For years, organisations like ours have stressed the need for a debt sustainability analysis (DSA) that works for African countries rather than reinforcing outdated and biased risk perceptions. This month, an opportunity emerged. The World Bank and IMF have proposed reforms to the Low-Income Country Debt Sustainability Framework (LIC-DSF). Some are welcome: distinguishing public debt stress from debt sustainability is overdue; the domestic debt risk module addresses a real gap; and more granular treatment of "high risk" ratings by time horizon and vulnerability type is useful.
But these are improvements to a framework whose deeper flaws persist. The central problem is not simply that the LIC-DSF can be too conservative. It is that it remains better at recording liabilities and vulnerability than at assessing how borrowing can create future repayment capacity. A debt sustainability framework should ultimately ask whether a country can generate the fiscal and foreign-exchange resources required to service its obligations without sacrificing development. On that test, four problems remain.
The split between low-income and market-access countries was never inevitable. Before the early 2000s there was no standardised debt sustainability methodology. In 2002, the IMF endorsed a unified framework for assessing public and external debt sustainability across its membership. Low-income countries were assessed under that same general framework.
A bespoke low-income country (LIC) process began in 2003 and culminated in the 2005 split between the LIC-DSF and the framework for market-access countries. The justification was that LICs relied mainly on concessional official finance while market-access countries borrowed from international capital markets. Even then, that distinction simplified reality. Today it is plainly outdated.
Originally published by African Business.