Review of the Debt Sustainability Framework for Low Income Countries

WASHINGTON, October 2, 2017 - The Debt Sustainability Framework for Low-income Countries (LIC DSF) has been the key instrument to assess risks to debt sustainability in LICs since 2005. Today, the introduction of new features will enhance its performance and provide countries with an early warning tool to identify debt distress.

The 2017 review introduces key reforms to keep up with the rapidly changing financing landscape facing LICs and further improve the DSF’s predictive ability. “The reforms endorsed by the Boards of the World Bank and the IMF, based on analysis and a consultative process, make the framework more comprehensive, transparent, and simpler to use, all while enabling the DSF to better capture the risks of debt distress” said Jan Walliser, World Bank’s Vice President for Equitable Growth, Finance, and Institutions. The World Bank and IMF collaborated in the development and rollout of the revised framework.

While the core architecture of the framework remains the same there are important reforms in the methodology. The revised framework bases the assessment of countries’ risk carrying capacity on an expanded set of variables:

1. Adjustments to the methodology are designed to improve the framework’s accuracy in predicting debt crisis.
2. New tools are prepared to help shed light on the plausibility of underlying macroeconomic projections, and new tailored stress tests to address shocks and drivers of distress are provided to help better evaluate specific risks, relevant, for some countries. 
3. The number of debt thresholds and standardized stress tests will be reduced.
4. Staff judgement remains an important component in the framework, and
5. The new Staff Guidance Note will support consistent and more transparent application of judgement that would cover the diversity of country situations. 

The debt sustainability framework for LICs complements the provision of medium term debt management strategies by the World Bank and IMF. It also complements the framework for debt sustainability analysis for market-access countries.

The revised DSF becomes effective as of July 1, 2018. In this regard, capacity building and training for authorities remains a priority.

Since its introduction in 2005, the debt sustainability framework (DSF) for low income countries (LIC) has been the cornerstone of the international community’s assessment of risks to debt sustainability in LICs, with important operational implications for stakeholders. The DSF plays a critical role in guiding borrowing and lending decisions: multilateral lenders including the International Development Association have linked their lending policies to the DSF results and the risk assessment derived by the DSF has informed the World Bank’s non-concessional borrowing policy (NCBP) and the IMF’s debt limits policy (DLP). The framework was previously reviewed in 2006, 2009, and 2012.

For more information on how The World Bank supports countries to develop debt management strategies please visit: www.worldbank.org/debt