Low-income countries (LICs) have often struggled with large external debts. The IMF and the World Bank introduced the Debt Sustainability Framework for such countries in April 2005 and have made changes to it periodically.
This video explains what debt sustainability is and why it is important.
Download the interactive guide on Debt Sustainability Framework for low-income countries.
The Debt Sustainability Framework (DSF) is designed to guide the borrowing decisions of low-income countries in a way that matches their financing needs with their ability to repay now and in the future.
The framework requires regular debt sustainability analyses of a country’s projected debt burden over the next 10 years and its vulnerability to economic and policy shocks. Countries vary in their ability to handle debt. The DSF classifies countries’ debt-carrying capacity into three categories – strong, medium, and weak.
Present value of external debt
|
External debt service
|
Present value of total public debt
|
||||
| GDP | Exports | Exports | Revenue | GPD | ||
| Strong | 55 | 240 | 21 | 23 | 70 | |
| Medium | 40 | 180 | 15 | 18 | 55 | |
| Weak | 30 | 140 | 10 | 14 | 35 |
|
The framework uses a composite indicator that considers a country’s historical performance, outlook for real growth, remittance inflows, international reserves, and other factors. Different indicative thresholds for debt burdens are used depending on the country’s debt-carrying capacity. Thresholds corresponding to strong performers are highest, indicating that countries with good macroeconomic performance and policies can generally handle greater debt accumulation.
On the basis of these thresholds and benchmarks, DSAs include an assessment of the risk of external and overall debt distress based on four categories: low risk; moderate risk; high risk, and in debt distress (when a distress event, like arrears or a restructuring, has occurred or is considered imminent).
The DSF facilitates comparability across countries and is used by the IMF and World Bank in their analysis and policy advice. Debt sustainability assessments help determine access to IMF financing and also are used for the design of debt limits in IMF-supported programs.
The framework’s effectiveness in preventing excessive debt accumulation hinges on its broad use by borrowers and creditors. Low-income countries are encouraged to use the DSF or a similar framework and creditors are encouraged to incorporate debt sustainability assessments into their lending decisions.
This page was last updated in February 2023
