World Bank to strengthen debt sustainability framework for low-income countries

The World Bank’s board of executive directors has approved a number of improvements to the analytical framework used for assessing debt sustainability and allocating IDA resources in low-income countries. These improvements ensure the framework remains relevant given the changing macroeconomic landscape facing low-income countries.
The paper, 'Revisiting the Debt Sustainability Framework for Low-Income Countries', which also was discussed by the board of the International Monetary Fund (IMF) last week, provides a comprehensive review of the Debt Sustainability Framework (DSF), a joint World Bank-IMF tool used to conduct public and external debt sustainability analysis.
“Underlying this revision of the DSF is the reality and recognition that low-income countries need to finance an enormous investment gap in order to achieve sustainable growth," said World Bank director for Economic Policy and Debt Jeffrey D Lewis.
"It’s key to adapt the DSF to help low-income countries meet the new challenges and enhance policy dialogue with their development partners,” he said.
Drawing on analytical work and consultations with a range of stakeholders, the proposals endorsed by the board include the analysis of debt thresholds by giving more prominence to country-specific factors affecting debt sustainability in low-income countries; improving the analysis of public debt and fiscal vulnerabilities, to guide external and domestic borrowing decisions; simplifying the implementation of the debt sustainability analysis to allow country authorities to undertake their own analysis, achieve greater transparency and strengthen their ownership of the DSF and strengthening the link between debt-financed investment and growth by relying on analytical models developed by IMF and World Bank staff to better capture the expected economic and social returns from investments.
These proposals come amid a changing landscape in many low-income countries, as the range of available financing options has widened since the DSF was first introduced in 2005.
Debt relief under the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative has permitted low-income countries to exit from continued cycles of debt crisis and restructuring, alleviated financial burdens on a sustained basis, and created new borrowing space.
As a result, low-income countries are seeking to exploit this borrowing space to finance public investment and are relying increasingly on non-concessional external borrowing.
Domestic debt is also likely to grow in importance as national savings increase and governments seek to develop local debt markets. Accordingly, low-income countries will face new risks as the universe of creditors and debt instruments continues to expand.
The joint World Bank-IMF Debt Sustainability Framework aims to support low-income countries’ efforts to achieve their development goals without creating future debt problems.
The DSF helps guide the borrowing decisions of low-income countries, provide guidance for creditors’ lending and grant allocation decisions, and improve World Bank and IMF assessments and policy advice. The DSF was previously reviewed in 2006 and 2009.