BRIEF

Debt Sustainability

January 9, 2018


The World Bank and International Monetary Fund work together to support the efforts of low-income countries to achieve their development goals without creating future debt problems. This work is structured through the Debt Sustainability Framework (DSF), and experts use a tool called Debt Sustainability Analysis (DSA) to assess individual countries. One specific goal of this line of work is to ensure that countries that have received debt relief are on a sustainable development track. It also allows creditors to better anticipate future risks and tailor their financing terms accordingly. Finally, it helps clients balance their needs for funds with the ability to repay their debts.

Debt Sustainability Framework (DSF)

This joint World Bank-IMF framework helps low-income countries to achieve their development goals without creating future debt problems. It also helps keep countries that have received debt relief under the HIPC Initiative and the MDRI on a sustainable track. The framework allows creditors to tailor their financing terms in anticipation of future risks, and helps clients balance the need for funds with the ability to repay their debts. 

In addition, the framework serves as the basis for financing decisions through the International Development Association, the fund for the world's poorest countries. The framework helps determine the grant-loan mix of assistance -- the decision is linked directly to the rating of the country’s risk of debt distress under the DSF assessment. While the debt sustainability in low income countries is based on CPIA related, indicative thresholds applied under the DSF, debt levels in middle income countries (MICs) are assessed with the help of other tools. 


Debt Sustainability Analysis (DSA)

To assess whether countries' current borrowing strategy may lead to future debt-servicing difficulties, World Bank debt experts, in close collaboration with the IMF, conduct annual, structured analyses called Debt Sustainability Analyses (DSA). As a result of this analysis, a country is classified according to its risk of debt distress. This classification is used to determined the share of grants and loans in IDA’s assistance to the country.

Subnational Debt Sustainability

Subnational governments’ role in delivering public goods and services is becoming increasingly important. States and provinces are taking on more responsibilities in areas of public investment and the provision of goods and services. This may be related to decentralization, in which national governments devolve fiscal responsibility from central to subnational governments, which may in turn be associated with factors such as rapid urbanization and the development and deepening of domestic financial markets across many countries and regions.

While the dynamics of central government fiscal management (e.g., with respect to sources of revenue and expenditure modalities) and related institutions are standardized and well comprehended across countries, those for subnational governments are much less clearly understood. These entities -- states, for example -- tend to have limited sources of revenue, limited flexibility with respect to both investment and expenditure decisions, and less discretion than central governments with respect to financing options.

Cross and within country differences in policy flexibility, and in fiscal aspects such as revenue sources and expenditure obligations, together with the country-specific nature of intergovernmental financing, suggest that no single standard subnational fiscal and debt framework may be sufficiently robust to accommodate to all subnational fiscal structures. Such framework should be customizable and flexible enough to accurately reflect the institutional and policy specificities of the government being analyzed.

Benchmarks or indicators of sustainability at the subnational level should be developed on a case-by-case basis, reflecting some ex-ante guidelines that are relevant to the government in question. Moreover, a standard set of data and robust forecasts for key subnational macroeconomic and fiscal variables (e.g., subnational output, revenue and expenditure growth, etc.) are not always available, making it necessary to customize the subnational fiscal and debt framework to the information at hand, which certainly does not preclude endeavors to identify or develop own data and robust economic projections.

Subnational fiscal and debt sustainability assessments have been undertaken by the World Bank Group in several contexts, including:

  • Development Policy Loans to subnational governments: These generally require an assessment of the potential impact of any proposed World Bank lending operations on fiscal and debt sustainability. Such assessments are usually included in the DPL proposal and its underlying analysis.
  • Analytical Work produced by the Bank for subnational clients: Insights from subnational fiscal and debt sustainability analyses contribute to improving public financial management, service delivery, and broader macroeconomic policy coordination in the context of broader analytical work produced by the Bank.




RESOURCES
  • Staff Guidance Note on the LIC DSA (2013) - [Document]
  • LIC DSA Templates - (Updated: August 2017)
  • How to do a Debt Sustainability Analysis for Low-Income Countries - [World Bank Guide]
  • Debt Sustainability Framework for Low-Income Countries - [English] [French]
  • Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries - [PDF]
  • Subnational Fiscal and Debt Sustainability Analysis - [Topic]
  • Stress Testing in the Debt Sustainability Framework (DSF) for Low-Income Countries (May 2011) - [Document]
PUBLICATIONS
  • Review of the debt sustainability framework for low income countries : proposed reforms (October 2017) [Document]
  • Revisiting the Debt Sustainability Framework for Low-Income Countries (January 2012) - [Document]
  • A Review of Some Aspects of the Low-Income Country Debt Sustainability Framework (August 2009) - [Document]
  • Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief (November 2006) - [Document]
  • Review of Low-Income Country Debt Sustainability Framework and Implications of the MDRI (March 2006) - [Document]
  • When Is External Debt Sustainable? (March 2006) - [Document]
  • Operational Framework for Debt Sustainability Assessments in Low-Income Countries: Further Considerations (March 2005) - [Document]
  • Public Summary: Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework and Policy Implications (November 2004) - [Document]
  • Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework and Policy Implications (September 2004) - [Document]
  • Debt Sustainability in Low-Income Countries: Proposal for an Operational Framework and Policy Implications (February 2004) - [Document]