Debt Sustainability Analysis
IntroductionLast Updated: November 11, 2013
The IMF's advice on macroeconomic policies—both in the context of IMF-supported programs and surveillance—is anchored in the analysis of a country's capacity to finance its policy objectives and service the ensuing debt without unduly large adjustments, which could otherwise compromise its stability. To this end, the IMF has developed a formal framework for conducting public and external debt sustainability analyses (DSAs) as tool to better detect, prevent, and resolve potential crises. This framework became operational in 2002.
The objective of the framework is threefold:
- Assess the current debt situation, its maturity structure, whether it has fixed or floating rates, whether it is indexed, and by whom it is held;
- Identify vulnerabilities in the debt structure or the policy framework far enough in advance so that policy corrections can be introduced before payment difficulties arise;
- In cases where such difficulties have emerged, or are about to emerge, examine the impact of alternative debt-stabilizing policy paths.
The framework consists of two complementary components: the analysis of the sustainability of total public debt and that of total external debt. Each component includes a baseline scenario, based on a set of macroeconomic projections that articulate the government's intended policies, with the main assumptions and parameters clearly laid out; and a series of sensitivity tests applied to the baseline scenario, providing a probabilistic upper bound for the debt dynamics under various assumptions regarding policy variables, macroeconomic developments, and financing costs. The paths of debt indicators under the baseline scenario and the stress tests allow to assess the vulnerability of the country to a payments crisis.
DSAs should however not be interpreted in a mechanistic or rigid fashion. Their results must be assessed against relevant country-specific circumstances, including the particular features of a given country's debt as well as its policy track record and its policy space. Thus, two types of frameworks have been designed: those for market-access countries and those tailored for low-income countries. In both cases, the frameworks have been regularly refined with a view to—among other elements—bringing a greater discipline to the analysis and responding to the changing economic and financial environment.