Low-income countries have often struggled with large external
debts. Debt burdens have been reduced, thanks in large part to
international debt relief initiatives. As part of the Millennium
Development Goals (MDGs), the IMF and the World Bank have developed
a framework to help guide countries and donors in mobilizing the
financing of low-income countries' development needs, while reducing
the chances of an excessive build-up of debt in the future. The
joint World Bank–International Monetary Fund (IMF) Debt
Sustainability Framework (DSF) was introduced in April 2005, and is
periodically reviewed, to address this challenge. The most recent
review was discussed by the Executive Boards of the International
Development Association and the IMF in February 2012.
Strategic approach in order to reach goals
The framework is designed to guide the borrowing decisions of
low-income countries in a way that matches their financing needs with
their current and prospective repayment ability, taking into account
each country’s circumstances.
Under the DSF, debt sustainability analyses (DSAs) are conducted
regularly. They consist of:
- an analysis of a country’s projected debt burden over the next
20 years and its vulnerability to external and policy
shocks—baseline and stress tests are calculated;
- an assessment of the risk of debt distress in that time, based
on indicative debt burden thresholds that depend on the quality of
the country’s policies and institutions; and
- recommendations for a borrowing (and lending) strategy that
limits the risk of debt distress.
Assessing debt to avoid risks
The DSF analyzes both external and public sector debt. Given that
loans to low-income countries vary considerably in their interest rates
and length of repayment, the framework focuses on the present value (PV)
of debt obligations. This ensures comparability over time and across
countries.
To assess debt sustainability, debt burden indicators are compared to
indicative thresholds over a 20-year projection period. A debt-burden
indicator that exceeds its indicative threshold suggests a risk of
experiencing some form of debt distress. There are four ratings for the
risk of external public debt distress:
- low risk, when all the debt burden indicators
are well below the thresholds;
- moderate risk, when debt burden indicators are
below the thresholds in the baseline scenario, but stress tests
indicate that thresholds could be breached if there are external
shocks or abrupt changes in macroeconomic policies;
- high risk, when the baseline scenario and
stress tests indicate a protracted breach of debt or debt-service
thresholds, but the country does not currently face any repayment
difficulties; or
- in debt distress, when the country is already
having repayment difficulties.
Countries with significant vulnerabilities related to public domestic
debt or private external debt, or both, are assigned an overall risk of
debt distress that flags these risks. This assessment of overall debt
vulnerability complements the rating on the risk of external public debt
distress.
Low-income countries with weaker policies and institutions tend to
face repayment problems at lower levels of debt than countries with
stronger policies and institutions. The DSF, therefore, classifies
countries into one of three policy performance categories (strong,
medium, and poor) using the World Bank's Country Policy and
Institutional Assessment (CPIA) index, and uses different indicative
thresholds for debt burdens depending on the performance category.
Thresholds corresponding to strong policy performers are highest,
indicating that in countries with good policies debt accumulation is
less risky.
Debt Burden
Thresholds under the DSF |
|
NPV of debt in percent of
|
Debt service in percent of
|
Exports
|
GDP
|
Revenue
|
Exports
|
Revenue
|
Weak Policy |
100
|
30
|
200
|
15
|
18
|
Medium Policy |
150
|
40
|
250
|
20
|
20
|
Strong Policy |
200
|
50
|
300
|
25
|
22
|
Integrating debt issues into policy advice
The DSF has enabled the IMF and the Bank to integrate debt issues
more effectively in their analysis and policy advice, through improved
frequency and quality of the analysis. It has also allowed comparability
across countries.
The DSF is important for the IMF’s assessment of macroeconomic
stability, the long-term sustainability of fiscal policy, and overall
debt sustainability. Furthermore, debt sustainability assessments are
taken into account to determine access to IMF financing, as well as for
the design of debt limits in Fund-supported programs. The World Bank
uses the assessment of the risk of external debt distress from the DSF
to determine the share of grants and loans in its assistance to each
low-income country.
The effectiveness of the DSF in preventing excessive debt
accumulation hinges on its broad use by borrowers and creditors. The IMF
and the Bank encourage low-income countries to use the DSF or a similar
framework as a first step toward developing medium-term debt strategies.
Creditors are encouraged to take into account the results of debt
sustainability assessments in their lending decisions. In this way, the
framework should help low-income countries raise the finance they need
to meet the Millennium Development Goals, including through grants when
the ability to service debt is limited.
More Information about the DSF:
http://imf.org/dsa or
http://www.worldbank.org/debt