On September 27, 2017, the Executive Board of the International Monetary Fund (IMF) reviewed the joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC DSF).
Since its introduction in 2005, the LIC DSF has been the cornerstone of the international community’s assessment of risks to debt sustainability in LICs, with important operational implications for stakeholders. The DSF has been playing a critical role in guiding borrowing and lending decisions; multilateral lenders including the International Development Association have linked their lending policies to the DSF results; and the risk assessment derived by the DSF has informed the IMF’s debt limits policy (DLP) and the World Bank’s non-concessional borrowing policy (NCBP).
The framework was previously reviewed in 2006, 2009, and 2012. While the 2012 review added several new features, notably incorporation of more country-specific information and greater attention to domestic debt vulnerabilities, Executive Directors saw room for further progress, including by improving the assessment of macro-linkages in stress tests and exploring more the links between investment and growth – areas which were left for future work.
In the extensive consultations surrounding the current review, stakeholders emphasized the importance of ensuring that the DSF remains balanced in its treatment of risks and borrowing opportunities, incorporates more country-specific information, and reflects the evolving financing landscape facing LICs, including risks emanating from LICs’ increased market financing and contingent liabilities.
The current review assesses the DSF’s performance in recent years and proposes a wide-ranging set of reforms that adapts the framework to the evolving circumstances facing LICs and makes it more comprehensive and transparent, and yet simpler to use. The changes will include a revised approach to the assessment of countries’ debt carrying capacity based on an expanded set of variables; adjustments to the methodology designed to improve the framework’s accuracy in predicting debt distress; new tools prepared to help shed light on the plausibility of underlying macroeconomic projections; tailored stress tests to help better evaluate specific risks of particular relevance for some countries; and a reduction in the number of debt thresholds and standardized stress tests.
The framework is expected to become operational in the second half of 2018. This will allow for completion of the associated Guidance Note and template, followed by an extensive six-month program of training for country-level authorities.
An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.