## _012210 ## Source details **Canonical URL:** [_012210](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_012210.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_012210.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_012210.pdf.json) --- ### Introduction and country coverage and overall objective - Objective: Support low-income countries (LICs) in achieving development goals without creating future debt problems; safeguard sustainability for countries receiving HIPC and MDRI relief. - Joint Bank-Fund DSAs: - Fully elaborated joint Bank-Fund LIC DSAs are expected once every three years for PRGT-eligible, IDA-only countries, with short annual updates in interim years. - For PRGT-eligible countries that are not IDA-only, Fund staff should follow a similar schedule. - If a country has durable and significant access to market financing, Fund staff could use the middle-income-country DSA template. - Timing note: A new rule shifting full joint DSAs to once every three years will become effective only once the current economic and financial crisis dissipates; until then, annual full DSAs remain required. - Operational guidance: - DSAs are an upstream device to inform country teams’ dialogue with authorities. - Country teams should communicate frequently with MDBs, engage authorities during preparation, discuss results with Ministry of Finance/Central Bank, share final DSA files, and encourage authorities to consent to publication. - Template projection design: - Template designed for a twenty-year projection period. - Uses a uniform discount rate to calculate PV of future external debt-service obligations. - Discount rate remained constant at 5 percent; in September 2009 it was lowered by 100 basis points to its present level of 4 percent. ### Main guidance changes (high-level) - Assessing impact of public investment on growth more systematically; consider detailed empirical analyses when scaling-up public investment is ongoing or imminent. - Determinants of long-term growth should be discussed in full DSA write-ups. - Expanded scope for considering remittances in assigning risk rating. - Defined circumstances for excluding SOE debt from DSAs. - Greater inertia for policy capacity assessments: - Changes in three-year moving average CPIA scores alter policy category only if they lead to a large breach of the cutoff or if a breach is sustained for at least two years. - If updated three-year moving average breaches the CPIA boundary after a new annual CPIA release, the performance category changes immediately only if the size of the breach exceeds 0.05. If the size of the breach is at or below 0.05, the performance category changes only if the breach is sustained for two consecutive years. - Guidance provided on treatment of SDR drawdowns in DSAs. - Streamlining DSAs: full DSAs typically required once every three years; short annual updates in off-years. - Full DSA write-ups must systematically present authorities’ views. - Guidance on using the middle-income-country DSA template for LICs with market access. ### LIC DSA framework — structure, pillars, and templates - Three pillars: - (i) Standardized forward-looking analysis of debt and debt-service dynamics (baseline, alternative scenarios, standardized stress tests/bound tests). - (ii) Debt sustainability assessment based on indicative country-specific debt-burden thresholds that depend on quality of policies and institutions (CPIA-based). - (iii) Recommendations on a borrowing (and lending) strategy to limit risk of debt distress while maximizing resources to achieve the MDGs. - Template outputs and features: - Automatically produces tables displaying dynamics of debt and debt-service ratios in baseline and summarizes standardized alternative scenarios and stress tests. - Scenarios should be adjusted for country-specific circumstances. - Bound tests are partial and assume a passive fiscal policy; fiscal reaction functions can be modeled separately in alternative scenarios if warranted. - Template components (explicit): - (i) a language sheet, (ii) a template navigator, (iii) four input sheets, (iv) five output tables, (v) four output figures, (vi) transformation worksheets, (vii) two customized-scenario worksheets, (viii) an instruction summary. - Navigator and input rules: - Required inputs shaded in yellow; analysis requires data on total stock of existing debt and new borrowing terms by main creditors; LIC DSA does not require loan-by-loan data. - Coverage decisions for public debt (central government, general government, nonfinancial public sector, net or gross) must be determined and noted in the DSA write-up. - Inp_Outp_debt and PV calculations: - “Inp_Outp_debt” focuses on medium- and long-term PPG debt; PV of PPG external debt emphasized for LICs. - PV of public debt = PV of external public debt + nominal value of public domestic debt (assuming nominal interest rate equals discount rate for domestic debt). - Users must enter debt-service projections on existing outstanding external PPG debt by main creditor groups until claims are paid off, and projected disbursements by creditor over the projection period. - Discount-rate rule: - The discount rate will be adjusted whenever it deviates from the U.S. dollar CIRR (6-month average) by at least 100 basis points for a consecutive period of six months. - Any changes to the discount rate will be reflected in the most recent template version. ### Debt and vulnerability indicators, definitions, and thresholds - Debt sustainability assessed using debt and debt service relative to measures of repayment capacity: GDP, exports of goods and services, or government revenues. - Distinction: - PV debt ratios capture concessionality and long-term solvency risks. - Debt-service ratios indicate immediate liquidity burden and timing likelihood of liquidity problems. - External debt defined on a residency basis; may include domestic-currency-denominated debt. - Private external debt: - Projected in template but not considered for IDA grant allocations. - Level and evolution of private external debt matter for overall external debt sustainability and can affect assessments in some cases. - Total public debt vulnerabilities should be assessed as part of the LIC DSA, but indicative debt-burden thresholds do not apply to total public debt; risk rating is based only on external public and publicly-guaranteed debt. - Use policy-dependent external debt-burden thresholds tied to the CPIA index: DSF divides countries into three performance categories: strong, medium, and poor (indicative thresholds in source Table 2). - Debt accumulation trigger: - A rate of debt accumulation in excess of 5 percent (of GDP) would trigger a more thorough analysis. ### Risk-of-debt-distress classification and judgment - Classification rules: - 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. - Moderate risk: Baseline does not indicate breach of thresholds, but alternative scenarios or stress tests result in a significant rise in debt-service indicators over the projection period (nearing thresholds) or a breach. - High risk: Baseline indicates a protracted breach of debt or debt-service thresholds but no current payment difficulties; alternative scenarios/stress tests exacerbate. - In debt distress: Current debt and debt-service ratios are in significant or sustained breach; actual or impending restructuring or arrears indicative. - Guidance on judgment: - Balance mechanistic classification with judgment; any use of judgment should be applied and explained in the DSA write-up. ### Macroeconomic scenario design, realism checks, and public investment analysis - Principal realism mechanisms: - (i) Subject baseline projections to reality checks (including historical scenarios). - (ii) Assess judiciously the impact of public investment on growth. - (iii) Undertake “post-mortem” analyses of projections in the previous DSA. - Public investment assessment: - DSA write-ups should discuss determinants of growth, including public investment (except not expected in short annual updates). - Simple techniques (e.g., growth accounting) often appropriate. - Complex methodologies (general equilibrium models, growth diagnostic studies) expected only where scaling-up of public investment is ongoing or imminent, or where high macroeconomic and PFM capacity exists. - Empirical guidance: prolonged growth accelerations are rare; macroeconomic returns from projects tend to be considerably lower than microeconomic project returns. - Box 2 indicators (selected categories): - Rates of Return, Structural Constraints, Macroeconomic Constraints, Aggregate Trends (e.g., Growth rate of per capita GDP; Growth rate of TFP). ### Special scrutiny for ambitious borrowing and growth assumptions - Mandatory inclusion of an alternative “high-investment, low-growth” scenario if baseline assumes substantial growth dividends from an ambitious debt-financed investment program. - Benchmarks for “sizeable” growth dividends: - Growth rates of at least one standard deviation above the historical average; or - If changing growth alone to historical levels would imply a significantly worse debt outlook making sustainability critically dependent on the projected growth acceleration. - If included, alternative scenario should assume little or no growth payoff from the debt-financed investment program. - Definition of large upfront borrowing: an annual increase in the PV of public external or total public debt of 5 percent of GDP or more. - Baseline must be supported by compelling evidence that assumed growth dividends are very likely to materialize; absent such evidence, baseline should be revised. ### Treatment of remittances - Conceptual point: Remittances share characteristics with exports and GDP and enhance foreign exchange and domestic resource space. - Procedure to take remittances into account (conditions for a more favorable rating): - Workers’ remittances represent a reliable source of foreign exchange: they should not have exhibited large volatility or a structural decline in the recent past. - Breaches of thresholds under the baseline or stress tests before taking account of remittances are not very protracted. - Modified debt burden indicators—PV of external debt and external debt service as ratios to the sum of exports and gross remittances, and to the sum of GDP and gross remittances—are significantly lower than the DSF thresholds applicable to the corresponding debt burden indicator. - Rule-of-thumb: use modified thresholds that are 10 percent lower than the applicable DSF thresholds. - Example: For a DSF threshold of 150 percent of exports for PV of debt, the remittance modified debt indicator should not exceed 135 percent. For a DSF threshold of 40 percent of GDP, the remittance modified indicator should not exceed 36 percent of GDP. - Using remittance-modified indicators, a country’s risk rating could be moved from high to moderate if under the baseline the debt ratios were below the modified thresholds. - Change from moderate to low could be considered if remittance-modified indicators under both baseline and alternative scenarios were below modified thresholds. - A two-step change from high to low is not permitted based on remittance-modified indicators. - Changes based on these considerations should be fully documented in the DSA write-up. - Additional operational notes: - A benchmark for the maximum permissible length of the breach of the thresholds could be 10 years starting from the current year (i.e., half of the projection period). - Net remittances may differ significantly from gross remittances; DSA write-up should indicate where repatriation of income by expatriate workers may represent a significant outflow. ### Treatment of domestic debt, SOE debt, and private external debt - Domestic debt: - All LIC DSAs must include a public DSA regardless of the size of public domestic debt. - Provide 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. - Public domestic debt defined on a residency basis and may include foreign currency-denominated obligations. Coverage should seek broader public sector but data limits often restrict coverage to central or general government. - Public sector contingent liabilities (PPP, financial sector weaknesses) should be taken into account where possible; staff should flag coverage problems and steps to improve coverage. - SOE external debt exclusion: - Removing an SOE’s external debt from external DSAs can be considered if the company can borrow externally without a public guarantee and its operations pose a limited fiscal risk. - Exclusion cases must be explicitly described in DSA write-ups and based on collected information on managerial independence, relations with government, audits, reporting, financial sustainability, and two binding fiscal-risk criteria (uncompensated quasi-fiscal activities; negative operating balances). - In IMF-supported programs, TMUs specify any exclusion of SOEs for external debt limits; same exclusions apply in the DSA. - Private external creditors: - For countries borrowing significant amounts from private external creditors, the DSF should be complemented with additional analyses of short-term debt-related vulnerabilities and financial sector soundness. - Additional indicators can highlight rollover risks, adequacy of reserve cover, and financial sector weaknesses. - Country teams should discuss policies to alleviate risks: debt-management frameworks, recording of debt stock, liquidity forecasting, reassessment of reserve adequacy, sequencing reforms for banking supervision prior to liberalization. ### Key indicators for vulnerability analysis (suggested list) - Public sector stock imbalances: PV of public sector debt-to-GDP (public sector revenue); PV of external public sector debt-to-GDP (exports); PV of foreign-currency denominated public sector debt-to-GDP; PV of contingent liabilities. - External sector stock imbalances: PV of external debt-to-GDP (exports); External debt-to-GDP; Non-interest external current account deficit that stabilizes external debt-to-GDP. - Public sector flow imbalances: Public sector debt service-to-revenue; External public debt service-to-exports; Public sector gross financing need (percent of GDP); Short-term public debt-to-total debt (remaining maturity). - External sector flow imbalances: External debt service-to-exports; External gross financing need (billions of U.S. dollars); Gross official reserves-to-short-term external debt. - Financial system soundness: Regulatory capital-to-risk-weighted assets; Nonperforming loans-to-total loans; Claims on Government and Central Bank-to-total banking sector claims; Private sector credit growth; Foreign currency loans-to-total loans; Share of foreign currency deposits held by nonresidents. ### Treatment of SDR allocations - IMF implemented a US$250 billion general allocation of SDRs. - Fourth Amendment made available a special allocation of up to an additional SDR 21.5 billion (US$33 billion) to some SDR Department participants. - A country’s SDR allocation should not be included in the nominal stock of gross external debt in DSAs because members are generally under no obligation to reconstitute their SDR holdings. - DSAs should capture net interest payments that arise when SDR holdings are below a participant’s SDR allocation; positive net interest payments will impact debt service and the PV of PPG debt and related LIC DSF indicators. - Worksheet “SDR”: - Designed to estimate the impact of net use of the SDR allocation on a country’s debt sustainability outlook. - Total SDR allocation and total SDR holdings should be entered in billions of USD. - PV calculations consider only future flow of interest payments because members are under no obligation to reconstitute holdings. ### Operational implications and use of DSAs in financing decisions - LIC DSAs inform IDA and Fund operational decisions and some multilaterals: - IDA-only countries judged at high risk of debt distress or in 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 continue to receive 100 percent credit financing on standard IDA terms. - LIC DSAs inform IDA’s Non-Concessional Borrowing Policy (NCBP) and consideration of waivers. - Design of debt limits in Fund-supported programs is systematically related to LIC DSA assessments. - Determination of access to the Fund’s concessional resources needs to take account of a recent LIC DSA; forward-looking indicators should include all projected disbursements, including from the Fund. - DSA-related financing and reporting thresholds and requirements: - A DSA update is required for financing requests that would, among other conditions, bring total access in excess of 80 percent of quota based on past scheduled and future scheduled disbursements in any 24-month period, or that involve a member rated as being at high risk of debt distress or in debt distress. - Financing requests of less than 10 percent of quota do not require an updated DSA. - For countries with high risk of debt distress (or in debt distress), where Fund financing exceeds 40 percent of quota per year, the DSA should include an explicit discussion of the contribution of Fund financial support to debt-burden indicators. - In some cases an alternative scenario excluding Fund financial support may be appropriate. ### Modalities for preparing DSAs, process timing, and division of responsibilities - Frequency and presentation: - Full joint Bank-Fund LIC DSAs are expected once every three years for PRGT-eligible IDA-only countries; short annual updates expected in intermediate years. - A full DSA may be required sooner if macroeconomic conditions have significantly changed or to satisfy other Bank-Fund requirements; any change warranting a risk rating change requires a full DSA. - Each calendar year, Bank and Fund country teams should agree on a DSA preparation schedule; for the Fund, a DSA is normally produced for an Article IV consultation or in program contexts; for the Bank, CAS include debt sustainability discussion. - Box 3 — Approx. timing (key milestones): - (T-90) days — Draft Policy Note / preliminary DSA draft begins. - (T-64) days — Department Review of Draft Policy Note/preliminary DSA draft. - (T-46) days — Mission: Fund and Bank teams complete DSA preparation with authorities’ input. - (T-16) days — Department Review of Staff Report/DSA formal clearance. - (T-10) days — Circulation of Staff Report to Board. - T — Board Meeting; DSA published after authorities' approval. - Division of responsibilities: - Fund leads on medium-term macroeconomic projections (three to five years). - Bank leads on long-term growth prospects and assessing the investment-growth nexus. - Fund staff 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 and assumptions on new multilateral borrowing based on current allocations. - Teams should agree on baseline assumptions, collaborate on alternative scenarios and stress tests, and share all relevant data files confidentially. - Dispute resolution: - Working-level discussions; escalate to mission chief and regional director (5 working days); further escalation to area director/vice president (5 working days); unresolved disputes brought to management who can resolve or decide to present differing staff views. ### DSA format, length, and publication - LIC DSAs should be prepared as self-contained documents. - DSAs should include a clear description of macroeconomic assumptions without referring to the Fund staff report. - Suggested limit: 2000 words (4–5 pages excluding tables or appendices). - LIC DSA updates between full DSAs are lighter: short write-up (usually no longer than one page) plus standard tables and charts; write-up should include a summary paragraph on the debt distress rating and important changes from the previous DSA. - Full DSAs should reflect the authorities’ views; authorities should be involved in preparation where possible and final DSA templates provided to them. ### Stress tests, standardized shocks, and customized scenarios - Template produces: - “Stress Test External” showing sensitivity of five key external debt-burden indicators to standardized shocks and alternative assumptions. - “Stress Test External – remit” (same analysis augmented by gross remittances). - “Stress Test Fiscal” showing PV of debt-to-GDP, PV of debt-to-revenue and debt-service-to-revenue ratios. - Panel charts illustrating PPG external debt and total public debt in baseline, historical scenario, and most extreme stress test. - Standardized sensitivity tests: - Two “alternative scenarios” and six “bound tests” for external DSA; three alternative scenarios and five bound tests for public DSA. - Standard stress tests calibrated using the average and standard deviations over the last 10 years of history. - Alternative scenarios — external DSA: - Historical Average Scenario: key variables at historical averages throughout projection period. - Level of concessionality: interest rate on new borrowing is 200 basis points higher than in the baseline. - Alternative scenarios — public DSA: - Historical Average Scenario; Primary Balance Unchanged; Lower long-run GDP growth (real GDP growth lower by one standard deviation divided by square root of projection period). - Bound tests — external DSA (specific shocks): - B1_GDP: real GDP growth one standard deviation below historical average in each of the first two years. - B2_ Exports: exports growth one standard deviation below historical average in each of the first two years. - B3_Deflator: inflation (U.S. dollar GDP deflator) one standard deviation below historical average in each of the first two years. - B4_non-debt flows: net non-debt flows one standard deviation below historical average in each of the first two years. - B5_Combo: first four variables each at one-half standard deviation below historical average in the first two years. - A fifth test: a one-time 30 percent depreciation of the domestic currency in the first year. - Bound tests — public DSA (specific shocks): - B1_GDP; B2_PB: primary balance one standard deviation below historical average; B3_combo; B4_depreciation: one-time 30 percent depreciation; B5_other flows: debt increases by 10 percent of GDP in first year due to other debt-creating flows. - Notable modeling assumption: - GDP growth shocks assume revenues stay constant as a share of GDP while expenditures stay constant in nominal terms; GDP shocks therefore increase (decrease) the primary deficit (surplus), amplifying shocks’ effects. - Customized scenario: - Activation via on/off control; modifiable variables include exports, imports, official and private current transfers, net FDI, real GDP growth, GDP deflator, revenues and grants, primary expenditure, inflation, nominal depreciation, and public sector assets. - Terms of new borrowing adjustable (average interest rate, maturity, grace period); composition of new public borrowing modifiable (external, MLT domestic, short-term domestic). ### Market access by low-income countries (definition and empirical observations) - Market-access evidence measured by two alternative tests: - First test: public sector issuance/guaranteeing of external bonds or disbursements under PPG external commercial loans in international markets during at least three of the last five years, cumulative amount over that period ≥ 100 percent of country’s Fund quota at assessment time. - Alternative: convincing evidence that sovereign could have tapped international markets on a durable and substantial basis despite actual borrowing falling short. - Empirical observations (2003–2007): - A few LICs tapped external bond markets since 2003; smaller subset issued multiple times (Grenada, India, Pakistan). - Angola, Maldives, Sri Lanka, Vietnam, and several ECCU members obtained external commercial loans over 2003–07. - For many countries market access was fairly small (e.g., below 10 percent of the Fund quota on average during 2003–07). - Angola, Sri Lanka and Pakistan accessed markets in four or five of the years 2003–07, with cumulative access exceeding present quota. - India’s access (via State Bank of India) amounted to 35 percent of quota since 2003; actual access over 2003–07 remained below 100 percent of quota. - Evidence indicates Angola, India, Sri Lanka, and Pakistan maintained regular market access in 2003–2007 consistent with duration and magnitude conditions. ### HIPC, MDRI, and interactions with LIC DSAs - HIPC DSA differs conceptually/methodologically from LIC DSA: - HIPC uses uniform PV debt-to-exports and PV debt-to-revenue thresholds with three-year backward-looking averages for denominators and predetermined currency-specific discount rates. - LIC DSA is forward-looking, uses single-year denominators, exchange rate projections, uniform discount rate, and policy-dependent indicative thresholds. - For HIPCs in process: - DSF remains the main tool and LIC DSA should be updated annually. - Selected HIPC DSA indicators 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. - Treatment of HIPC Initiative and MDRI relief in baseline or alternative scenarios depends on HIPC status (post-completion point, interim period, not yet at decision point) with specific guidance on incorporation and decomposition of differences due to discount and exchange rates and export denominator methods. ### Engagement, dissemination, and capacity building - DSF should be used as a tool for better communication and coordination between creditors and borrowers, and among creditors. - Combined with technical assistance, the DSF should help build capacity in public debt management and support borrowers in developing medium-term debt strategies. - Country teams should involve relevant MDBs early in the DSA process, subject to authorities’ consent and confidentiality rules. - Following the Board meeting, country teams are encouraged to disseminate DSA results, in consultation with the authorities, and to encourage early consent to publication. ### Annex V: debt dynamics — identity, decomposition, and debt-to-GDP dynamics (selected equations and definitions) - Public debt evolution identity (nominal and decomposed into external and domestic components) presented in source, including: - Variables definitions: D (debt stock), i (effective nominal interest rate), T (total public-sector revenues), G (total grants), S (public expenditures excluding interest/amortization), O (other debt-creating flows), RES (residual). - Superscripts: f denotes external debt; std denotes short-term domestic debt (1 year or less); ltd denotes long-term domestic debt (more than 1 year). - Exchange rate variable: e is nominal exchange rate (LC/USD). - Restatement in real terms and simplification: - Real interest rate r defined as r = i – π - i π, approximated by r ≈ i – π. - Relation among inflation, exchange rate, and GDP-deflator growth provided. - Debt-to-GDP ratio and debt dynamic: - Dividing real identity by GDP yields expression for change in debt-to-GDP ratio incorporating: - Contribution of average real interest rate on domestic and external debt. - Contribution of real GDP growth (g). - Contribution of real exchange rate changes (ε) via revaluation of external debt. - Role of primary balance (PB) and other debt-creating flows (O) and residual (RES). - Presentation includes algebraic grouping isolating labeled contributions: average real interest rate; real GDP growth; real exchange rate. *Source: _012210 - References and associated DSA guidance excerpts. Canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_012210.pdf* ### References ............................................................................................................. ### _012210 - References ............................................................................................................. ### Introduction and country coverage - Objective: Support low-income countries (LICs) in achieving development goals without creating future debt problems; safeguard sustainability for countries receiving HIPC and MDRI relief. - Joint Bank-Fund DSAs: - Prepared jointly by Bank and Fund staff with collaboration on macroeconomic baseline, alternative scenarios, debt distress rating, and DSA write-up. - Fully elaborated joint Bank-Fund LIC DSAs are expected once every three years for PRGT-eligible, IDA-only countries, with short annual updates in interim years. - For PRGT-eligible countries that are not IDA-only, Fund staff should follow a similar schedule. - If a country has durable and significant access to market financing, Fund staff could use the middle-income-country DSA template. - Operational guidance: - DSAs are an upstream device to inform country teams’ dialogue with authorities. - Country teams should communicate frequently with MDBs, engage authorities during preparation, discuss results with Ministry of Finance/Central Bank, share final DSA files, and encourage authorities to consent to publication. - Table 1: Lists PRGT-eligible countries according to IDA status (last update: October 1, 2009). - Timing note: A new rule shifting full joint DSAs to once every three years will become effective only once the current economic and financial crisis dissipates; until then, annual full DSAs remain required. ### Main guidance changes (Box 1) - Assessing impact of public investment on growth more systematically; consider detailed empirical analyses when scaling-up public investment is ongoing or imminent. - Determinants of long-term growth should be discussed in full DSA write-ups. - Expanded scope for considering remittances in assigning risk rating. - Defined circumstances for excluding SOE debt from DSAs. - Greater inertia for policy capacity assessments: changes in three-year moving average CPIA scores alter policy category only if they lead to a large breach of the cutoff or if a breach is sustained for at least two years. - Guidance provided on treatment of SDR drawdowns in DSAs. - Streamlining DSAs: full DSAs typically required once every three years; short annual updates in off-years. - Full DSA write-ups must systematically present authorities’ views. - Guidance on using the middle-income-country DSA template for LICs with market access. ### LIC DSA framework — structure and pillars - Built on three pillars: - (i) Standardized forward-looking analysis of debt and debt-service dynamics under a baseline scenario, alternative scenarios, and standardized stress test scenarios (bound tests). - (ii) 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 resources to achieve the MDGs. - The DSF requires projection of external and total public sector debt indicators using a mandatory pre-set template: - Used for public and publicly-guaranteed (PPG) and private external debt in the external DSA. - Used for total public sector debt including domestic debt (where possible including state-owned enterprises) in the public sector DSA. - Projection design: - Template designed for a twenty-year projection period. - Uses a uniform discount rate to calculate PV of future external debt-service obligations. - Discount rate 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. - Since inception, discount rate remained constant at 5 percent; in September 2009 it was lowered by 100 basis points to its present level of 4 percent. - Template outputs: - Automatically produces tables displaying dynamics of debt and debt-service ratios in baseline scenario and summarizes results of standardized alternative scenarios and stress tests. - Scenarios should be adjusted for country-specific circumstances. - Bound tests are partial and assume a passive fiscal policy; fiscal reaction functions can be modeled separately in alternative scenarios if warranted. ### Debt and vulnerability indicators - Debt sustainability assessed using debt and debt service relative to measures of repayment capacity (GDP, exports of goods and services, or government revenues). - Distinction: - PV debt ratios capture concessionality and long-term solvency risks. - Debt-service ratios indicate immediate liquidity burden and timing likelihood of liquidity problems. - External debt defined on a residency basis; may include domestic-currency-denominated debt. - Private external debt: - Projected in template but not considered for IDA grant allocations. - Level and evolution of private external debt matter for overall external debt sustainability and can affect assessments in some cases. - Total public debt vulnerabilities should be assessed as part of the LIC DSA, but indicative debt-burden thresholds do not apply to total public debt; risk rating is based only on external public and publicly-guaranteed debt. ### Country-specific debt-burden thresholds and CPIA treatment - Use policy-dependent external debt-burden thresholds tied to the Country Policy and Institutional Assessment (CPIA) index. - DSF divides countries into three performance categories: strong, medium, and poor. - Indicative external debt-burden thresholds are associated with these categories (see Table 2 in source). - To reduce rating volatility from small CPIA fluctuations: - Use three-year moving average CPIA score to determine policy performance. - If updated three-year moving average breaches the CPIA boundary after a new annual CPIA release, the performance category changes immediately only if the size of the breach exceeds 0.05. - If the size of the breach is at or below 0.05, the performance category changes only if the breach is sustained for two consecutive years. ### Operational and analytical notes - Debt definitions and scope: - DSF uses definition of public and publicly-guaranteed (PPG) external debt from "External Debt Statistics: Guide for Compilers and Users". - External debt analysis generally focuses on medium- and long-term debt; write-ups should discuss risks from a large stock of short-term debt. - Domestic debt or domestically-issued debt denominated in domestic currency is often used as a proxy for domestic debt due to record-keeping and data limitations in LICs. - Vulnerability analysis: - Additional vulnerability indicators should be introduced where debt to private external creditors is significant. - The time path of debt-service ratios provides an indication of timing and likelihood of liquidity problems; PV measures indicate long-term solvency risk. - Engagement and communication: - Staff should present DSA results to donors and interested parties after Board meetings, with authorities’ consent. - Full DSA write-ups must reflect authorities’ views systematically. *Source: _012210 - References. Canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_012210.pdf* ### 10. Every joint Bank-Fund and Fund-only DSA should include an explicit assessment ### _012210 - 10. Every joint Bank-Fund and Fund-only DSA should include an explicit assessment ### Risk-of-debt-distress classification - Countries are classified based on how current and projected external public debt indicators compare with thresholds under the baseline, alternative scenarios, and stress tests: - 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. In cases where only one indicator is above its benchmark, judgment is needed to determine whether there is a debt sustainability problem or some other issue, for example, a data problem. - Moderate risk. While the baseline scenario does not indicate a breach of thresholds, alternative scenarios or stress tests result in a significant rise in debt-service indicators over the projection period (nearing thresholds) or a breach of debt or debt-service thresholds. - High risk. The baseline scenario indicates a protracted breach of debt or debt-service thresholds but the country does currently not face any payment difficulties. This is exacerbated by the alternative scenarios or stress tests. - In debt distress. Current debt and debt-service ratios are in significant or sustained breach of thresholds. Actual or impending debt restructuring negotiations, or the existence of arrears would generally suggest that a country is in debt distress. - Guidance on judgment: - Assessment should balance mechanistic classification and judgmental approach. - Judgment may be applied where mechanistic approach implies an unreasonable rating (e.g., marginal and temporary breach of thresholds, ability to pay evidenced by foreign exchange reserves or remittance inflows, or lack of CPIA scores). - Any use of judgment should be applied and explained in the DSA write-up. ### DSA purpose and upstream role - DSAs should: - Function as an upstream device for Bank and Fund program design and inform dialogue with authorities. - Be a cornerstone for medium-term debt strategies, fiscal frameworks, and public expenditure planning in support of sustainable progress toward development goals (the third DSF pillar). - Be based on realistic macroeconomic scenarios. ### Design of macroeconomic scenarios — realism and reality checks - Principal mechanisms to promote realism: - (i) Subject baseline projections to reality checks. - (ii) Assess judiciously the impact of public investment on growth. - (iii) Undertake “post-mortem” analyses of projections in the previous DSA. - Standard reality checks: - Historical scenarios compare baseline projections with evolution of debt ratios under historical trends for key economic variables. Baseline debt ratios significantly lower than historical scenario ratios require explicit justification. - “Post-mortems” explaining differences between assumptions and outcomes for key variables of the previous DSA are expected in the write-up. If previous DSAs proved too optimistic, assumptions should be scrutinized and revised as needed. - Financing assumptions that envisage notable improvement in financing terms require explicit justification (e.g., contracting of concessional loans that has already taken place or firm donor commitments). Review accuracy of past financing assumptions where relevant. - Explicit justification required when sustainability relies on sharp deviations from historical norms (e.g., significant improvement in revenue collection, investment rate, financing mix, or productivity growth). ### Assessing the impact of public investment on growth - DSA write-ups should include a discussion on determinants of growth, including public investment (except not expected in short annual updates). - Coverage: key assumptions, analytical techniques for medium-term growth projections, and main conclusions. - Simple techniques (e.g., growth accounting) often appropriate. - Where relevant and available, indicators in Box 2 should be considered. - Use of complex methodologies: - Complex/resource-intensive methodologies (general equilibrium models, growth diagnostic studies, micro-level studies) expected only where scaling-up of public investment is ongoing or imminent, or where high macroeconomic and PFM capacity exists. - Such models can capture macroeconomic absorptive capacity constraints (private investment crowding out, Dutch disease) and be calibrated to country-specific factors. - Empirical guidance: - Prolonged growth accelerations are rare. - Macroeconomic returns from projects (impact on GDP, government revenues, and exports) tend to be considerably lower than microeconomic project returns. ### Box 2 — Indicators for analysis of link between debt-financed investment and growth - 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 - The government’s ability to capture returns on 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 ### Special scrutiny for ambitious borrowing and growth assumptions - Mandatory inclusion of an alternative “high-investment, low-growth” scenario if baseline assumes substantial growth dividends from an ambitious debt-financed investment program. - Benchmarks for “sizeable” growth dividends: - Growth rates of at least one standard deviation above the historical average. - Or if changing growth alone to historical levels would imply a significantly worse debt outlook making sustainability critically dependent on the projected growth acceleration. - If included, the alternative scenario should assume little or no growth payoff from the debt-financed investment program. - Baseline must be supported by compelling evidence that assumed growth dividends are very likely to materialize; absent such evidence, baseline should be revised. - Definition of large upfront borrowing: - Large upfront borrowing is defined as an annual increase in the PV of public external or total public debt of 5 percent of GDP or more. ### Treatment of remittances - Conceptual points: - Remittances share characteristics with exports and GDP as variables that affect capacity to repay; they enhance foreign exchange and ease domestic resource constraints. - Data limitations have prevented formal inclusion of remittances in the DSF; initial empirical model did not include remittances. Only GDP, exports of goods and services, and government revenues are explicitly used in the DSF as proxies for capacity to repay. - Procedure to take remittances into account (conditions for a more favorable rating): - Workers’ remittances represent a reliable source of foreign exchange: they should not have exhibited large volatility or a structural decline in the recent past. The same considerations should apply for projections. - Breaches of thresholds under the baseline or stress tests (i.e. before taking account of remittances) are not very protracted. - The modified debt burden indicators—the PV of external debt and external debt service as ratios to the sum of exports and gross remittances, and to the sum of gross domestic product and gross remittances, respectively—are significantly lower than the DSF thresholds applicable to the corresponding debt burden indicator. - In the absence of a formal re-estimation of the framework, a rule-of-thumb could be to use modified thresholds that are 10 percent lower than the applicable DSF thresholds. - Example: For a DSF threshold of 150 percent of exports for PV of debt, the remittance modified debt indicator should not exceed 135 percent. For a DSF threshold of 40 percent of GDP, the remittance modified indicator should not exceed 36 percent of GDP. - Using the remittance-modified debt indicators, a country’s risk rating could be moved from high to moderate if under the baseline scenario the debt ratios were below the modified thresholds. - A change in the risk rating from moderate to low could be considered if remittance-modified debt indicators under both the baseline and alternative scenarios were below the modified thresholds. - A two-step change in the risk rating, from high to low, is not permitted based on the remittance-modified indicators. - A change in the rating based on these considerations should be fully documented in the DSA write-up. - Additional operational notes: - A benchmark for the maximum permissible length of the breach of the thresholds could be 10 years starting from the current year, i.e. half of the projection period. - Net remittances may differ significantly from gross remittances; DSA write-up should indicate where repatriation of income by expatriate workers may represent a significant outflow. ### Treatment of domestic debt - All LIC DSAs must include a public DSA regardless of the size of public domestic debt. - Rationale: Public domestic debt typically involves higher costs and shorter maturities, and rising domestic debt increases likelihood of external debt distress. - Coverage and definition guidance: - Public domestic debt is defined on a residency basis and may include foreign currency-denominated obligations. - Domestic debt data should seek to cover liabilities of the broader public sector, including central government, local governments, state-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 those arising from public-private partnerships and weaknesses in the financial sector, should be taken into account. - Staff should flag coverage problems and steps taken to improve coverage in the DSA write-up. *Source: IMF/World Bank DSA guidance excerpt.* ### 25. Guided by the results of stress tests and alternative scenarios, staff’s assessment ### Guided by the results of stress tests and alternative scenarios, staff’s assessment ### Domestic debt and primary balance - Domestic debt risks: - Provide a 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 (e.g., general budget financing or assumption of contingent liabilities), creditor base, likely duration, financing burden, and medium-term implications. - Primary balance: - The public DSA should assess whether the projected evolution of the primary fiscal balance is consistent with debt sustainability. - Staff should assess risks posed by the baseline primary fiscal deficit path. ### Debt distress classification and commentary - Domestic debt and debt service affect overall fiscal sustainability assessments. - If inclusion of domestic debt and debt service would lead to a different sustainability assessment than the external DSA, the DSA write-up should provide expanded commentary reviewing debt-servicing risks and medium-term fiscal implications. - Such assessment does not affect the country’s classification of the risk of (external) debt distress or IDA’s grant allocation. - The risk of debt distress rating is guided only by results of the external DSA relative to the thresholds. ### Treatment of State-Owned Enterprise (SOE) debt in external DSAs - External DSAs cover public and publicly-guaranteed (PPG) external debt as defined in External Debt Statistics. - Removing an SOE’s external debt from external DSAs can be considered if: - The company can borrow externally without a public guarantee, and - Its operations pose a limited fiscal risk. - Exclusion cases must be explicitly described in DSA write-ups and based on: - Collected information on managerial independence; relations with government; periodicity of audits; publication of comprehensive annual reports and protection of shareholders’ rights; financial indices and sustainability; and other risk factors (detailed indicators in Annex III). - Two binding fiscal-risk criteria (recognizing limited data in LICs): an enterprise poses high fiscal risk if it carries out uncompensated quasi-fiscal activities or has negative operating balances. - Enterprises may be judged to have low fiscal risk based on financial strength or track record even if not meeting all Annex III criteria. - In IMF-supported programs, TMUs would specify any exclusion of SOEs for external debt limits; same exclusions would apply in the DSA. ### Treatment of debt held by private external creditors - Increased private capital flows can provide resources but create vulnerabilities: - Abrupt reversals in market sentiment causing sudden capital outflows. - Non-standard financing terms (e.g., collateralization with future export receipts) weakening medium-term sustainability. - Contingent liabilities for the government from balance-sheet effects in the domestic financial system. - For countries borrowing significant amounts from private external creditors, the DSF should be complemented with additional analyses of short-term debt-related vulnerabilities and financial sector soundness. - Additional indicators (Table 3, subject to data availability) can highlight: - Risks to sovereign liquidity from debt composition and maturity structure. - External liquidity and rollover risks, and adequacy of reserve cover (especially for short-term debt), which may need to reflect risk of reversals in market sentiment. - Financial sector weaknesses that may give rise to systemic problems. - Country teams should discuss with authorities policies to alleviate risks, including: - Debt-management frameworks assigning legal authority to borrow, identifying permissible instruments, and accountability mechanisms. - Effective recording of debt stock, liquidity forecasting, and critical indicators to monitor benefits, costs, and risks of private borrowing. - Possible need for technical assistance. - Re-assessment of reserve adequacy. - Sequencing reforms to strengthen banking supervision and prudential regulation prior to capital account liberalization. - The IMF’s Financial Sector Indicators database is a regular source for relevant indicators. ### Key indicators for vulnerability analysis (as suggested) - Indicators of public sector stock imbalances (solvency risk): PV of public sector debt-to-GDP (public sector revenue); PV of external public sector debt-to-GDP (exports); PV of foreign-currency denominated public sector debt-to-GDP; PV of contingent liabilities (not included in public sector debt); Public sector debt-to-GDP ratio and disaggregations (External; Foreign currency denominated; Foreign currency linked; Indexed to the CPI); Primary deficit that stabilizes public sector debt-to-GDP. - Indicators of external sector stock imbalances (solvency risk): PV of external debt-to-GDP (exports); External debt-to-GDP; Non-interest external current account deficit that stabilizes external debt-to-GDP. - Indicators of public sector flow imbalances (liquidity, rollover risks): Public sector debt service-to-revenue; External public debt service-to-exports; Public sector gross financing need (percent of GDP); Short-term public debt-to-total debt (at remaining maturity); Domestically-issued public debt held by nonresidents-to-GDP. - Indicators of external sector flow imbalances (external liquidity, rollover risks): External debt service-to-exports (revenue); External gross financing need (billions of U.S. dollars); Gross official reserves-to-short-term external debt (at remaining maturity); Extended reserve cover; Gross official reserves-to-broad money (M2); Foreign currency deposits-to-foreign assets of the banking system. - Indicators of financial system soundness: Regulatory capital-to-risk-weighted assets; Nonperforming loans-to-total loans (gross and net of provisions); Claims on the Government and Central Bank-to-total banking sector claims; Private sector credit growth; Foreign currency loans-to-total loans; Foreign currency deposits-to-total banking sector deposits; Share of foreign currency deposits held by nonresidents. ### Treatment of SDR allocations - The IMF implemented a US$250 billion general allocation of SDRs. - The Fourth Amendment made available a special allocation of up to an additional SDR 21.5 billion (US$33 billion) to some SDR Department participants. - A country’s SDR allocation should not be included in the nominal stock of gross external debt in DSAs because members are generally under no obligation to reconstitute their SDR holdings. - Country conventions on recording SDR allocations should be explicitly noted in DSA write-ups where they differ from DSA treatment. - DSAs should capture net interest payments that arise when SDR holdings are below a participant’s SDR allocation; positive net interest payments will impact debt service and the PV of PPG debt and related LIC DSF indicators. ### Operational implications - LIC DSAs inform IDA and Fund operational decisions and those of some other multilaterals (including AfDB): - LIC DSAs form the basis for determining the grant/loan mix in IDA allocations: - IDA-only countries judged at high risk of debt distress or in 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 continue to receive 100 percent credit financing on standard IDA terms. - LIC DSAs inform IDA’s Non-Concessional Borrowing Policy (NCBP), including consideration of waivers to nonconcessional debt limits based in part on DSF-assessed debt sustainability outlook. - Design of debt limits in Fund-supported programs is systematically related to LIC DSA assessments. - Determination of access to the Fund’s concessional resources needs to take account of a recent LIC DSA; forward-looking debt and debt service indicators should include all projected disbursements, including from the Fund. - When risk-of-debt-distress classification shifts higher, staff should comprehensively reassess recommended debt accumulation strategy. - DSA-related financing and reporting thresholds and requirements noted: - A DSA update is required for financing requests that would, among other conditions, bring total access in excess of 80 percent of quota based on past scheduled and future scheduled disbursements in any 24-month period, or that involve a member rated as being at high risk of debt distress or in debt distress. - Financing requests of less than 10 percent of quota do not require an updated DSA. - For countries with high risk of debt distress (or in debt distress), where Fund financing exceeds 40 percent of quota per year, the DSA should include an explicit discussion of the contribution of Fund financial support to debt-burden indicators. - In some cases an alternative scenario excluding Fund financial support may be appropriate (e.g., if Fund financing is large in relation to key indicators, or country has high risk of debt distress, or if debt risk rating is downgraded). ### Modalities for preparing DSAs - Frequency and presentation: - Full joint Bank-Fund LIC DSAs are expected once every three years for PRGT-eligible IDA-only countries; short annual updates are expected in intermediate years. - A full DSA may be required sooner if macroeconomic conditions have significantly changed or to satisfy other Bank-Fund requirements; any change warranting a risk rating change requires a full DSA. - Each calendar year, Bank and Fund country teams should agree on a DSA preparation schedule; for the Fund, a DSA is normally produced for an Article IV consultation or in program contexts; for the Bank, CAS include debt sustainability discussion. - When a joint DSA is needed but the Fund’s Board will not consider a review or Article IV within two months, the joint DSA is sent to the Fund’s Board for information when sent to the Bank’s Board; analogous procedure applies in reverse. - Updates and institutional coordination: - 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. - Major changes (e.g., non-concessional borrowing episodes) require consultation with the other institution. - The three-year DSA cycle restarts if a full DSA is produced earlier due to changed circumstances. *Source: IMF.* ### Box 3. DSA Process ### Box 3. DSA Process ### Overview - Bank and Fund country teams agree on an annual schedule for preparation of DSAs (full DSAs or updates). - Early consultations between Bank and Fund stakeholders are critical to avoid last-minute changes. - Fund policy consultation stage allows early input from reviewing departments; Bank country team liaises with PRMED as necessary. - Bank and Fund country teams should agree on broad DSA parameters, including new borrowing, prior to the p stage. As a general rule, this agreement should be sought at least 90 business days ahead of the prospective Board meeting. ### Approx. Timing (key milestones and responsibilities) - (T-90) days — Draft Policy Note (on Bank side preliminary DSA draft) - Fund: Fund team (desk or SPR economist) begins DSA template and write-up in consultation with Bank counterpart; Mission chief approves draft DSA; Informal contact from AD to alert reviewing departments. - Bank: Bank team begins DSA template and write-up in consultation with Fund counterpart and WB Region economist; discusses sectoral issues with sector specialists; preliminary Bank-Fund meeting to discuss macroeconomic assumptions (minutes recorded); regional lead economist or sector manager approves draft DSA. - (T-64) days — Department Review of Draft Policy Note/preliminary DSA draft - Fund: At least three days before the PCM, Fund Team sends draft DSA as part of Policy Note to SPR and other departments to raise and resolve major issues related to content, coverage, and broad assumptions; circulate draft PN and background materials to reviewing departments. - Bank: Bank team sends draft DSA to PRMED for preliminary comments; allow three days for review. - (T-61) days — Policy Consultation Meeting/PRMED and Regional preliminary comments - Policy Consultation Meeting (usually 2 - 3 weeks before the mission). - PRMED provides comments on preliminary draft to WB country economist (allow 1 day for review and sign-off). - Department Review of Revised Policy Note/PRMED revised preliminary review - Circulate revised Policy Note (including DSA) to SPR; copy other reviewing divisions — allow 1 day for review and clearance (allow 3 days for clearance). - Fund Management clears the revised Policy Note. - (T-46) days — Mission - Fund: Fund team completes DSA preparation during mission with input/comments from authorities. - Bank: Bank team completes DSA preparation with Fund staff input/comments (Bank participation in missions encouraged). - (T-36) days — End of mission - If Bank country team not on mission, Fund team relays changes to draft DSA. - If Bank team not on mission, Bank and Fund meet to discuss changes to macroeconomic projections (minutes recorded); Bank receives revised draft DSA, templates, and macro framework (detailed/linked real, monetary, fiscal, and BoP sector tables). - (T-16) days — Department Review of Staff Report/DSA formal clearance - Completed DSA sent to review departments alongside Staff Report (allow 3 days for review). - Prior to formal clearance, regional sector manager approves DSA. Completed DSA sent to PRMED Director and regional PREM Director for formal clearance (allow 3 days for review). - (T-13) days — Staff Report to Management - Fund: Executive Summary to management highlighting DSA results and issues (allow 3 days for review). - Bank: PRMED and PREM Directors clear DSA. Bank team sends full DSA to management alongside other country documents. - (T-10) days — Circulation of Staff Report to Board - DSA sent to Board with Staff Report. DSA submitted by PRMED to SECBO and sent to Board for information. - T — Board Meeting - DSA subsequently published (given authorities approval) as a supplement to the Staff Report. - DSA published after authorities' approval received by Bank or Fund staff. - Together with Fund staff, WB country economist provides revised draft to PRMED for review. ### LIC DSA format and frequency - LIC DSAs should be prepared as self-contained documents. - DSAs should include a clear description of macroeconomic assumptions without referring to the Fund staff report. - Suggested limit: 2000 words (4–5 pages excluding tables or appendices). - LIC DSA updates between full DSAs are lighter exercises: short write-up (usually no longer than one page) plus standard tables and charts; write-up should include a summary paragraph on the debt distress rating and important changes from the previous DSA. - A full DSA outline is contained in Annex II (not reproduced here). ### DSAs for Countries with Market Access - For PRGT-eligible countries that are not IDA-only and have durable and substantial market access, the middle-income country template may be used; no formal risk rating; assessment of debt vulnerabilities is judgmental. - Market access evidence measured by one of two alternative tests: - First test: public sector issuance/guaranteeing of external bonds or disbursements under public and publicly guaranteed external commercial loans in international markets during at least three of the last five years, in a cumulative amount over that period equivalent to at least 100 percent of the country’s Fund quota at the time of the assessment. - Alternative: convincing evidence that the sovereign could have tapped international markets on a durable and substantial basis despite actual borrowing falling short—case-specific assessment considering volume and terms of recent borrowing and sovereign credit rating. - Assessment of durable and substantial market access must be made each time before using the middle-income country template. ### Division of Responsibilities between Bank and Fund Staff - Fund leads on medium-term macroeconomic projections (three to five years) developed with the member country; these projections are the starting point for consultation with the Bank on the baseline scenario. - Bank leads on long-term growth prospects and, where needed, assessing the investment-growth nexus. - External sector DSA: - Fund staff 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 and assumptions on new multilateral borrowing based on current allocations. - Bank and Fund teams should: - Agree on assumptions underlying the baseline scenario. - Collaborate on alternative scenarios and stress tests. - Consider additional country-specific factors. - Share all relevant data files confidentially. - Public sector DSA output, together with Fund fiscal projections, provides basis for public sector DSA; teams should discuss whether public sector DSA output would lead to a different sustainability assessment than external DSA and agree how to reflect this in the write-up. ### Dispute Resolution - Aim for common Bank-Fund assessment; where disagreement occurs, follow resolution steps: - Working level: country economists discuss basis of disagreements; determine if different viewpoints lead to a material difference in risk classification; if not material, seek accommodation. If material, Fund mission chief and Bank regional PREM director attempt agreement. - Mission chief and regional director, after consulting reviewing departments (SPR for Fund, PRMED for Bank), seek resolution within five working days. If unsuccessful, escalate to area department director (Fund) and vice president (Bank) to seek resolution within five working days. - If unresolved, managements of the two institutions are informed. Managements can, within five working days, either resolve the dispute or decide that 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 and Clearance - LIC DSA documents are subject to the regular review process; draft updated DSAs should be sent for review at the policy note stage to allow constructive feedback, including on debt limits in Fund-supported programs. - On the Bank side, preliminary draft (briefing-stage equivalent) should be transmitted to PRMED for initial guidance. - Completed DSA reviewed on a stand-alone basis by PRMED and regional PREM director, who have three days for review. After incorporating comments necessary for clearance, PRMED sends the DSA as a stand-alone document via PRMVP to SECBO for transmission to the Board for information. - Each institution expected to abide by agreed timeline; any major disagreement should be raised immediately. - If comments are not received within agreed timeframe despite attempts to solicit input, the originating institution’s front office should contact the commenting institution’s front office to resolve timing; ultimately, failure to comment by the agreed timeline implicitly waives the right to comment. Such cases should be documented and brought to management attention. - Final versions of external and fiscal DSA templates should be submitted to the SPR review box (Fund) and to PRMED (Bank) when the DSA and staff report are sent to the Executive Board(s). All electronic links to external files should be broken to avoid discrepancies between published tables and electronic files. ### Reflecting the Authorities’ Views - Full DSAs should reflect the authorities’ views; authorities should be involved in preparation where possible. - DSA assumptions and results should be thoroughly discussed with the authorities and final DSA templates provided to them. - A systematic presentation of authorities’ views is desirable and could be placed in a separate short section. - If authorities’ views differ significantly from staff views, resources permitting, alternative scenarios may be prepared based on authorities’ assumptions. ### Arrangements for HIPCs - HIPC DSA differs conceptually/methodologically from LIC DSA: HIPC uses uniform PV debt-to-exports and PV debt-to-revenue thresholds with three-year backward-looking averages for denominators and predetermined currency-specific discount rates. LIC DSA is forward-looking, uses single-year denominators, exchange rate projections, uniform discount rate, and policy-dependent indicative thresholds. - DSF applies to both HIPCs and non-HIPC low-income countries; for HIPCs in process (preliminary HIPC document issued and HIPC DSA prepared but not yet at completion point), arrangements include: - DSF remains the main tool and LIC DSA should be updated annually. - Selected indicators from the HIPC DSA should be included in LIC DSA tables as memorandum items (debt-service and debt-stock ratios). - 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, they must be based on consistent baseline macroeconomic scenario and debt data; baseline macroeconomic scenarios (including assumptions on new borrowing) should generally be identical. Debt ratios and debt-service projections will differ due to different exchange rates and discount rates; the write-up should decompose significant differences into components attributable to (i) different discount and exchange rates, and (ii) different 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 baseline should incorporate HIPC Initiative and MDRI relief in the baseline scenario; debt-service projections should take into account specific mechanisms under which HIPC and MDRI relief is delivered. - Interim period countries: baseline should assume HIPC interim relief (risk rating should not be predicated on reaching completion point). Alternative scenario should assume irrevocable HIPC and MDRI relief beyond expected completion point date; PV indicators affected only by relief beyond expected completion point date; in years preceding expected completion point date, PV based on debt-service projections before completion point debt relief. - Countries not yet at decision point but with Boards having reviewed HIPC preliminary document: baseline incorporates only traditional debt relief. Alternative scenario should incorporate HIPC relief assumed to be delivered through debt rescheduling beyond assumed decision point date; estimates of value of debt relief will be approximate since actual HIPC debt reduction factor depends on decision point date. *Source: Box 3. DSA Process (provided content).* ### 53. The effectiveness of the DSF ultimately depends on its broader use by borrowers ### _012210 - 53. The effectiveness of the DSF ultimately depends on its broader use by borrowers ### Use, coordination, and capacity building - The DSF should be seen as a tool for better communication and coordination between creditors and borrowers, and among creditors. - The DSF, combined with technical assistance, should help to build capacity in public debt management. - Over time, borrowers can develop their own medium-term debt strategy to support development objectives while containing risks of debt distress and macroeconomic vulnerability. - Emerging creditors, some of which have a limited tradition of regular coordination and information sharing, should be included in the broader use of the DSF. ### Engagement with MDBs and stakeholders - Country teams should involve relevant MDBs, as appropriate and with the consent of the authorities where needed, in the early phases of the DSA process. - Footnote: The MDBs would typically include the AfDB, AsDB, IDB, and EBRD. Information sharing is subject to the Fund’s policy on sharing confidential information and may require consent of the authorities’ or third parties. (Footnote reference 63) ### Dissemination and publication of DSA results - Following the Board meeting, country teams, in consultation with the authorities, are encouraged to disseminate DSA results, if and when the authorities consent to this. - Dissemination could take the form of a presentation in the context of regular contacts with the donor/creditor community (e.g., consultative group meetings), including emerging creditors. - Both the Bank and the Fund maintain a dedicated website on published DSAs and relevant background material (http://worldbank.org/debt and http://www.imf.org/dsa). - Staff should encourage the authorities to consent as early as possible to the publication of the DSA (for the Fund, the staff report to which the DSA is supplemented). - Footnote: To the extent that the DSA contains nonpublic third party information, consent of such third parties would in principle also be required for the DSA’s dissemination. In practice, such a need may arise only rarely, because information received from third party is generally processed and aggregated to other information. (Footnote reference 64) ### LIC DSA template: role and structure (user guidance highlights) - The LIC DSA has been used since its inception in April 2005. - The template is set up for a 20-year projection period and covers two types of debt: - debt incurred externally by domestic residents (both public and private sectors); - debt incurred by the public sector (either in gross or net terms), including domestic public debt. - The template includes for each type of debt: - a baseline scenario, - a set of sensitivity tests, - output tables, - and a set of charts summarizing the results of the DSA. ### Template components (explicit list) - The template consists of: - (i) a language sheet, - (ii) a template navigator, - (iii) four input sheets, - (iv) five output tables, - (v) four output figures, - (vi) a range of worksheets that transform the input data into the information provided in the output tables, - (vii) two worksheets that allow for customized scenarios for each type of debt, - (viii) a summary of the instructions laid out in more detail in this Annex. ### Navigator and input guidance - Navigator main sections: - INPUT: Data Input, Input-Output Debt and Approach to Public Debt with corresponding drop-down menus. - SCENARIOS: series of boxes to open and navigate through scenarios worksheets for each type of debt. - To display boxes and open worksheets click the blue arrow next to “Open fiscal all” or “Open external all”. - Close irrelevant sections by clicking the red arrow next to “Close fiscal all” or “Close external all”. - OUTPUT: drop-down menu to navigate through the output tables and charts and link to Worksheet “Output database”. - Input sheets: - Required inputs are cells shaded in yellow; non-shaded cells are formulas. - Analysis requires data on the total stock of existing debt and new borrowing terms by main creditors; the LIC DSA does not require loan-by-loan data. - Worksheet “Data_input” collects key macroeconomic series for the baseline and qualitative features (debt distress rating, HIPC, MDRI, IMF-supported program, IDA status, and the three-year moving average of the CPIA). - When filling data, select the scale for the template in cell E17. - Special attention to historical-only variables: public and publicly guaranteed external debt (stock and debt service) and concessional loans. - Footnote: Projected concessional loans are computed based on new borrowing assumptions, i.e., the average concessionality of each lender. (Footnote reference 66) - Coverage decisions for public debt (central government, general government, nonfinancial public sector, net or gross) must be determined and noted in the DSA write-up. - Footnotes reference guidance on coverage and accounting/reporting issues. (Footnote references 67–69) ### Inp_Outp_debt worksheet and PV calculations - “Inp_Outp_debt” focuses only on medium and long-term PPG debt; coverage differs from the “Data-input” sheet. - The sheet is divided into four parts: - (i) terms of new external and public borrowing; - (ii) debt service on existing PPG external debt; - (iii) amounts of new external PPG borrowing; - (iv) output – stock, debt service and PV of external PPG debt. - For LICs, the present value (PV) of debt is emphasized as a more informative measure of effective debt burden. - Customization: - Enter the name of each creditor in “Descriptor” and its lending terms to calculate PV of new disbursements. - For public marginal borrowing: divide between foreign-currency borrowing, domestic medium-and long-term borrowing, and domestic short-term borrowing; specify interest rate and maturity for each. - Interest rates: nominal for foreign-currency borrowing (assumed in U.S. dollars), real for domestic borrowing. - PV of public debt = PV of external public debt + nominal value of public domestic debt (assuming nominal interest rate equals discount rate for domestic debt). - Users must enter debt-service projections on existing outstanding external PPG debt by main creditor groups until claims are paid off, and projected disbursements by creditor over the projection period. - The PV of PPG external debt is calculated based on projected debt service and new disbursements using assumed terms of new borrowing. ### Discount rate and stress-test assumptions - Terms of additional external financing from stress tests default to the average terms assumed in the baseline but can be adjusted. - The discount rate has been set at a uniform 5 percent and should not be altered. - The discount rate will be adjusted whenever it deviates from the U.S. dollar CIRR (6-month average) by at least 100 basis points for a consecutive period of six months. - Any changes to the discount rate will be reflected in the most recent version of the template posted on the website. - Use of one discount rate for all external loans implies explicit exchange-rate projections to convert debt service into U.S. dollars; medium-term conversion should be based on WEO exchange rate assumptions. ### SDR, PV targets, and monitoring tools - Worksheet “SDR”: - Designed to estimate the impact of net use of the SDR allocation on a country’s debt sustainability outlook. - Total SDR allocation and total SDR holdings should be entered in billions of USD. - If SDR allocation exceeds holdings, the member pays interest on net use of SDRs. - PV calculations consider only future flow of interest payments because members are under no obligation to reconstitute holdings. - Footnote: Interest payments associated with net use of SDRs are calculated using net use of SDRs and a projection of the SDR interest rate; after the end of the WEO projection year interest and exchange rates are assumed to remain constant. (Footnote reference 71) - Worksheet “PV targets”: - The Fund’s policy on debt limits moved to a menu of options reflecting diversity of LIC situations. - PV targets worksheet assists teams in setting and monitoring debt limits for higher-capacity countries (PV or average concessionality targets). - Allows setting and monitoring on a disbursement or contracting basis. - Disbursement-based limits use information from ‘Inp_Outp_Debt’. - Contracting-based limits rely on terms and conditions of debt expected to be contracted in the upcoming year and should be consistent with Inp_Outp_debt data. - Users must input appropriate loan disbursement or contract information to monitor targets. ### Output tables and decomposition - Once inputs are populated, the template runs stress tests and produces output tables and panel charts automatically. - “Table Baseline External” reports evolution of nominal external debt-to-GDP ratio in the baseline and decomposes changes into: - (i) non-interest current account deficit and its basic breakdown; - (ii) non-debt creating capital inflows (net FDI); - (iii) endogenous debt dynamics (calculated using GDP growth, interest rates, and price and exchange rate movements; changes not shown for projection period). - A residual captures change in debt unexplained by identifiable factors. - The table presents five external debt-burden indicators: PV of PPG external debt relative to GDP, exports, and revenues; and debt service on PPG external debt relative to exports and revenues. - Debt burden indicators are also presented in terms of the sum of exports and gross remittances, and the sum of GDP and gross remittances. - Key macroeconomic assumptions and how they compare with historical averages are shown; a rate of debt accumulation in excess of 5 percent would trigger a more thorough analysis. - “Table Baseline Fiscal” reports evolution of nominal public debt-to-GDP ratio in the baseline and decomposes changes into: - (i) the primary balance and its basic breakdown; - (ii) endogenous debt dynamics (calculated using GDP growth, interest rates, and currency appreciation/depreciation; not shown for projection period); - (iii) other debt-creating/reducing flows, including privatization receipts and asset purchases, debt relief, or recognition of contingent liabilities. - A residual captures changes not explained by identified factors. - The table presents debt burden indicators: PV of debt-to-GDP ratio, PV of contingent liabilities, gross financing need, PV of debt-to-revenue ratio, debt-service-to-revenue ratio, and the primary deficit that stabilizes the debt-to-GDP ratio (note: a negative number corresponds to a primary surplus). - The estimated primary deficit stabilizes the PV ratio only in the year in question, assuming previous years followed the baseline path. - Key macroeconomic assumptions and comparisons with historical averages are shown. *Source: _012210 - 53. The effectiveness of the DSF ultimately depends on its broader use by borrowers* ### 72. The table “Stress Test External” shows the sensitivity of the five key external debt- ### _012210 - 72. The table “Stress Test External” shows the sensitivity of the five key external debt- ### Overview - The template produces: - The table “Stress Test External” showing sensitivity of five key external debt-burden indicators to standardized shocks and alternative assumptions. - The table “Stress Test External – remit” (same analysis augmented by gross remittances for GDP- and export-based repayment-capacity indicators). - The table “Stress Test Fiscal” showing PV of debt-to-GDP, PV of debt-to-revenue and debt-service-to-revenue ratios. - Two panel charts (Worksheet “Panel Chart”) illustrating PPG external debt and total public debt in the baseline, an historical scenario, and the most extreme stress test (the most extreme stress test is defined as the test that results in the highest indicator after 10 years of projections). - Two additional panel charts (Worksheet “Panel Chart – remit”) incorporating gross remittances into external debt burden indicators based on GDP and exports. - For external debt the template also shows the rate of debt accumulation and the average grant element under the baseline. ### Standardized sensitivity tests (general) - The template distinguishes: - Two “alternative scenarios” and six “bound tests” for the external DSA. - Three “alternative scenarios” and five “bound tests” for the public DSA. - Standard stress tests (alternative scenarios and bound tests) are calibrated using the average and standard deviations over the last 10 years of history. - Alternative scenarios present mechanical responses in debt-burden indicators and do not reflect a comprehensive macroeconomic framework or potential policy responses; users seeking consistent second-round effects should develop an alternative baseline projection or use the customized scenario. ### Alternative scenarios — external DSA - Historical Average Scenario (Worksheet “A1_ Historical”): - Assumes key variables are at their respective historical averages throughout the projection period; indicates extent of optimism in the baseline relative to historical performance. - Level of concessionality (Worksheet “A2_ Financing”): - Assumes the interest rate on new borrowing is 200 basis points higher than in the baseline. ### Alternative scenarios — public DSA - Historical Average Scenario (Worksheet “A1_ historical”): - Assumes key variables are at their historical averages throughout the projection period. - Primary Balance Unchanged (Worksheet “A2_ PB unchanged”): - Assumes the primary balance is unchanged from the last actual observation (replicates a “status quo”). - Lower long-run GDP growth (Worksheet “A3_LR growth”): - Assumes real GDP growth in all future years is lower than under the baseline by one standard deviation divided by the square root of the projection period. ### Bound tests — purpose and calibration - Bound tests provide an upper bound of a confidence interval to the baseline projections (the confidence interval corresponds, on average, to a 25 percent probability over a ten-year period, derived from stochastic simulations). - Tests can be adjusted for country-specific circumstances (choice of calibration period, exclusion of non-representative events). Changes should be made in worksheets “Baseline” and “Baseline-fiscal” and justified in the write-up. ### Bound tests — external DSA (specific shocks) - B1_GDP: real GDP growth one standard deviation below historical average in each of the first two years. - B2_ Exports: exports growth one standard deviation below historical average in each of the first two years. - B3_Deflator: inflation (U.S. dollar GDP deflator) one standard deviation below historical average in each of the first two years. - B4_non- debt flows: net non-debt flows (including FDI and current transfers) one standard deviation below historical average in each of the first two years. - B5_Combo: combines the first four variables, each at one-half standard deviation below historical average in the first two years. - A fifth (unnamed here) test: a one-time 30 percent depreciation of the domestic currency in the first year of the projection period. ### Bound tests — public DSA (specific shocks) - B1_GDP: real GDP growth one standard deviation below historical average in the first two years. - B2_PB: primary balance one standard deviation below historical average in the first two years. - B3_combo: GDP growth and primary balance both one-half standard deviation below historical average. - B4_depreciation: a one-time 30 percent depreciation of the domestic currency (relative to the baseline) in the first year. - B5_other flows: debt increases by 10 percent of GDP in the first year due to other debt-creating flows (e.g., bank recapitalization or recognition of contingent liabilities). ### Notable modeling assumption affecting shocks - GDP growth shocks assume revenues stay constant as a share of GDP while expenditures stay constant in nominal terms; hence GDP shocks increase (decrease) the primary deficit (surplus), amplifying the shocks’ effects. Users may alter these assumptions if inappropriate for the country, but must note and justify changes. ### Customized scenario — external DSA - Purpose: allow country-specific analysis (commodity prices, terms of new borrowing, path of primary balance, etc.). - Activation: set the Customized Scenario’s status to “ON” via a blue box at the top right of the worksheet; switch “OFF” via a red box. - Modifiable variables (rows 8 to 19): exports, imports, official and private current transfers, net FDI, real GDP growth, GDP deflator. A check line for the current account deficit is included in line 12. - Includes a default shock to exports or imports (accounting for commodity price changes) with user-adjustable shock profile. - Terms of new borrowing adjustable via cells C23:C26 (average interest rate, maturity, and grace period). ### Customized scenario — public DSA - Modifiable variables (rows 8 to 15): revenues and grants, primary expenditure, real GDP growth, inflation, nominal depreciation of the exchange rate. A check line for the primary balance is included in line 12. - Public sector assets (for net public debt analysis) can be modified in line 11. - Terms of new borrowing adjustable in cells A25:A28 and A33:A35 (average interest rate, maturity, and grace period). - Composition of new public borrowing (external, MLT domestic, short term domestic) modifiable in cells A20:A22. ### DSA outline template (high-level guidance) - Encourages teams to cover: - Background: evolution and composition of public and PPG external debt, private external debt if relevant, debt relief/rescheduling, structure of public domestic debt. - Underlying DSA assumptions: differences from prior DSA, forecast errors, realization of growth dividends, revisions. - Baseline macroeconomic assumptions (Real GDP growth, Inflation measured by GDP deflator, Current account balance, Government balances, External assistance and scaling up, Domestic borrowing, Real interest rates). - External DSA and Public DSA baselines, alternative scenarios, and stress tests. - Debt distress classification, contributing factors, contingent liabilities, debt management issues, and borrowing strategy recommendations. - Documentation of discussions with authorities to build capacity and ownership. ### Market access by low-income countries — definition and empirical observations (2003–2007) - Definition pillars: - Voluntary: focuses on public and publicly guaranteed external bond issuance and external commercial loans (external bonds = international capital markets; external commercial loans = commercial loans contracted with nonresidents by residents). Excludes domestic directed borrowing and markets not integrated with broader international markets. - Durability and Size: assesses medium-term durability (e.g., five-year horizon), repeat access, and magnitude relative to Fund quota. - Empirical findings (based on 2003–2007 data): - A few LICs tapped external bond markets since 2003; an even smaller subset issued bonds multiple times (Grenada, India, and Pakistan). Two countries issued only one external bond (Vietnam in 2005 and Sri Lanka in 2007). - Angola, Maldives, Sri Lanka, Vietnam, and several ECCU members obtained external commercial loans over 2003–07. - For many countries market access was fairly small (e.g., below 10 percent of the Fund quota on average during 2003–07). - Angola, Sri Lanka and Pakistan accessed international financial markets in four or five of the recent (pre-crisis) years (2003–07), with cumulative access exceeding their present quota in the Fund. - India’s access (via State Bank of India) amounted to 35 percent of quota since 2003; actual access over 2003–07 remained below 100 percent of quota. India’s market access is also confirmed by an investment grade sovereign credit rating. - Evidence indicates Angola, India, Sri Lanka, and Pakistan maintained regular market access in 2003–2007 consistent with the proposed duration and magnitude conditions. - Data sources and notes: - Disbursement data (1990–2007) of external bond and commercial loans drawn from the Global Development Finance (GDF) database; results were confirmed with additional information. - Comparable data on India are not available in the GDF database. *Italic: IMF DSA template text (selected paragraphs on sensitivity analyses, scenarios, customized scenarios, DSA outline, and market access) from content unit _012210 - 72.* ### ANNEX V: DEBT DYNAMICS ### ANNEX V: DEBT DYNAMICS ### The level of domestic debt - The LIC debt sustainability framework (DSF) is based on a general identity characterizing the evolution of the stock of public debt. Public debt includes obligations of the central, regional and local governments. - Basic form of the evolution of public debt (as presented): - 1111111 )(*)1(   ttttttt RESOSGTDiD (1) - Definitions of variables (as presented): - 1t D is total public debt denominated in local currency (LC). - 1t i is the effective nominal interest rate on debt. - 1t T is total public-sector revenues in local currency (LC). - 1t G is total grants to the public sector in local currency (LC). - 1t S is public expenditures excluding interest and amortization payments in local currency (LC). - 1t O is other identified debt-creating flows (including privatization receipts; recognition of contingent liabilities; HIPC debt relief; bank recapitalization; and other specific items). - 1t RES is a residual ensuring that the identity holds. - Decomposition into external and domestic (short and long term) debt: - 11111111 1 1 )(*)1(*)1(*)1(*     ttttt ltd t ltd t std t std t f t f t t t t RESOSGTDiDiDi e e D (2) - Superscripts and additional variable definitions: - f denotes external debt; std denotes short-term domestic debt (1 year or less); ltd denotes long-term domestic debt (more than 1 year). - 1t e is the nominal exchange rate (LC/USD). - 1 f t i is the nominal interest rate on external debt. - 1 std t i is the nominal interest rate on short-term domestic debt. - 1 ltd t i is the nominal interest rate on long-term domestic debt. - Interpretation of terms: - f t f t t t Di e e *)1( * 1 1    represents obligations associated with external debt stock from the previous period (including interest), revalued at current exchange rate. - std t std t Di*)1( 1   represents obligations on short-term domestic debt (including interest). - ltd t ltd t Di*)1( 1   represents obligations on long-term domestic debt (including interest). - 111  ttt SGT represents the primary balance (excludes interest payments); a primary deficit (surplus) adds (reduces) the public sector debt. ### Restatement in real terms and simplification - Equation restated in terms of real interest rates (r), inflation (π) and the real exchange rate (ε); domestic debt is simplified (no short/long decomposition) and primary balance (PB) is aggregated: - 11111111t1 *)1(*)1(*)1(*)1(*)(1   ttt d t d t d t f t f t f tt RESOPBDrDrD (3) - Real interest rate definition (as presented): - The real interest rate is defined as r = i – π - i π, which can be approximated by r  i – π.84 - Relationship among inflation, exchange rate, and GDP-deflator growth (as presented): -            d t f t t t e e 1 11 1 t 1 1 1 1    (4) ### The debt-to-GDP ratio and the debt dynamic - Rationale: scale the stock of debt by a measure of repayment capacity; this annex focuses on the debt-to-GDP ratio. - Dividing equation (3) by GDP (Y) in period t+1 yields (as presented): - 1 1 1 1 1 1 1 11 1 111t 1 1 *)1(*)1(*)1(*)1(*)(1               t t t t t t t d t d t d t t f t d t f t t t Y RES Y O Y PB Y D r Y D r Y D    (4) - Using small caps to express contemporaneous ratios gives (as presented): - 111 1 11 1 111t1 *)1(*)1(*)1(*)1(*)(1       ttt t d t d t d t t f t d t f tt resopb Y D r Y D rd    (5) - Define πt+1, where g is real growth: - Let t d ttt YgY*)1(*)1( 111  , then derive expression (6) (as presented). - Canceling domestic inflation contribution yields (as presented): - 111 1 1 1 11t 1 )1( )1( * )1( )1(*)(1              ttt d t t d t f t t f t t resopbd g r d g r d  (7) - With d t f tt ddd  and deducting d t from both sides, the change in the debt-to-GDP ratio (the debt dynamic) is therefore (as presented): -  d t f t tttt d t t d t f t t f t tt dd resopbd g r d g r dd                   111 1 1 1 11t 1 )1( )1( * )1( )1(*)(1  (8) ### Decomposition and grouping of contributions - Define B = - 111  ttt resopb 1 - Isolating )1( 1 1  t g and grouping effects of interest rates, exchange rate and growth yields the long grouped expression provided in the source (presented across multiple lines in the source). Key labeled contributions in the source: - Contribution of the average real interest rate - Contribution of real GDP growth - Contribution of the real exchange rate - The source presents the full algebraic grouping showing how: - the average real interest rate terms interact with debt shares (domestic and external), - real GDP growth terms enter through denominators and deflators, - the real exchange rate (ε) affects the external debt component revalued in local currency. *Source: ANNEX V: DEBT DYNAMICS (extracted equations, definitions, and decomposition from the supplied content)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_012210.pdf_