The Debt Sustainability Framework (DSF) is the main tool for multilateral institutions and other creditors to assess risks to debt sustainability in Lower Income Countries (LICs). 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, and then combines indicative rules and staff judgment to assign risk ratings of debt distress.
However, since 2005, when the DSF was introduced, the economic environment in which many LICs operate changed significantly, resulting in potentially important gaps in the DSF. To cope with the evolving financing landscape, the DSF was reviewed on three occasions, most recently in 2012. While the 2012 review saw the introduction of several new features including incorporation of more country-specific information, there was room for further progress especially in improving the assessment of macro-linkages in stress tests and exploring the links between investment and growth. The 2017 review delivers a new framework that improves these features, and that significantly reduces the rate of false alarms – incorrectly predicting the occurrence of debt signals – and moderately decreases the rate of missed crises.