## _041607

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### Framework purpose, scope, and operational guidance
- Objective:
  - Support LICs in achieving development goals without creating future debt problems and keep beneficiaries of the HIPC Initiative and MDRI on a sustainable track.
- Joint preparation and frequency:
  - Country DSAs are prepared jointly by Bank and Fund staff.
  - A joint LIC DSA is generally expected to be prepared once a year for each IDA-only, PRGF-eligible country.
- Role in operations and communication:
  - DSAs inform upstream dialogue with authorities, program design, IDA allocation, and donor/creditor coordination.
  - DSAs should be published as supplements to Fund staff reports, be self-contained, and be shared with authorities; staff encouraged to present results to donors with authorities’ consent.
- Capacity and timing constraints:
  - Agreement on broad DSA parameters, including new borrowing, should be sought at least 90 business days (T-90) ahead of the prospective Board meeting.
  - DSAs should be concise; a limit of 2000 words is suggested (excluding tables or appendices).

### Structure, templates, and technical parameters
- Three pillars of the LIC DSA framework:
  - (i) Standardized forward-looking debt/debt-service analysis (baseline, alternatives, stress tests).
  - (ii) Debt sustainability assessment against policy-dependent, country-specific thresholds (CPIA-based).
  - (iii) Recommendations on borrowing/lending strategy to limit debt distress while maximizing resources for MDGs.
- Projection and template mechanics:
  - Templates designed for a twenty-year projection period.
  - Templates use a uniform discount rate set at 5 percent; the discount rate will be adjusted whenever the six-month average U.S. dollar commercial interest reference rate (CIRR) deviates from the rate in the template by more than 100 basis points for a period of six months or more.
  - Templates automatically produce baseline and stress-test outputs; require insertion of historical and projected macro variables.
  - External template assumes NPV for private external debt equals nominal value (nominal interest rate assumed equal to discount rate).
- Coverage:
  - Two mandatory templates: (i) public, publicly-guaranteed (PPG) and private external debt; (ii) total public sector debt including domestic debt (where possible including state-owned enterprises).
  - PPG includes debt owed by the central bank to the IMF, if any.
  - External debt is defined on a residency basis and may include domestic-currency-denominated debt.

### Policy-dependent thresholds and CPIA treatment
- CPIA policy-performance categories and thresholds:
  - A rating at or above 3.75 corresponds to strong performance.
  - A rating between 3.25 and 3.75 reflects medium performance.
  - A rating at or below 3.25 corresponds to poor policy performance.
  - Use a three-year moving average CPIA score to determine policy performance under the DSF.
- Indicative external debt-burden thresholds (as presented):
  - "NPV of debt in percent of GDP / Debt service in percent of Exports / Debt service in percent of Revenue"
    - Weak Policy: 100 / 30 / 20 / 15 / 25
    - Medium Policy: 150 / 40 / 25 / 20 / 30
    - Strong Policy: 200 / 50 / 30 / 25 / 35
  - Note: thresholds are guideposts, not rigid ceilings.

### Debt-distress risk classification and judgement
- Risk categories:
  - Low risk: indicators well below thresholds; stress tests do not cause significant breaches.
  - Moderate risk: baseline below thresholds but alternative scenarios/stress tests lead to indicators nearing or breaching thresholds.
  - High risk: baseline indicates protracted breach of thresholds without current payment difficulties; stress tests worsen situation.
  - In debt distress: significant or sustained breach of thresholds; existence of arrears generally suggests in debt distress.
- Judgment versus mechanistic rules:
  - Mechanistic classification must be balanced with judgment where rules imply an unreasonable rating.
  - Examples warranting judgment and explicit explanation: marginal/temporary breaches, reserve positions not captured in templates, problems compiling CPIA scores.

### Macroeconomic scenarios, realism checks, and scaling-up scrutiny
- Core design principle:
  - Baselines must be realistic, reflecting growth potential and capacity constraints; risk that reforms may not be implemented must be considered.
- Standard reality checks:
  - Historical scenarios compare baseline to evolution under historical trends (default 10-year averages).
  - Scrutinize past projections: “post-mortems” explaining assumption/outcome differences are expected.
  - Financing assumptions requiring explicit justification when notable improvements materially affect debt indicators.
- Special scrutiny for large, debt-financed investment:
  - Large upfront borrowing defined as an annual increase in the NPV of public external or total public debt of 5 percent of GDP or more triggers detailed justification.
  - If baseline assumes growth dividends from debt-financed investment that are "sizeable":
    - Benchmarks for “sizeable”: growth rates at least one standard deviation above the historical average, or if reverting to historical growth would imply a significantly worse debt outlook.
    - An alternative “high-investment, low-growth” scenario is mandatory when those conditions hold.
  - Baseline must have compelling evidence for projected growth dividends; otherwise baseline should be revised.

### Domestic debt treatment and implications
- Mandatory inclusion:
  - All LIC DSAs must include a public DSA regardless of size of domestic debt.
- Domestic-debt assessment focus:
  - Thorough review where domestic debt stocks are significant (i.e., above 15-20 percent of GDP).
  - Any rapid recent build-up of domestic debt warrants explanation irrespective of level.
  - Assess creditor base, likely duration, financing burden, and medium-term fiscal implications.
- Reporting and classification:
  - If including domestic debt would change interpretation of sustainability relative to external-only DSA, the write-up must explicitly flag and expand commentary.
  - Inclusion of domestic debt does not change the country’s official risk classification for external debt (and does not affect IDA grant allocation).

### Private external creditors and emerging vulnerabilities
- Risks from private external sovereign borrowing:
  - Abrupt reversals in market sentiment and sudden capital outflows.
  - Non-standard financing terms (e.g., collateralizing future export receipts).
  - Secondary balance-sheet effects on domestic financial system and contingent public liabilities.
- Additional analyses where private external borrowing is significant:
  - Analyze sovereign liquidity risks from composition/maturity structure, external liquidity and rollover risks (reserve adequacy, short-term debt), and financial-sector weaknesses that could create contingent liabilities.
- Policy discussion with authorities:
  - Illustrative measures: legal borrowing authority, recording and portfolio management, liquidity forecasting, reserve adequacy reassessment, sequencing financial-sector reforms, and technical assistance.

### Stress tests, alternative scenarios, and standardized diagnostics
- Template standardized sensitivity tests:
  - Alternative scenarios (mechanical):
    - Historical average scenario (Worksheet “A1_Historical”): key variables equal historical averages (default 10-year).
    - Level of concessionality / financing (Worksheet “A2_Financing”): interest rate on new borrowing is two percentage points higher than baseline.
    - Primary-balance unchanged (Worksheet “A2_PB unchanged”): primary balance unchanged from last actual observation.
    - Lower long-run GDP growth (Worksheet “A3_LR growth”): real GDP growth lower than baseline by one standard deviation divided by the square root of the projection period.
  - Bound tests (standardized shocks intended to approximate an upper bound of risk):
    - B1_GDP (Worksheet “B1_GDP”): real GDP growth one standard deviation below historical average in each of first two years.
    - B2_Exports (Worksheet “B2_Exports”): exports growth one standard deviation below historical average in each of first two years.
    - B3_Deflator (Worksheet “B3_Deflator”): inflation (increase in U.S. dollar GDP deflator) one standard deviation below historical average in each of first two years.
    - B4_non-debt flows (Worksheet “B4_non-debt flows”): net non-debt flows (FDI and current transfers) one standard deviation below historical average in each of first two years.
    - B5_Combo (Worksheet “B5_Combo”): all four variables half a standard deviation below historical average in each of first two years.
    - One-time 30 percent depreciation of domestic currency in first year.
    - Alternative set phrased as B1_GDP, B2_PB, B3_combo, B4_depreciation, B5_other flows in the fiscal template:
      - B4_depreciation: one-time 30 percent depreciation.
      - B5_other flows: debt increases by 10 percent of GDP in the first year due to other debt-creating flows.
- Calibration and customization:
  - Parameters use past 10 years by default; can be adjusted for non-representative events or country-specific circumstances.
  - Changes must be made in the Baseline worksheet and clearly noted and justified.
- Modeling note on GDP shocks:
  - Shocks assume revenue stays constant as a share of GDP and expenditure stays constant in nominal terms; GDP shocks therefore alter the primary deficit.

### Templates outputs and debt decomposition
- External template outputs:
  - “SR_Table_Baseline” reports nominal debt-to-GDP evolution and decomposes changes into non-interest current account deficit, net FDI, endogenous debt dynamics (GDP growth, interest rates, price/exchange rates), and a residual.
  - Presents five debt-burden indicators: NPV of PPG external debt relative to GDP, exports, and revenues; debt service on PPG external debt relative to exports and revenues.
  - Flags rate of debt accumulation — a rate in excess of 5 percent would trigger more thorough analysis.
  - “SR_Table_Stress” summarizes sensitivity of the five indicators to standardized shocks and alternative assumptions; chart shows baseline, historical scenario, and most extreme stress test after 10 years.
- Fiscal template outputs:
  - “Table_baseline” decomposes debt-to-GDP changes into primary balance and its breakdown, endogenous debt dynamics, and other debt-creating/reducing flows (privatization receipts, asset purchases, debt relief, contingent liabilities).
  - Additional indicators: NPV of debt-to-GDP (NPV external debt plus nominal public domestic debt), NPV of contingent liabilities, gross financing need, NPV of debt-to-revenue, debt-service-to-revenue, and the primary deficit that stabilizes debt-to-GDP.
  - “Table tests” summarizes NPV of debt-to-GDP, NPV debt-to-revenue, and debt-service-to-revenue under alternatives and stress tests; chart shows baseline, no-reform, and most extreme stress test.

### Division of responsibilities, process, and dispute resolution
- Responsibilities:
  - Fund leads medium-term macroeconomic projections (three to five years); Bank leads long-term growth prospects.
  - Fund responsible for debt-service projections for bilateral and commercial creditors and assumptions on new borrowing from these creditors.
  - Bank provides debt-service projections for multilateral creditors and assumptions on new multilateral borrowing based on current allocations.
  - Teams must agree on baseline assumptions, collaborate on alternatives and stress tests, and jointly assess debt-distress risk; share data files confidentially.
- DSA schedule and key milestones (approximate timing in business days):
  - Pre-briefing paper: (T-90) days — prepare DSA template and write-up.
  - Department review of brief: (T-65) days.
  - To management: (T-60) days — management clears the brief.
  - Mission: (T-55) days — complete DSA preparation during mission.
  - End of mission: (T-45) days — relay changes if Bank team not on mission.
  - Department review of staff report: (T-25) days.
  - To management: (T-18) days — send Executive Summary to management.
  - Board circulation: (T-10) days — transmit DSA to Board.
  - Board discussion and publication: DSA published as Staff Report Supplement/DSA published (publication subject to Fund publication policy and authorities’ consent).
- Dispute resolution steps and timelines:
  - Working-level economists seek accommodation; if material, mission chief and Bank regional PREM director attempt agreement.
  - If unresolved, consult review departments and seek resolution within five working days.
  - If still unresolved, escalate to area department director (Fund) and vice president (Bank) with five working days for resolution.
  - Managements may resolve within five working days or decide to present differing staff views to their respective Boards.

### Operational implications and policy recommendations
- IDA grant/loan mix tied to DSA risk classification:
  - High risk: 100 percent grant financing from IDA.
  - Moderate risk: 50/50 blend of grants and traditional credits.
  - Low risk: 100 percent credit financing on standard IDA terms.
- Projection assumptions:
  - Regular IDA credit terms on all IDA lending should be assumed for all years in the projection period for which grant finance has not already been committed by IDA.
- Fund program design and conditionality:
  - Programs for LICs with debt sustainability concerns could supplement existing debt limits with conditionality related to the NPV of external debt and use limits on overall fiscal deficit versus limits on domestic financing.
  - Conditionality on the NPV of external debt would be derived from the DSA on a fiscal year basis and expected to be in the form of indicative targets.
- Concessionality guidance:
  - Recommended grant element for concessional loans, including in Fund-supported programs, would increase with the risk of debt distress.
  - DSA should be the primary means of assessing alternative financing strategies and recommending minimum concessionality for new lending.
- When risk classification shifts upward:
  - Conduct a comprehensive reassessment of the recommended debt accumulation strategy.

*Source: _041607*

### References..............................................................................................................

### References

### I. INTRODUCTION AND COUNTRY COVERAGE
- Objective of joint Fund-Bank debt sustainability framework for low-income countries (LICs):
  - Support LICs in achieving development goals without creating future debt problems.
  - Keep countries that have received debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) on a sustainable track.
- Joint preparation and collaboration:
  - Country DSAs are prepared jointly by Bank and Fund staff, with close collaboration on macroeconomic baseline, alternative scenarios, debt distress rating, and write-up.
- Frequency and coverage:
  - Joint Bank-Fund LIC DSAs are generally expected to be prepared once a year for PRGF-eligible, IDA-only countries.
  - For PRGF-eligible countries that are not IDA-only, Fund staff is expected to produce a LIC DSA once a year, unless the country has significant access to market financing (in which case Fund staff could use the template designed for middle-income countries).
- Operational guidance:
  - The DSF should inform country teams’ upstream dialogue with authorities rather than serve as an ex-post consistency check.
  - Country teams should communicate frequently on DSAs with relevant Multilateral Development Banks (MDBs), present DSA results to the authorities, and share final DSA files with the authorities.
  - With authorities’ consent, country teams are encouraged to present DSA findings to donors and other interested parties.
- New financial environment and policy challenges:
  - Post-debt relief perceptions of large borrowing space in some LICs.
  - Emergence of new creditors and rising importance of domestic debt expanding volume and sources of funds.
  - Fund and Bank Boards called on staffs to enhance rigor and quality of DSAs and effectiveness of the DSF.

### Box 1 — Enhancing the DSF: Main Changes from Previous Practice
- Historical scenarios:
  - Historical scenarios should be used actively and large differences between the baseline and historical scenarios will need to be carefully justified in the text (Section III A).
- Scrutiny of past projections:
  - Scrutinizing past projections against outcomes is critical to improve quality of future projections (Section III A).
- High projected growth dividends:
  - High projected growth dividends associated with large upfront borrowing (5 percent of GDP or more in NPV terms) trigger inclusion of an alternative “high-investment, low-growth” scenario and a detailed and explicit justification of projected growth dividends (Section III A).
- Financing assumptions:
  - Financing assumptions require an explicit justification when the scenario assumes a significant improvement in the terms, such that, absent this improvement, the evolution of debt indicators would be significantly worse (Section III A).
- Domestic debt disclosure:
  - Public DSAs should be included in all DSAs. The write up should explicitly flag situations where inclusion of domestic debt in overall debt and debt-service prospects would lead to a different interpretation of risk of debt distress from consideration of external debt and debt service alone (Section III B).
- Private external capital flows:
  - Additional analysis is needed where increased private external capital flows into sovereign debt instruments may give rise to new vulnerabilities (Section III C).
- CPIA smoothing:
  - A three-year moving average CPIA score should be used to reduce volatility of thresholds and potential unwarranted fluctuations in the IDA grant share for a given country (Section II B).
- Capacity and ownership:
  - Staff should actively discuss DSA assumptions and outcomes with the authorities and encourage use of the instrument (Section VI).
- Publication and accessibility:
  - DSAs should be published as supplements to Fund staff reports, self contained, and easily accessible (Section IV A).
- Review process:
  - A preliminary DSA needs to be included in IMF briefing papers; Bank-Fund collaboration needs to take place prior to preparation of briefs for the DSA to be joint (Section IV A, B, D and Box 3).

### II. LIC DSA FRAMEWORK — Structure and Pillars
- The LIC DSA framework is built on three pillars:
  - (i) A standardized forward-looking analysis of debt and debt-service dynamics under a baseline scenario, alternative scenarios, and standardized stress test scenarios (bound tests).
  - (ii) A debt sustainability assessment based on indicative country-specific debt-burden thresholds that depend on quality of policies and institutions.
  - (iii) Recommendations on a borrowing (and lending) strategy to limit risk of debt distress while maximizing resource envelope to achieve the Millennium Development Goals (MDGs).

### A. Debt and Debt-Service Projections and Indicators
- Templates and scope:
  - Staff inserts historical and projected data for macroeconomic variables in two mandatory pre-set templates:
    - One for public, publicly-guaranteed (PPG) and private external debt.
    - One for total public sector debt including domestic debt (where possible including state-owned enterprises).
  - Templates designed for a twenty-year projection period.
- Discount rate and adjustments:
  - Templates use a uniform discount rate to calculate present value of future external debt-service obligations.
  - The discount rate will be adjusted in the template whenever the six-month average U.S. dollar commercial interest reference rate (CIRR) deviates from the rate in the template by more than 100 basis points for a period of six months or more.
- Output and scenarios:
  - Templates automatically produce output tables displaying dynamics of debt and debt-service ratios in the baseline and summarizing alternative scenarios and stress tests.
  - Scenarios should be adjusted to take account of country-specific circumstances when appropriate.
- Rationale for indicators:
  - NPV of debt captures concessionality of outstanding debt and summarizes future obligations.
  - Debt-service indicators measure immediate burden that debt imposes by crowding out other resource uses.
  - Repayment capacity measures: GDP, exports of goods and services, or government revenues — choice depends on country constraints.
- Notes and definitions:
  - PPG includes debt owed by the central bank to the IMF, if any.
  - Private external debt is not considered for the purpose of IDA grant allocations but matters for overall external debt sustainability.
  - External debt is defined on a residency basis and may include domestic currency denominated debt.

### B. Country-Specific Debt-Burden Thresholds
- Policy-dependence:
  - DSF uses policy-dependent external debt-burden indicators because sustainable debt levels depend on quality of policies and institutions.
- Policy performance measure:
  - Measured by the Country Policy and Institutional Assessment (CPIA) index, compiled annually by the World Bank.
  - DSF divides countries into three performance categories: strong, medium, and poor.
- CPIA categories (as described):
  - A rating at or above 3.75 corresponds to strong performance.
  - A rating between 3.25 and 3.75 reflects medium performance.
  - A rating at or below 3.25 corresponds to poor policy performance.
- Use of moving average:
  - The three-year moving average CPIA score should be used to determine a country’s policy performance under the DSF to reduce undesirable uncertainty regarding financing terms from annual CPIA fluctuations.
  - Because CPIA scores are averages of 16 indicators, the CPIA thresholds should not be used mechanically; teams may apply discretion as to timing of moving-average application upon confirmation with reviewing departments (PRMED and PDR).
- Indicative external debt-burden thresholds (NPV of debt and debt service indicators apply to external public debt):
  - NPV of debt in percent of GDP / Debt service in percent of Exports / Debt service in percent of Revenue
    - Weak Policy: 100 / 30 / 20 / 15 / 25
    - Medium Policy: 150 / 40 / 25 / 20 / 30
    - Strong Policy: 200 / 50 / 30 / 25 / 35
  - Note: These thresholds are guideposts, not rigid ceilings.

### C. Debt Distress Risk — Classification
- Every joint Fund-Bank DSA must include explicit assessment of country’s risk of debt distress.
- Risk classification categories and criteria:
  - Low risk:
    - All debt indicators are well below relevant country-specific debt-burden thresholds.
    - Stress testing and country-specific alternative scenarios do not result in indicators significantly breaching thresholds.
    - If only one indicator is above its benchmark, judgment is needed to determine whether there is a debt sustainability problem or another issue (e.g., data problem).
  - Moderate risk:
    - Baseline scenario does not indicate a breach of thresholds, but alternative scenarios or stress tests result in significant rise in debt-service indicators over projection period (nearing thresholds) or a breach of debt or debt-service thresholds.
  - High risk:
    - Baseline scenario indicates a protracted breach of debt or debt-service thresholds but the country does not currently face payment difficulties.
    - Alternative scenarios or stress tests exacerbate the situation.
  - In debt distress:
    - Current debt and debt-service ratios are in significant or sustained breach of thresholds.
    - Existence of arrears would generally suggest a country is in debt distress, unless there are other reasons than debt-service burden for not servicing its debt.

*Content derived from the provided PDF chapter/section.*

### 11.      The assessment of the risk of debt distress needs to strike a balance between a

### The assessment of the risk of debt distress needs to strike a balance between a mechanistic use of this classification and a judgmental approach

### Judgment versus mechanistic classification
- Mechanistic classification of debt distress must be balanced with judgment where mechanistic rules would imply an unreasonable rating.
- Examples warranting judgment and explicit explanation in the DSA write-up:
  - A marginal and temporary breach of thresholds.
  - An ability to pay evidenced from the level of foreign exchange reserves not captured in templates.
  - Problems in compiling the relevant CPIA scores.

### III. DSA — Design and operational implications
- Purpose of DSAs:
  - Function as an upstream device for Bank and Fund program design and inform dialogue with authorities.
  - Early detection of debt-related vulnerabilities.
  - Cornerstone for medium-term debt strategies, fiscal frameworks, and public expenditure planning in support of sustainable progress toward the country’s development goals (the third DSF pillar).
- DSAs must be based on realistic macroeconomic scenarios and address rising importance of domestic debt and emergence of new creditors.

### A. Design of macroeconomic scenarios
- Core principle:
  - DSAs need to be based on realistic macroeconomic scenarios that take due account of a country’s growth potential and capacity constraints, including the risk that desired policy reforms may not be implemented.
- Principal mechanism for realism:
  - Scrutinize baseline projections by (i) subjecting them to reality checks and (ii) using existing and new precautionary features of the DSF.

Standard reality checks
- Historical scenarios:
  - Built into the DSA template to compare baseline projections with the evolution of debt ratios under historical trends for key economic variables.
  - Baseline debt ratios significantly lower than historical scenario ratios raise concerns of excessive optimism and require explicit justification in the DSA write-up.
  - Plausible reasons for deviation include recent performance improvements not captured in historical (10-year) averages or structural breaks (e.g., end of civil conflict).
- Scrutinizing past projections:
  - “Post-mortems” explaining differences of assumptions and outcomes for key variables of the previous DSA are expected in the write-up.
  - If previous DSAs were too optimistic, assumptions should be subject to more detailed scrutiny and justification, and presumably revised if not adjusted for past forecast errors.
- Financing assumptions:
  - Any notable improvement in financing terms that materially affects debt indicators requires explicit justification (e.g., contracted concessional loans already taken, firm commitments of highly concessional financing from specified donors).
  - Review accuracy of past financing assumptions in such cases.
- Explicit justification required if sustainability relies on sharp shifts in:
  - Fiscal policy (e.g., significant improvement in revenue collection).
  - Investment rate.
  - Financing mix.
  - Productivity growth.

Reality checks and precautionary features in scaling-up scenarios
- Analytical challenge:
  - Projecting the impact of additional public investment on GDP growth, exports, and public revenues.
- Teams’ responsibilities:
  - Carefully justify underlying assumptions and check plausibility.
  - Draw on country history, analytical considerations, and empirical cross-country work.
- Box 2 — Indicators for analysis of the link between debt-financed investment and growth (useful but not mandatory to present in DSAs):
  - Rates of Return:
    - Microeconomic studies on rates of return of projects.
    - Implementation lags/gaps for investment and recurrent budgets.
    - Estimates of stocks and shortfalls in public capital.
    - Composition of public expenditures in terms of growth impact.
  - Structural Constraints:
    - Policy and institutional constraints as indicated by the CPIA, public governance indicators, Doing Business surveys, PEFA, other public expenditure management analyses.
    - Level and growth rates of public investment.
    - Completion or implementation rate of public investment projects.
    - Skill shortages that can only be alleviated in the long run.
  - Macroeconomic Constraints:
    - The cost of capital, as indicated through firm-level surveys and real interest rates.
    - Rate (or rate of growth) of private investment.
    - Excess reserves/lending capacity in banking system.
    - Various real exchange rate measures (unit labor costs, export market share).
  - Aggregate Trends:
    - Growth rate of per capita GDP.
    - Growth rate of TFP.
    - Results of “binding constraints to growth” analyses.

- Empirical guidance (general conclusions from the literature):
  - Prolonged growth accelerations are rare, arguing for caution.
  - Macroeconomic returns to public investment tend to be considerably lower than microeconomic project returns, since modulated by factors outside the project.
  - Quality of policies and institutions has a large influence on macroeconomic return of public investment.
  - Economic volatility, including aid volatility, and shocks argue for caution in average growth/export projections over time.

- Special scrutiny where high projected growth dividends accompany ambitious borrowing plans:
  - Inclusion of an alternative “high-investment, low-growth” scenario is mandatory if the baseline assumes ambitious debt-financed investment leads to sizeable growth dividends.
  - Benchmarks for “sizeable” growth dividends:
    - Growth rates of at least one standard deviation above the historical average.
    - Or if reverting growth to historical levels would imply a significantly worse debt outlook, making sustainability critically dependent on the projected growth acceleration.
  - If such conditions hold, DSA must include an alternative scenario assuming little or no growth payoff from the investment program.
  - Baseline requires compelling evidence that assumed growth dividends are very likely to materialize; absent such evidence, baseline should be revised.
  - Detailed justification required if baseline includes very large upfront borrowing.
    - Definition: Large upfront borrowing = an annual increase in the NPV of public external or total public debt of 5 percent of GDP or more.

### B. Treatment of domestic debt
- Requirement:
  - Regardless of size, all LIC DSAs must include a public DSA.
- Rationale:
  - Public domestic debt typically involves higher costs and shorter maturities, and is large and increasing in many LICs; rising domestic debt increases likelihood of external debt distress.
- Coverage and definition guidance:
  - Public domestic debt defined on a residency basis and may include foreign currency-denominated obligations.
  - Data should seek to cover liabilities of broader public sector: central government, local governments, government-owned enterprises, and the central bank.
  - In most cases, data limitations will limit coverage to central or general government until capacity improves.
  - To the extent possible, public sector contingent liabilities (including PPPs and financial sector weaknesses) should be taken into account and flagged in the DSA write-up.
- Staff assessment focus (guided by stress tests and alternative scenarios):
  - Domestic debt risks:
    - Thorough review where domestic debt stocks are significant (i.e., above 15-20 percent of GDP).
    - Any rapid recent build-up of domestic debt warrants an explanation irrespective of level.
    - Assessment should cover circumstances behind high/rising debt stock (e.g., general budget financing or assumption of contingent liabilities), creditor base, likely duration, financing burden, and medium-term implications.
  - Primary balance:
    - Public DSA should assess whether projected evolution of the primary fiscal balance is consistent with debt sustainability and evaluate risks from baseline primary fiscal deficit path.
  - Debt distress classification:
    - Level and evolution of domestic debt and debt service matter for overall fiscal sustainability.
    - If inclusion of domestic debt would change sustainability assessment relative to the external DSA, DSA write-up should provide expanded commentary reviewing debt-servicing risks and medium-term fiscal implications.
    - This domestic-debt-inclusive assessment does not affect a country’s classification of the risk of (external) debt distress and therefore does not affect IDA’s grant allocation; IDA grant allocation is guided only by results of the external DSA relative to thresholds.

### C. Treatment of debt held by private external creditors
- New vulnerabilities from increased private sector capital flows:
  - (i) Abrupt reversals in market sentiment leading to sudden capital outflows.
  - (ii) Non-standard financing terms (e.g., collateralization with future export receipts) weakening medium-term debt sustainability.
  - (iii) Secondary balance sheet effects on domestic financial system from shifts in lending away from lower-yield government securities toward riskier assets, possibly creating contingent public liabilities.
- Additional analyses where borrowing from private external creditors is significant:
  - Complement DSF with analyses of short-term debt-related vulnerabilities and financial sector soundness.
  - Additional indicators (subject to data availability) to highlight:
    - (i) Risks to sovereign liquidity from composition and maturity structure of debt.
    - (ii) External liquidity and rollover risks, and adequacy of reserve cover (especially in relation to short-term debt), potentially needing to reflect risk of reversals in market sentiment.
    - (iii) Weaknesses in the financial sector that may give rise to contingent public liabilities.
  - Where these factors are significant, explain and take into account in sustainability assessment.
- Policy discussion with authorities:
  - Country teams should discuss policies to alleviate risks, illustrative measures include:
    - Legal authority to borrow, identification of permissible instruments, and accountability mechanisms.
    - Effective recording of the debt stock to facilitate portfolio management.
    - Framework for liquidity forecasting.
    - Availability of critical indicators to monitor benefits, costs, and risks of borrowing from private sources.
    - Technical assistance as needed.
    - Re-assessment of reserve adequacy.
    - Sequencing reforms to strengthen banking supervision and prudential regulation prior to capital account liberalization.

### D. Operational implications
- Role of LIC DSAs:
  - Pivotal in IDA operations and influential for Fund program design.
- Key operational links:
  - IDA grant/loan mix determined by LIC DSA risk classification:
    - Countries judged to be at high risk of debt distress receive 100 percent grant financing from IDA.
    - Countries at moderate risk receive a 50/50 blend of grants and traditional credits.
    - Countries at low risk receive 100 percent credit financing on standard IDA terms.
  - Assumption for projections:
    - Regular IDA credit terms on all IDA lending should be assumed for all years in the projection period for which grant finance has not already been committed by IDA.
  - For the Fund:
    - Programs for LICs with debt sustainability concerns could supplement existing debt limits with conditionality related to the NPV of external debt and make more systematic use of limits on overall fiscal deficit versus limits on domestic financing.
    - Conditionality on the NPV of external debt would be derived from the DSA on a fiscal year basis and expected to be in the form of indicative targets due to complexity and monitoring difficulties of NPV-based targets.
  - Concessionality:
    - Presumed that recommended grant element for concessional loans, including in Fund-supported programs, would increase with the risk of debt distress.
    - DSA should be primary means of assessing impact of alternative financing strategies and recommending minimum concessionality for new lending.
  - When risk classification shifts to a higher level:
    - Staff should conduct a comprehensive reassessment of the recommended debt accumulation strategy.

*Source: _041607 - 11.      The assessment of the risk of debt distress needs to strike a balance between a*

### 27.      A joint LIC DSA is generally expected to be prepared once a year for each IDA-

### A joint LIC DSA is generally expected to be prepared once a year for each IDA-only, PRGF-eligible country

### DSA frequency, scheduling, and board circulation
- A joint LIC DSA is generally expected to be prepared once a year for each IDA-only, PRGF-eligible country.
- Each calendar year, Fund and Bank country teams need to agree on a schedule for the preparation of DSAs for individual countries.
- For the Fund, a DSA will normally be produced for an Article IV consultation, and otherwise in the context of program requests or reviews.
- For the Bank, the DSA will be required for Country Assistance Strategies and for IDA allocation purposes.
- In cases where a joint DSA is needed but one institution’s Board review is not expected within two months, the joint DSA is sent to the other institution’s Board for information at the same time as its own Board submission.
- Agreement on content and timing should be reached well ahead of time (see Box 3).

### DSA process and recommended timeline (Box 3 highlights)
- Early consultations between Fund and Bank stakeholders are critical once the DSA process starts.
- As a general rule, agreement on broad parameters of the DSA, including new borrowing, should be sought at least 90 business days ahead of the prospective Board meeting.
- A preliminary joint DSA should be included in the Fund’s brief; this preliminary DSA contains broad parameters of a medium-to-long-term macro framework and is subject to change.
- No Bank clearance of the preliminary DSA contained in briefs is required, but significant differences should be reported in the brief.

- Recommended timeline and key milestones (approximate timing in business days, as shown in Box 3):
  - Pre-briefing paper: (T-90) days — Fund team prepares DSA template and write-up in consultation with Bank counterpart; Bank prepares in consultation with Fund counterpart.
  - Department review of brief: (T-65) days — Fund Team sends draft DSA as part of brief to PDR and other departments; Bank Team sends draft DSA to PRMED.
  - To management: (T-60) days — Fund management clears the brief.
  - Mission: (T-55) days — Fund team completes DSA preparation during mission; Bank team completes DSA work with Fund staff.
  - End of mission: (T-45) days — If Bank country team has not been on mission, Fund team relays any changes to draft DSA to Bank team.
  - Department review of staff report: (T-25) days — Completed DSA sent to review departments; Completed DSA sent to PRMED and regional PREM Director for review.
  - To management: (T-18) days — Fund team sends an Executive Summary to management highlighting DSA results; Bank team sends full DSA to management.
  - Board circulation: (T-10) days — DSA transmitted to Board; DSA submitted by PRMVP to SECBO and transmitted to Board for information.
  - Board discussion and publication: DSA published as Staff Report Supplement 1/DSA published (publication subject to Fund publication policy and authorities’ consent).

### Updates, timing for changes, and document format
- Each institution can update the DSA for its own purposes if changes in assumptions are relatively minor. The other institution must be notified and given at least three business days to comment.
- When either institution believes major changes are warranted, consultation with the other is required.
- LIC DSAs should be prepared as self-contained documents, including a clear description of macroeconomic assumptions without referring to the Fund staff report.
- DSAs should be concise; a limit of 2000 words is suggested (excluding tables or appendices).
- The Bank will publish LIC DSAs on a stand-alone basis and as of FY08 will send all LIC DSAs to its Board for information in this format.

### Division of responsibilities between Fund and Bank staff
- Fund leads on medium-term macroeconomic projections (three to five years) developed with the member country; these form the starting point for consultation with the Bank on the baseline scenario.
- Bank leads on long-term growth prospects.
- For the external sector DSA:
  - Fund staff is responsible for debt-service projections for bilateral and commercial creditors and assumptions on new borrowing from these creditors.
  - Bank staff provides debt-service projections for multilateral creditors together with assumptions on new multilateral borrowing based on current allocations.
- Bank staff should, where necessary, obtain debt-service projections on outstanding Fund lending from the Fund country team.
- Fund and Bank teams should agree on baseline assumptions, collaborate on alternative scenarios and stress tests, and jointly assess risk of debt distress.
- All relevant data files should be shared across teams but treated confidentially.

### Public sector DSA linkage
- External sector DSA output, together with Fund fiscal projections, provides the basis for public sector DSAs.
- Fund and Bank teams should discuss if the public sector DSA output would lead to a different sustainability assessment than the external DSA and how to reflect this in the write-up.

### Dispute resolution
- Common Bank-Fund assessment should be sought, but where disagreements arise:
  - Working-level country economists should first discuss whether differing viewpoints lead to material differences in risk classification; seek accommodation if not material.
  - If material, Fund mission chief and Bank’s regional PREM director should attempt to reach agreement.
  - Mission chief and regional director, after consulting review departments (PDR in Fund, PRMED in Bank), should seek resolution within five working days.
  - If unresolved, elevate to area department director at the Fund and vice president at the Bank; seek resolution within five working days.
  - If still unresolved, managements can, within five working days, resolve the dispute or decide the DSA document will present different staff views to the respective Boards; in the latter case each institution presents its views in its own words.

### Review process, clearance, and timeliness
- LIC DSA documents are subject to the regular review process; timing details are in Box 3.
- On the Fund side:
  - PDR (and other functional departments) will have at least three days for review and clearance.
  - Management will have at least five days for approval.
  - Any substantive changes by Fund management will be communicated to Bank staff.
- On the Bank side:
  - Country teams should transmit a preliminary draft to PRMED for initial guidance.
  - Completed DSA reviewed on a stand-alone basis by PRMED and the regional PREM director, who will have three days for review.
  - After comments are incorporated, PRMED sends the DSA as a stand-alone document via PRMVP to SECBO for transmission to the Board for information.
- Each institution is expected to abide by the agreed timeline; failure to comment within the agreed timeframe effectively waives the right to comment, but such cases should be documented and brought to management attention.
- Final versions of DSA files (external and fiscal templates) should be submitted to the PDR review box in the Fund and to PRMED in the Bank at the time the DSA (and staff report) is sent to the Fund’s Executive Board or respective Executive Boards.
- To avoid discrepancies, all electronic links to external files (fiscal, balance of payments etc.) should be broken before submission; files should also be sent to the authorities.

### Arrangements for HIPCs and scenarios
- The HIPC DSA differs conceptually and methodologically from LIC DSA: HIPC uses uniform thresholds for NPV of debt-to-exports and NPV of debt-to-revenue with three-year backward-looking averages and predetermined currency-specific discount rates; LIC DSA is forward-looking, uses single-year denominators, and applies policy-dependent indicative thresholds.
- The DSF should be applied to both HIPCs and non-HIPC low-income countries. For HIPCs that have started the HIPC process but not reached completion point:
  - The DSF remains the main tool and the LIC DSA should be updated annually; selected indicators from the HIPC DSA should be included in LIC DSA tables as memorandum items.
  - Decision and completion point documents should contain a LIC DSA as a supplement for forward-looking analysis.
- When HIPC DSA and LIC DSA are in the same document, both must be based on consistent baseline macroeconomic scenarios and debt data; baseline macro scenarios and assumptions on new borrowing should generally be identical.
- Debt ratios and debt-service projections will differ because of different exchange rates, discount rates, and denominators; the write-up should decompose differences into components attributable to (i) discount and exchange rates and (ii) exports (three-year averages versus current levels).
- HIPC Initiative and MDRI debt relief should be accounted for in baseline or alternative scenarios depending on HIPC status:
  - Post-completion point countries: LIC DSA should incorporate HIPC Initiative and MDRI relief in the baseline scenario; debt-service projections should take into account the specific delivery mechanisms (e.g., debt forgiveness or rescheduling).
  - Interim-period countries: Baseline should assume HIPC interim relief (risk rating not predicated on reaching completion point); an alternative scenario should assume irrevocable HIPC and MDRI relief beyond expected completion point date, with NPV indicators affected only beyond that date.
  - Countries with preliminary HIPC documents but not decision point: Baseline should incorporate only traditional debt relief; alternative scenario can incorporate HIPC relief delivered through debt rescheduling beyond assumed decision point date (value of debt relief will be approximate).

### Communications strategy and dissemination
- The DSF is a tool to improve communication and coordination between borrowers and creditors, and among creditors, including emerging creditors.
- Country teams are encouraged to involve relevant MDBs early in the DSA process, as appropriate and with authorities’ consent.
- DSA assumptions and results should be thoroughly discussed with the authorities (preferably early in Fund missions when the DSA is for an IMF Board document); final DSA templates should be provided to the authorities.
- The DSF combined with technical assistance should help build capacity in public debt management and support development of medium-term debt strategies.
- Following Board meetings, country teams, in consultation with authorities, are encouraged to disseminate DSA results if authorities consent.
- Both Bank and Fund maintain websites on published DSAs and background material (http://www.imf.org/dsa and http://worldbank.org/debt); staff should encourage authorities to consent to publication of the DSA (and for the Fund, the staff report to which the DSA is supplemented).

*Source: _041607 - 27.      A joint LIC DSA is generally expected to be prepared once a year for each IDA-only, PRGF-eligible country (excerpt).*

### REFERENCES

### REFERENCES

### Listed IMF/IDA documents
- International Monetary Fund and International Development Association, 2004, “Debt-Sustainability in Low-Income Countries-Proposal for an Operational Framework and Policy Implications,” available via internet: http://www.imf.org/external/pp/longres.aspx?id=41).
- ______, 2004a, “Debt Sustainability in Low-Income Countries―Further Considerations on an Operational Framework and Policy Implications,” available via internet: http://www.imf.org/external/pp/longres.aspx?id=440.
- ______, 2004b, “Operational Framework for Debt Sustainability in Low-Income Countries―Implications for Fund Program Design,“ available via internet: http://www.imf.org/external/pp/longres.aspx?id=479.
- ______, 2005, “Operational Framework for Debt Sustainability Assessments in Low-Income Countries—Further Considerations,” available via internet: http://www.imf.org/external/pp/longres.aspx?id=412.
- ______, 2006 “Review of Low-Income Country Debt Sustainability Framework and Implications of the Multilateral Debt Relief Initiative (MDRI),” available via internet: http://www.imf.org/external/pp/longres.aspx?id=557.
- ______, 2006a, “Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief,” available via internet: http://www.imf.org/external/pp/longres.aspx?id=3959.

### Annex I: Debt Dynamics Templates for Low-Income Countries — Users’ Guide (Introduction)
- Purpose:
  - Assessing fiscal and external sustainability underpins Article IV surveillance and use of Fund resources, informs IDA grant allocation, and informs Bank dialogue on economic management.
  - The LIC DSA has been used only since its inception in April 2005.23
  - This user’s guide provides practical guidance to country teams on using templates for external and fiscal sustainability analyses in low-income countries.
- Standardization and common features:
  - Templates are set up for a 20-year projection period.
  - Include a baseline scenario, a set of sensitivity tests, an output table, and charts summarizing DSA results.
  - External template covers debt incurred externally by domestic residents (public and private); fiscal template includes all public sector debt, including domestic debt.

### External template — structure and inputs
- Composition:
  - (i) two input sheets; (ii) two output tables; (iii) one output figure; (iv) worksheets transforming input data; (v) summary instructions.
- Input worksheets:
  - Two input sheets: “Input_external” and “Inp_Outp_debt”.
  - Required inputs are cells shaded in yellow; non-shaded cells are automatically calculated.
  - DSA requires total stock of existing debt and new borrowing and associated debt service by main creditors — loan-by-loan data generally not required.
  - “Input external” collects baseline macro series: stock of total external debt and associated debt service (including on new borrowing), exports, imports, current transfers, nominal GDP, qualitative info (three-year moving average of the CPIA, debt distress rating, HIPC, MDRI, IMF-supported program, IDA status).
  - For historical years and first five projection years, macro data can be refreshed via EDSS by (i) changing the country code in column "Series_Code", and (ii) refreshing via EDSS button.24
  - If WEO projections are outdated (or program baseline differs), all relevant figures should be inserted directly; same for projections beyond the WEO period.25
- NPV and debt terms:
  - “Inp_Outp_debt” computes NPV of debt—NPV for private external debt is assumed equal to nominal value (nominal interest rate assumed equal to discount rate taken from “input_external”).
  - For PPG external debt, required inputs:
    - Debt-service projections on existing outstanding liabilities by main creditor groups over entire maturity period.
    - Disbursements by creditors and repayment terms (interest rate, grace period, maturity).
  - Terms of additional financing in stress tests set to coincide with average baseline terms but can be adjusted.
  - Discount rate set at a uniform 5 percent, consistent with IMF and IDA (2004), and should not be altered.
  - Discount rate will be adjusted by 100 basis points whenever it deviates from the U.S. dollar CIRR (6-month average) by at least that magnitude for a consecutive period of 6 months.
  - One discount rate for all loans implies need for explicit exchange-rate projections to convert debt service into U.S. dollars; medium-term conversion should be based on WEO exchange rate assumptions.

### External template — outputs and sensitivity analyses
- Outputs:
  - Template automatically runs stress tests and produces output tables and a panel chart.
  - “SR_Table_Baseline”:
    - Reports evolution of nominal debt-to-GDP ratio in baseline and decomposes changes into: (i) non-interest current account deficit and its breakdown; (ii) non-debt creating capital inflows (net FDI); (iii) endogenous debt dynamics (GDP growth, interest rates, price and exchange rate movements); and a residual for unexplained change.27
    - Presents evolution of five other debt-burden indicators: NPV of PPG external debt relative to GDP, exports, and revenues; debt service on PPG external debt relative to exports and revenues.
    - Shows key macro assumptions, comparison with historical averages, and rate of debt accumulations — a rate in excess of 5 percent would trigger more thorough analysis.
  - “SR_Table_Stress”:
    - Shows sensitivity of the five key external debt-burden indicators to standardized shocks and alternative assumptions.
    - Panel chart depicts evolution under baseline, the “historical scenario”, and the most extreme stress test (highest indicator after 10 years), plus rate of debt accumulation and average grant element under baseline.
- Sensitivity analyses — standardized tests:
  - Distinguishes two “alternative scenarios” and six “bound tests”.
- Alternative scenarios:
  - Historical Average Scenario (Worksheet “A1_Historical”): Assumes key variables equal to respective historical averages throughout projection period; template uses ten-year historical averages as default.
  - Level of concessionality (Worksheet “A2_Financing”): Assumes interest rate on new borrowing is two percentage points higher than baseline.
  - Note: These scenarios present mechanical responses and do not form comprehensive alternative macro scenarios; staff may present a fully articulated alternative macro scenario by developing an alternative baseline projection and rerunning the template.
- Bound tests:
  - Provide upper bound of a confidence interval; confidence interval corresponds, on average, to a 25 percent probability over a ten-year period.28
  - Tests:
    - B1_GDP: real GDP growth one standard deviation below historical average in each of first two years.
    - B2_Exports: exports growth one standard deviation below historical average in each of first two years.
    - B3_Deflator: inflation (increase in U.S. dollar GDP deflator) one standard deviation below historical average in each of first two years.
    - B4_non-debt flows: net non-debt flows (FDI and current transfers) one standard deviation below historical average in each of first two years.
    - B5_Combo: all four variables half a standard deviation below historical average in each of first two years.
    - One-time 30 percent depreciation of domestic currency in first year of projection period.
  - Tests may be adjusted for country-specific circumstances, including choice of calibration period (template uses past 10 years) and adjustments for non-representative events; parameter changes must be made in worksheet “Baseline” and clearly noted and justified.

### Fiscal template — structure and inputs
- Composition:
  - (i) one input sheet; (ii) two output tables; (iii) one output graph; (iv) worksheets transforming input data; (v) summary instructions (first sheet).
- Input worksheet:
  - Worksheet “Input_fiscal” requires key macro series in baseline and assumptions on terms of marginal borrowing. Required inputs are cells shaded in yellow.
  - Staff must determine appropriate coverage of public sector (central government, general government, nonfinancial public sector, etc.) and type of debt (net or gross), noting coverage and type in the DSA write-up.
  - Coverage and type of debt should be consistent across fiscal series; contingent liabilities should be reported separately if available.
  - Ensure consistency between public external debt definitions in external and fiscal templates—these may differ.
  - Assumptions on terms of marginal borrowing (cells D33-51) required for stress tests; template allows division of marginal borrowing between foreign-currency borrowing, domestic medium- and long-term, and domestic short-term borrowing.
  - Interest rates specified in nominal terms for foreign-currency borrowing (assumed U.S. dollars) and in real terms for domestic borrowing.
  - Terms on marginal foreign-currency borrowing should be consistent with external template.
  - Discount rate should be the same as in the external template and not be altered.

### Fiscal template — outputs and sensitivity analysis
- Outputs:
  - Template runs stress tests and produces output tables and a panel chart.
  - “Table_baseline”:
    - Reports evolution of debt-to-GDP ratio in baseline and decomposes changes into: primary balance and its breakdown; endogenous debt dynamics (GDP growth, interest rates, currency appreciation/depreciation); other debt-creating/reducing flows (privatization receipts, asset purchases, debt relief, recognition of contingent liabilities).
    - Residual represents change unexplained by identifiable factors; large residuals may indicate data errors and should be understood.
    - Additional debt indicators presented:
      - NPV of debt-to-GDP: calculated as sum of NPV of external debt plus nominal value of public domestic debt (domestic nominal interest rate assumed equal to discount rate).
      - NPV of contingent liabilities: may include government loan guarantees, expected costs of bank recapitalization, unfunded pension liabilities; standard discount rate used for external debt, NPV of domestic debt assumed equal to nominal value.
      - Gross financing need.
      - NPV of debt-to-revenue ratio.
      - Debt-service-to-revenue ratio.
      - Primary deficit that stabilizes the debt-to-GDP ratio: defined as difference between actual primary deficit and actual change in debt-to-GDP ratio; (1) negative number corresponds to primary surplus; (2) estimated primary deficit stabilizes the NPV ratio in the year in question assuming prior years followed baseline path.
    - Shows key macro and external assumptions in baseline and comparison to historical average.
  - “Table tests”:
    - Shows evolution of NPV of debt-to-GDP, NPV of debt-to-revenue, and debt-service-to-revenue under alternative scenarios and stress tests.
    - Panel chart (Worksheet “charts”) shows variables in baseline, no-reform scenario, and most extreme stress test (defined as test producing highest indicator after 10 years).
- Sensitivity analysis:
  - Template produces standardized alternative scenarios and stress tests analogous to those in external template (details continue beyond the provided excerpt).

*Source: _041607 - REFERENCES*

### 69.      The template includes a set of standardized sensitivity tests to assess the robustness of

### The template includes a set of standardized sensitivity tests to assess the robustness of the sustainability indicators to changes in key assumptions and parameters

### Purpose and structure
- The template distinguishes between three “alternative scenarios” and five “bound tests”.
- Debt dynamics under the alternative scenarios and bound tests are derived in separate worksheets and summarized in the output tables and figure.
- The three alternative scenarios present a mechanical response of debt dynamics to changes in critical variables; they are not comprehensive, fully consistent alternative macroeconomic scenarios.
- Bound tests are standardized tests intended to provide the upper bound of a confidence interval to the baseline projections.

### Alternative scenarios (worksheets and assumptions)
- Historical average scenario (Worksheet “A1_ historical”):
  - Assumes key variables are at their historical averages throughout the projection period.
  - The template uses ten-year historical averages as a default.
  - Purpose: indicates the extent of optimism in the baseline projections relative to the country’s historical performance.
- Primary balance unchanged (Worksheet “A2_ PB unchanged”):
  - Assumes the primary balance is unchanged from the last actual observation.
  - Intention: replicate a “status quo”.
- Lower long-run GDP growth (Worksheet “A3_LR growth”):
  - Assumes real GDP growth in all future years is lower than the baseline by one standard deviation divided by the square root of the projection period.
  - Purpose: illustrate effects of persistently lower-than-projected growth.
- Note on alternative fully articulated scenarios:
  - Staff may present debt dynamics for an alternative fully articulated macroeconomic scenario (which could include a policy response).
  - This requires developing an alternative baseline projection consistent with that scenario and rerunning the template.

### Bound tests (worksheets and shocks)
- B1_GDP (Worksheet “B1_GDP”):
  - Assumes real GDP growth is one standard deviation below the historical average in the first two years of projection.
- B2_PB (Worksheet “B2_ PB”):
  - Assumes the primary balance is one standard deviation below the historical average in the first two years of projection.
- B3_combo (Worksheet “B3_combo”):
  - Combines shocks to real GDP growth and the primary balance, assuming they are one-half a standard deviation below the historical average.
- B4_depreciation (Worksheet “B4_depreciation”):
  - Assumes a one-time 30 percent depreciation of the domestic currency (relative to the baseline) in the first year of the projection period.
- B5_other flows (Worksheet “B5_other flows”):
  - Assumes that debt increases by 10 percent of GDP in the first year of projection due to other debt-creating flows (for example, a bank recapitalization or recognition of other contingent liabilities).

### Customization and calibration guidance
- Sensitivity-test parameters can be adjusted to take account of country-specific circumstances.
  - Possible modification: change the period over which stress-test parameters are calibrated (the template uses averages and standard deviations over the past 10 years).
  - Country teams may adjust historical data if it covers non-representative events (for example, a war or a particularly severe crisis).
- Changes to the parameters used in scenarios should be made in the worksheet “Baseline” (columns AJ-AK).
- Staff can change tests B1-B3 to shock the baseline rather than the historical averages if historical averages are believed to be excessively optimistic (for example, if the deficit has been rising over time).
- Any changes must be properly noted and justified.

### Modeling assumption to note on GDP shocks
- The shocks to GDP growth assume:
  - Revenue stays constant as a share of GDP.
  - Expenditure stays constant in nominal terms.
- Implication: GDP shocks increase (decrease) the primary deficit (surplus), which partly explains why these shocks often have large effects.
- If staff consider these assumptions unreasonable for their country, the assumptions could be altered, but such alterations should be clearly noted and justified.

*Source: IMF template description (sensitivity tests and worksheets).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_041607.pdf_