## Back to Basics: What is Debt Sustainability? ## Source details **Canonical URL:** [Back to Basics: What is Debt Sustainability?](https://www.imf.org/en/publications/fandd/issues/2020/09/what-is-debt-sustainability-basics) ## Other formats - [Markdown version](/en/publications/fandd/issues/2020/09/what-is-debt-sustainability-basics/index.md) - [Structured JSON version](/en/publications/fandd/issues/2020/09/what-is-debt-sustainability-basics/index.json) - [Bundle manifest](/en/publications/fandd/issues/2020/09/what-is-debt-sustainability-basics/bundle-manifest.json) ## Bibliographic details - Authors: DALIA HAKURA - Published: September 1, 2020 --- ### Overview - 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. ### When debt is sustainable - 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: - Analysts assess whether policies needed to stabilize debt are feasible and consistent with maintaining growth potential or development progress. - When countries borrow from financial markets, risks associated with refinancing are important. - Debt instrument and creditor coverage: - 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. - Countries incur debt to private bond holders, banks, other countries and their official lending institutions, and multilateral lenders such as the World Bank. - Definitions of public debt (from narrow to broad): - Narrow: budgetary central government. - Broader: general government (budgetary central government, state and local government, extrabudgetary units, and social security funds). - 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). - Importance of comprehensive coverage: - 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. - Example risk: loss-making state-owned enterprise debt that is publicly guaranteed can shift the burden to the central government and weaken debt sustainability. - Typical coverage by country group: - Advanced economies and emerging markets: debt sustainability analysis frequently focuses on the general government. - Low-income countries: nearly complete coverage of both public and publicly guaranteed debt is standard. - Holders of public debt matter: - IMF and World Bank assessments cover both domestic and external public sector debt. - Sovereign credit rating agencies frequently concentrate on market-based external public sector debt. ### Why some debt is good - Role of borrowing: - Public debt can finance important development programs and projects. - Alternative financing and constraints: - 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. - Risks of unsustainable debt: - 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. - Three key considerations before new borrowing: - New borrowing should be consistent with fiscal spending and deficit plans. - The new borrowing should be carefully set to keep public debt on a sustainable path. - 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. - Debt reporting and management: - Countries should improve debt reporting and debt statistics as part of comprehensive medium-term debt management strategies. - Debt statistics should include coverage of public and publicly guaranteed debt that is as broad as possible, including debt of state-owned enterprises. - Sharing this data with lenders can encourage responsible lending. ### How much is too much? - Determinants of debt-carrying capacity: - Quality of institutions and debt management capacity, policies, and macroeconomic fundamentals. - Debt-carrying capacity can change over time and is influenced by the global economic environment. - IMF frameworks: - The IMF’s frameworks for low-income countries and countries with access to capital markets take into consideration individual countries’ debt-carrying capacity. - Assessments are calibrated in reference to previous episodes of debt distress for groups of countries with similar economic characteristics. - 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. - Uncertainty and analytical tools: - Frameworks consider the degree of uncertainty in projections of debt and debt service indicators through fan charts and stress tests. - Because assessments are based on projections of debt, interest, and key macroeconomic variables, frameworks rely on tools to help gauge the realism of forecasts. - The IMF’s approach to debt sustainability leaves room for informed judgment. - Pandemic-era considerations: - Question raised: whether debt-carrying capacities have improved sufficiently to handle elevated debt levels. - 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. - Historical lesson: there are limits to countries’ debt-carrying capacity; rising debt-service burdens need careful management. - Role of growth: - All else equal, higher growth improves debt dynamics. - 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). - Stimulating sustained domestic growth can be difficult and can require new debt (for example, to fund public investment). - With an uncertain outlook for growth, debt service needs careful management; strengthening debt management and debt data should be top priorities. *Source: “What Is Debt Sustainability?” by DALIA HAKURA, September 2020, IMF F&D* --- ## Content in this bundle - **¿Qué es la sostenibilidad de la deuda? ● Finanzas y Desarrollo ● Septiembre de 2020** - [¿Qué es la sostenibilidad de la deuda? ● Finanzas y Desarrollo ● Septiembre de 2020 (Markdown version)](/-/media/files/publications/fandd/article/2020/september/es/que-es-sostenibilidad-deuda-esencial.pdf.md){rel="alternate" type="text/markdown"} - [¿Qué es la sostenibilidad de la deuda? ● Finanzas y Desarrollo ● Septiembre de 2020 (PDF)](/-/media/files/publications/fandd/article/2020/september/es/que-es-sostenibilidad-deuda-esencial.pdf){rel="external" type="application/pdf"} - **L’ABC de l’économie : Qu’est-ce que la viabilité de la dette ?** - [L’ABC de l’économie : Qu’est-ce que la viabilité de la dette ? (Markdown version)](/-/media/files/publications/fandd/article/2020/september/fr/qu-est-ce-que-la-viabilite-de-la-dette-abc.pdf.md){rel="alternate" type="text/markdown"} - [L’ABC de l’économie : Qu’est-ce que la viabilité de la dette ? (PDF)](/-/media/files/publications/fandd/article/2020/september/fr/qu-est-ce-que-la-viabilite-de-la-dette-abc.pdf){rel="external" type="application/pdf"} - **Back to Basics: What is Debt Sustainability? – IMF F&D** - [Back to Basics: What is Debt Sustainability? – IMF F&D (Markdown version)](/-/media/files/publications/fandd/article/2020/september/what-is-debt-sustainability-basics.pdf.md){rel="alternate" type="text/markdown"} - [Back to Basics: What is Debt Sustainability? – IMF F&D (PDF)](/-/media/files/publications/fandd/article/2020/september/what-is-debt-sustainability-basics.pdf){rel="external" type="application/pdf"} - **Policy Paper** - [Policy Paper (Markdown version)](/-/media/files/publications/pp/2020/english/ppea2020005.pdf.md){rel="alternate" type="text/markdown"} - [Policy Paper (PDF)](/-/media/files/publications/pp/2020/english/ppea2020005.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2020/09/what-is-debt-sustainability-basics_