focused on external public debt. Although external public debt remains the largest component of debt in most low-income countries, the share of domestic public debt in total public debt has increased, reflecting debt relief and the development of domestic debt markets (see chart). In some countries, the level of domestic debt...