Review of the Debt Sustainability Framework for Low Income Countries: Proposed Reforms

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Canonical URL: Review of the Debt Sustainability Framework for Low Income Countries: Proposed Reforms

The Debt Sustainability Framework for Low-income Countries (LIC DSF) is described as the cornerstone of assessments of risks to debt sustainability in LICs.
Core functions of the framework:
- Classifies countries based on their assessed debt-carrying capacity.
- Estimates threshold levels for selected debt burden indicators.
- Evaluates baseline projections and stress test scenarios relative to these thresholds.
- Combines indicative rules and staff judgment to assign risk ratings of external debt distress.

The framework has demonstrated operational value since the last review in 2012.
Areas for improvement identified through staff analysis and stakeholder feedback:
- Gaps in the framework given the evolving nature of risks facing LICs.
- Complexity of the framework.
- Lack of transparency in aspects of the framework.
Objective concern: ensure the framework provides early warnings of potential debt distress without unnecessarily constraining borrowing for development.

Two over-arching principles guiding the proposed reforms:
- The core architecture of the DSF—model-based results complemented by judgment—remains appropriate.
- Reforms should maintain an appropriate balance by providing early warnings of potential debt distress without unnecessarily constraining borrowing for development.

The paper proposes a set of reforms to enhance the value of the LIC DSF for all users.
Emphasis on enhancing performance in assessing risks, improving transparency, and addressing identified gaps.

International Monetary Fund — Review of the Debt Sustainability Framework for Low Income Countries: Proposed Reforms, October 2, 2017