IMF and World Bank tighten debt rules for low-income countries

The IMF Executive Board discussed the so-called Debt Sustainability Framework for Low-Income Countries (LIC-DSF) on 9 September. According to the IMF, the debt environment for low-income countries has become more complex and riskier since the previous major review in 2017. In many countries, debt has risen, while governments are increasingly borrowing through a range of domestic and foreign sources, including commercial financing.

According to the review, the existing framework has functioned well in identifying serious debt problems at an early stage and in supporting governments and lenders in financial decision-making. At the same time, the IMF sees room for further improvement to better take account of changing economic conditions.

Clearer distinction between debt problems

An important part of the reform is a sharper distinction between countries at risk of debt problems and countries whose debt is actually assessed as unsustainable.

This will include examining countries’ capacity to carry debt. Existing thresholds for debt distress will also be adjusted and expanded, and new instruments will be introduced to assess debt sustainability.

More attention to domestic debt

The revised framework must also take domestic debt into account more systematically. This has become more important in many low-income countries.

Long-term challenges, such as investments in development and climate adaptation, must also be more explicitly included. The aim is for countries to better assess how much fiscal space they have to make necessary investments without debt becoming unmanageable in the longer term.

Furthermore, the IMF wants to improve the quality and reliability of debt data. Countries are encouraged to make more comprehensive and transparent information on their public debt available. Stress tests and models will also be adjusted to make financial projections more consistent and accurate.

Framework has existed since 2005

The Debt Sustainability Framework was introduced in 2005 and has since become an important instrument in assessing debt risks in low-income countries. The framework was previously revised in 2006, 2009, 2012 and 2017.

In addition to the IMF and the World Bank, the latest review consulted representatives of lending and borrowing countries, development partners, academics, civil society organisations and the private sector.

The harmonised discount rate used within the framework remains unchanged at 5 percent.

The revised framework is expected to become operational in the second half of 2027. Before then, new guidelines will be drawn up and staff and national authorities will receive training on its application.

According to IMF directors, the changes are necessary because debt vulnerabilities have increased and differences between low-income countries have become greater. At the same time, they stress that clear guidelines, good communication and support for countries are needed to implement the new system effectively.