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.