{
  "title": "Back to Basics: What is Debt Sustainability?",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2020/09/what-is-debt-sustainability-basics",
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  "summary": "Many factors go into assessing how much debt an economy can safely carry, write’s the IMF’s Dalia Hakura in a new back-to-basics explainer.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Title: What Is Debt Sustainability?\n- Author: DALIA HAKURA\n- Date: September 2020\n- Read time indicator on page: Less than a minute(0 words) Read\n- DALIA HAKURA is a deputy division chief in the IMF’s Strategy, Policy, and Review Department.\n- Summary premise: Many factors go into assessing how much debt an economy can safely carry; elevated public debt in low-income countries and emerging market economies and the added spending needs from COVID-19 raise concerns about debt sustainability."
    },
    {
      "heading": "When debt is sustainable",
      "content": "- Definition: A country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default.\n- Analytical focus:\n  - Analysts assess whether policies needed to stabilize debt are feasible and consistent with maintaining growth potential or development progress.\n  - When countries borrow from financial markets, risks associated with refinancing are important.\n- Debt instrument and creditor coverage:\n  - A debt instrument is a financial claim that requires payment of interest, principal, or both by the debtor to the creditor at a future date.\n  - Countries incur debt to private bond holders, banks, other countries and their official lending institutions, and multilateral lenders such as the World Bank.\n- Definitions of public debt (from narrow to broad):\n  - Narrow: budgetary central government.\n  - Broader: general government (budgetary central government, state and local government, extrabudgetary units, and social security funds).\n  - Broadest: public sector debt combining general government with public nonfinancial corporations and public financial corporations, including the central bank; also covers publicly guaranteed debt and external public debt (debt held by nonresidents).\n- Importance of comprehensive coverage:\n  - To properly assess a country’s debt sustainability, it is important to cover all types of debt that pose a risk to a country’s public finances.\n  - Example risk: loss-making state-owned enterprise debt that is publicly guaranteed can shift the burden to the central government and weaken debt sustainability.\n- Typical coverage by country group:\n  - Advanced economies and emerging markets: debt sustainability analysis frequently focuses on the general government.\n  - Low-income countries: nearly complete coverage of both public and publicly guaranteed debt is standard.\n- Holders of public debt matter:\n  - IMF and World Bank assessments cover both domestic and external public sector debt.\n  - Sovereign credit rating agencies frequently concentrate on market-based external public sector debt."
    },
    {
      "heading": "Why some debt is good",
      "content": "- Role of borrowing:\n  - Public debt can finance important development programs and projects.\n- Alternative financing and constraints:\n  - Alternatives include raising domestic revenue, improving efficiency of spending, reducing corruption, and improving the business environment, but these may take time and may not be sufficient.\n- Risks of unsustainable debt:\n  - Unsustainable debt can lead to debt distress requiring debt restructuring; defaults can cause loss of market access, higher borrowing costs, and harm to growth and investment.\n- Three key considerations before new borrowing:\n  - New borrowing should be consistent with fiscal spending and deficit plans.\n  - The new borrowing should be carefully set to keep public debt on a sustainable path.\n  - Compare the return from contracting debt with the cost of accumulating debt; debt that finances productive social and infrastructure spending can lead to higher income that may offset debt service costs and help balance risks to debt sustainability.\n- Debt reporting and management:\n  - Countries should improve debt reporting and debt statistics as part of comprehensive medium-term debt management strategies.\n  - Debt statistics should include coverage of public and publicly guaranteed debt that is as broad as possible, including debt of state-owned enterprises.\n  - Sharing this data with lenders can encourage responsible lending."
    },
    {
      "heading": "How much is too much?",
      "content": "- Determinants of debt-carrying capacity:\n  - Quality of institutions and debt management capacity, policies, and macroeconomic fundamentals.\n  - Debt-carrying capacity can change over time and is influenced by the global economic environment.\n- IMF frameworks:\n  - The IMF’s frameworks for low-income countries and countries with access to capital markets take into consideration individual countries’ debt-carrying capacity.\n  - Assessments are calibrated in reference to previous episodes of debt distress for groups of countries with similar economic characteristics.\n  - Calibrations lead to debt sustainability analysis thresholds for key public debt indicators that signal higher risk if that indicator exceeds (or is expected to exceed) its threshold; thresholds can be based on historical experience or convey information about the likelihood of future debt distress.\n- Uncertainty and analytical tools:\n  - Frameworks consider the degree of uncertainty in projections of debt and debt service indicators through fan charts and stress tests.\n  - Because assessments are based on projections of debt, interest, and key macroeconomic variables, frameworks rely on tools to help gauge the realism of forecasts.\n  - The IMF’s approach to debt sustainability leaves room for informed judgment.\n- Pandemic-era considerations:\n  - Question raised: whether debt-carrying capacities have improved sufficiently to handle elevated debt levels.\n  - Observation: since the global financial crisis, low interest rates have arguably increased countries’ capacity to borrow, but this does not necessarily translate into an ability to handle higher debt service.\n  - Historical lesson: there are limits to countries’ debt-carrying capacity; rising debt-service burdens need careful management.\n- Role of growth:\n  - All else equal, higher growth improves debt dynamics.\n  - Most historical cases of significant debt reductions without restructuring involved a surge in growth, often driven by external impulses (global boom, natural resources exports coming onstream, improved terms of trade).\n  - Stimulating sustained domestic growth can be difficult and can require new debt (for example, to fund public investment).\n  - With an uncertain outlook for growth, debt service needs careful management; strengthening debt management and debt data should be top priorities.\n\nSource: “What Is Debt Sustainability?” by DALIA HAKURA, September 2020, IMF F&D\n\n---\n\n Content in this bundle\n\n- ¿Qué es la sostenibilidad de la deuda? ● Finanzas y Desarrollo ● Septiembre de 2020\n  - ¿Qué es la sostenibilidad de la deuda? ● Finanzas y Desarrollo ● Septiembre de 2020 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - ¿Qué es la sostenibilidad de la deuda? ● Finanzas y Desarrollo ● Septiembre de 2020 (PDF){rel=\"external\" type=\"application/pdf\"}\n- L’ABC de l’économie : Qu’est-ce que la viabilité de la dette ?\n  - L’ABC de l’économie : Qu’est-ce que la viabilité de la dette ? (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - L’ABC de l’économie : Qu’est-ce que la viabilité de la dette ? (PDF){rel=\"external\" type=\"application/pdf\"}\n- Back to Basics: What is Debt Sustainability?  – IMF F&D\n  - Back to Basics: What is Debt Sustainability?  – IMF F&D (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Back to Basics: What is Debt Sustainability?  – IMF F&D (PDF){rel=\"external\" type=\"application/pdf\"}\n- Policy Paper\n  - Policy Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Policy Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2020/09/what-is-debt-sustainability-basics"
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    "Authors: DALIA HAKURA",
    "Published: September 1, 2020",
    "Title: What Is Debt Sustainability?",
    "Author: DALIA HAKURA",
    "Date: September 2020",
    "Read time indicator on page: Less than a minute(0 words) Read",
    "DALIA HAKURA is a deputy division chief in the IMF’s Strategy, Policy, and Review Department.",
    "Summary premise: Many factors go into assessing how much debt an economy can safely carry; elevated public debt in low-income countries and emerging market economies and the added spending needs from COVID-19 raise concerns about debt sustainability.",
    "Definition: A country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default.",
    "Analytical focus:",
    "Debt instrument and creditor coverage:",
    "Definitions of public debt (from narrow to broad):",
    "Importance of comprehensive coverage:",
    "Typical coverage by country group:",
    "Holders of public debt matter:",
    "Role of borrowing:",
    "Alternative financing and constraints:",
    "Risks of unsustainable debt:",
    "Three key considerations before new borrowing:",
    "Debt reporting and management:",
    "Determinants of debt-carrying capacity:",
    "IMF frameworks:",
    "Uncertainty and analytical tools:",
    "Pandemic-era considerations:",
    "Role of growth:",
    "**¿Qué es la sostenibilidad de la deuda? ● Finanzas y Desarrollo ● Septiembre de 2020**",
    "**L’ABC de l’économie : Qu’est-ce que la viabilité de la dette ?**",
    "**Back to Basics: What is Debt Sustainability?  – IMF F&D**",
    "**Policy Paper**"
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