Finance

Background

What is the World Bank & IMF debt sustainability framework for low-income countries?

16 October 2024 | Inside the institutions

Demonstration opposing the practices of the World Bank and International Monetary Fund on Sunday, April 26, 2009. Credit: Ben Schumin/ Flickr.

Debt sustainability assessments (DSAs) evaluate the capacity of a country to meet its scheduled debt commitments in light of evolving economic, social and political constraints. DSAs can decide how much debt relief a country going through a restructuring process can get if debt is judged unsustainable. They influence the type and amount of lending by multilateral banks, and shape lending decisions by governments and the private sector. The IMF has a policy that restricts lending to countries when debt is judged unsustainable, unless governments seek a combination of debt relief, grants and budget cuts to make it sustainable. The IMF is the main actor in conducting DSAs, usually performing them in the context of its Article IV consultations or through its financing programmes (see Inside the Institutions, IMF surveillance).

The Fund’s approach to DSAs differentiates between “low-income countries” (LICs) (which includes 70 low- and middle-income countries considered more ‘vulnerable’ by the Fund), and “market access countries” (MACs), which can be slightly richer but still include many debt-vulnerable countries such as Sri Lanka, Suriname and Pakistan. The LICs are usually those eligible for IMF’s Poverty Reduction and Growth Trust (PRGT) concessional financing and also have access to this form of zero interest rate financing from the International Development Association (IDA), the Bank’s low-income arm. The assessments are carried out through separate frameworks – the LIC Debt Sustainability Framework (DSF) and the Sovereign Risk and Debt Sustainability Framework for MACs.

The LIC-DSF, developed in collaboration with the World Bank, provides a methodology for assessing whether a country is at low, moderate, or high risk of failing to meet external debt payments. For LICs, the DSF ratings are important as they can determine the IDA grant allocation framework, with countries in debt distress qualifying for grants while those not in distress are subjected to standard IDA terms. In a 2019 joint position paper, civil society organisations (CSOs) argued that the DSF lacks a clear definition of debt sustainability. The Fund defines a country as being in debt distress if it has defaulted on external debt. But since IMF loans prevent defaults, this definition cannot be used for assessing debt prior to loan programmes. This results in the Fund rarely classifying debt situations as ‘unsustainable’ and instead opting for loans rather than debt restructurings – which inter alia, as stated in the CSO joint paper, “forces unfair and unsuccessful austerity on people in the borrowing country, lengthens the period of a debt crisis and risks public money being needed for debt relief rather than original lenders having to pay.”

Over-optimistic DSAs: tightening the fiscal straitjacket

A long-standing issue with DSAs is the tendency towards overly optimistic growth projections. DSAs often assume that debt-to-GDP ratios can decline through GDP growth. The Bank and Fund assume this ‘growth’ is however expected following fiscal consolidation – i.e., raising taxes and slashing government spending on essential public services. According to Germany-based CSO Friedrich-Erbert Stiftung, the IMF projected in 2023 that Sri Lanka, currently in severe debt distress, would transition from a deficit of -3.8 per cent of GDP in 2022 to a primary surplus (where government revenue exceeds its non-interest expenditures) of 2.3 per cent by 2025 (see Observer Autumn 2022).

The coupling of debt ‘sustainability’ with fiscal consolidation raises concerns. While fiscal adjustments may allow governments to continue to service debts in the short-term, they often lead to unemployment and decreased aggregate demand, which negatively impacts the very growth predicted by the Fund and undermine governments’ ability to repay debt in the longer term – as acknowledged  by the IMF in 2013, in a mea culpa regarding its failure to account for the impact of austerity on economic growth. Despite this, 2020 research by US-based Boston University Global Development Policy (GDP) Centre showed that there has been no subsequent change in IMF policy advice. A June 2016 CSO letter proposed a reform where debt tied to investments that demonstrably improve debt sustainability by generating revenue and reducing poverty should “sit outside” the DSF. Yet, this call was ignored in the 2017 LIC-DSF review.

The fact that the costs of IMF-mandated adjustments fall on citizens is contrary to international human rights law, as argued by Attiya Warris, the UN Independent Expert on foreign debt, other international financial obligations and human rights, in an August 2021 report, whereby DSAs “allow for the label of ‘sustainable’ to be applied unduly, in contexts where debt servicing may be depriving a State of resources needed to guarantee human rights” (see Observer Autumn 2023). Additionally, the Fund itself noted in 2022 that fiscal consolidation contributes to social unrest, with the recent uprisings in Kenya a clear case in point (see Observer Autumn 2024). In 2016 Juan Pablo Bohoslavsky, former UN Independent Expert on Foreign Debt and Human Rights, advocated for a human rights-based framework for sovereign debt to meet the Sustainable Development Goals. Such considerations were again absent from the 2017 LIC-DSF review.

A highly dysfunctional debt restructuring system: by choice?

The Fund recognised in 2013 that “debt restructurings have often been too little too late, this failing to re-establish debt sustainability and market access in a durable way”. However, a decade on, debt restructurings are, at most, reducing debt risks to ‘moderate’ levels, without any space to absorb shocks, leaving countries susceptible to returning to the ‘high risk’ category after just one shock. For instance, in 2024, the Fund projected that Zambia’s external debt indicators for the present value of the debt-to-GDP ratio and the debt service-to-revenue ratio will be at or above the DSF thresholds. As such, one shock could then push all indicators well above these thresholds. CSOs argue that the IMF should establish a policy requiring debt restructurings to reduce debt risk to ‘moderate’ while allowing for enough shock absorption.

Research by the GDP Center has shown that DSAs are far from politically neutral: it found that borrowing countries with high foreign direct investment from Western private lenders endure harsher austerity, while those aligned with European trade and diplomacy face more lenient measures. The IMF’s role as lender and policy advisor creates a potential conflict of interest, especially considering the influence of powerful shareholders, which operate within the Fund’s highly unequal governance structure, which often favour creditors over debtors. CSOs have been calling for DSAs to “be carried out by a body which is democratically accountable, but independent of creditors and debtors, such as a UN agency” (see Observer Autumn 2022). Currently, many countries have nowhere else to turn for relief as “the international sovereign debt architecture remains a mélange of inadequate and insufficient attempts, including the expired Debt Service Suspension Initiative (DSSI) and the hardly-used G20 Common Framework” (see Observer Autumn 2022, Summer 2022, Spring 2022).

Debt sustainability starts by integrating SDGs and climate goals

Countries are trapped in vicious borrowing cycles that persistently fail to address solvency issues, exacerbated by the IMF’s tendency to treat crises as liquidity problems. Tim Jones of UK-based CSO Debt Justice argues that “in the absence of a legally constituted debt workout or arbitration mechanism, the only tool governments have to force creditors to negotiate on debt restructuring is the threat of default. And for a threat to be credible, it has to be real” (see Observer Spring 2017). This dynamic contributes to what is now recognised as the “worst debt crisis ever.” In 2023, debt servicing consumed 38 per cent of budget revenues and 30 per cent of government expenditure across the Global South, with LICs seeing the highest debt payments since 1998, surpassing spending on health, education, and climate action.

The current 2024 LIC-DSF review takes place at a crucial juncture. Various government-led proposals to reform the international financial architecture have called for changes to DSAs to better reflect the significance of fiscal space for SDGs and climate action, a sentiment echoed by the Bank’s Independent Evaluation Group. In August 2024, an IMF supplement note introduced climate risks in DSAs for specific financial arrangements, such as the Fund’s Resilience and Sustainability Trust. However, CSOs view these changes as incremental. For example, the Task Force on Climate, Development and the IMF argued that the note doubles down on private finance, detailing four specific ways in which the LIC-DSF can be improved in an October 2024 publication. As Belgium-based CSO Eurodad stated, much more is needed to determine “how to integrate the need to finance SDGs and climate action, as well as human rights and feminist perspectives, in debt sustainability frameworks.”

More background on this issue

Finance

Background

16 October 2024 | Inside the institutions

What is the World Bank & IMF debt sustainability framework for low-income countries?

This Inside the Institutions examines the joint World Bank and IMF Debt Sustainability Framework (DSF) for low-income countries (LICs) and evaluates its impact on LICs’ ability to maintain fiscal space for development and climate goals.

Environment

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9 April 2024 | Inside the institutions

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13 December 2023 | Inside the institutions

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This Inside the Institutions looks at IMF’s Resilience and Sustainability Trust (RST) reflecting on concerns about its eligibility criteria, quota limit, and 'green conditions'.

Finance

Background

6 April 2022 | Inside the institutions

What are IMF surcharges?

This Inside the Institutions looks at the issue of surcharges, which are additional interest payments the IMF imposes on countries with large, outstanding debts to the IMF.

IFI governance

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4 October 2021 | Minutes

Making the Most of Special Drawing Rights: Approaches to maximise impact and create a sustainable and just recovery

Notes from the Civil Society Policy Forum session on 4 October on the ways to maximise the impacts of the recent allocation of $650 billion Special Drawing Rights.

Finance

Background

1 April 2021 | Minutes

Special Drawing Rights as a sustainable option for financing fight against COVID-19 and economic recovery in Africa

Notes from the Spring 2021 Civil Society Policy Forum session on 1 April.

Finance

Background

29 March 2021 | Minutes

Showcasing the impact of debt in poor countries and a proposal for fair and green recovery financing

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Finance

Background

28 September 2020 | Minutes

Covid-19 and debt: Going beyond debt suspension towards a systemic response to debt crises

Notes from the virtual Civil Society Policy Forum 28 September Session at the IMF and World Bank 2020 Annual Meetings on Covid-19 and debt.

IFI governance

Background

7 October 2016 | Minutes

Recurring debt crises in sub-Saharan Africa and the rise of bond issuance

Notes from a side event at the IMF/World Bank 2016 annual meetings launching a new report on bonds issuance in Nigeria, Zambia and Ghana, followed by a panel discussion on government bonds as a debt issue.

IFI governance

Background

6 October 2016 | Minutes

Stopping vulture funds through national anti-vulture laws

Notes from a side event at the IMF/World Bank 2016 annual meetings exploring the issue of vulture funds from various angles, as well as possible solutions.

IFI governance

Background

17 April 2015 | Minutes

Ebola debt relief – Implications and next steps

Notes from a meeting on Ebola during the World Bank spring meetings.

IFI governance

Background

11 October 2014

Sovereign debt restructuring: options, obstacles and opportunities

Notes of a meeting on sovereign debt restructuring at the World Bank-IMF annual meetings 2014

IFI governance

Background

9 October 2014

After SCOTUS: Next steps in sovereign debt restructuring

Notes of a meeting on sovereign debt restructuring after SCOTUS at the World Bank-IMF annual meetings 2014

Conditionality

Background

12 April 2014

IMF recommendations to Arab countries in transition: Challenges & prospects

Finance

Background

10 April 2014

The IMF's work on tax spillovers and developing countries

IFI governance

Background

13 October 2013 | Minutes

Why the Bank and Fund provide too little debt relief too late – and what can be done about it

Expert panelists discuss the need for comprehensive and automatic debt restructuring mechanisms, at the Annual Meetings 2013 civil society forum

IFI governance

Background

13 October 2013 | Minutes

Is the European recovery finally under way?

CEPR event at the 2013 civil society forum on whether a recovery is under way in Europe; held as a debate between Prakash Loungani of the IMF's research department and Mark Weisbrot, CEPR co-director.

IFI governance

Background

12 October 2013 | Minutes

Austerity and Inequality in Europe

Minutes from Oxfam-hosted civil society seminar at 2013 Annual meetings on European austerity and inequality

Finance

Background

10 October 2013 | Minutes

Economic impact of IMF programmes in low-income countries: civil society forum

Notes from a civil society forum on economic impact of IMF programmes in low-income countries, 10 October 2013

IFI governance

Background

30 May 2013 | Minutes

Civil society meeting with Steve Field, UK IMF Executive Director

Minutes of CSO meeting with Steve Field UK IMF Executive Director, 9 April 2013

IFI governance

Background

18 April 2013 | Minutes

After recent court decisions: how can sovereign debt workouts become fair, comprehensive and account

This session examines the challenges which recent court decisions pose to sovereign debt workouts that allow for burden-sharing and take into account the social development needs of debtor countries.

Knowledge

Background

18 April 2013 | Minutes

Frameworks to support IMF policy advice to low-income countries

This event examined financial Sector Surveillance in Low Income Countries - Financial Deepening and Macro-stability Financial Deepening and Macro-Stability

IFI governance

Background

13 February 2013 | Inside the institutions

World Bank Group's sub-national lending

The World Bank and the International Finance Corporation (IFC, the Bank's private sector arm) are jointly encouraging sub-national lending to states or provinces, aimed at boosting direct engagement at the state or municipal level.

IFI governance

Background

12 October 2012 | Minutes

Facilitating international adjustment through timely debt resolution

This session highlighted the perspectives of finance ministers, policy makers, and academics on the need to ensure timely, effective international adjustment in a manner consistent with sustained global growth and continued adherence to the system of open, dynamic international trade and payments constructed over the past 65 years.

Finance

Background

20 April 2012 | Minutes

How can the IMF enhance its focus on growth and poverty reduction in LICS?

A civil society meeting held at the World Bank and the IMF hold their 2012 spring meetings in Washington DC on Friday 20th April.

IFI governance

Background

20 April 2012 | Minutes

Seminar - Time for a New Consensus: Regulating Financial Flows for Stability and Development

As the World Bank and the IMF hold their 2012 spring meetings in Washington DC this week, Latindadd and the Bretton Woods Project organised a seminar about regulating financial flows on Thursday 19 April.

IFI governance

Background

20 April 2012 | Minutes

Austerity in the Eurozone

Seminar at the Spring meetings 2012, 19 April 12

Accountability

Background

18 April 2012 | Minutes

UK civil society meeting UK IMF Executive Director Alex Gibbs

Notes of a meeting with UK executive director to the IMF Alex Gibbs in April 2012

Land

Background

13 March 2012 | Minutes

Notes of meeting between Stewart James, Alternate UK Executive Director to the World Bank, and NGOs

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Accountability

Background

12 October 2011 | Minutes

UK civil society meeting with HM Treasury and UK IMF Executive Director

Notes meeting Alex Gibbs September 2011

Accountability

Background

18 April 2011 | Minutes

Consultation on Program for Results (P4R)

Notes of meeting, Washington DC, April 16, 2011

Finance

Background

13 April 2011 | Minutes

Meeting between the UK IMF Executive Director Alex Gibbs, HM Treasury and UK civil society organisat

Notes of the seminar of spring meetings 2011

Accountability

Background

7 March 2011 | Minutes

Notes of meeting between UK Executive Director to World Bank and Civil Society Groups

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Conditionality

Background

8 October 2010 | Minutes

Civil Society Townhall Meeting with Robert Zoellick and Dominique Strauss-Kahn

Notes of the seminar of annual meetings 2010

Knowledge

Background

7 October 2010 | Minutes

Meeting between the UK IMF Executive Director Alex Gibbs , HM Treasury and UK civil society organisa

Notes of the seminar of annual meetings 2010

Conditionality

Background

17 June 2010 | Inside the institutions

The IMF's framework for low-income countries

In the midst of the global financial and economic crisis the IMF amended its lending framework for low-income countries (LICs). It now has three main instruments for LICs – the Extended Credit Facility, the Standby Credit Facility and the Rapid Credit Facility. The three different programmes are subsidised by the newly created Poverty Reduction and Growth Trust (PRGT). The IMF also engages with LICs through non-financial facilities, especially the Policy Support Instrument (PSI) and the St

Accountability

Background

30 March 2010 | Minutes

Meeting between UK civil society and Alex Gibbs, UK IMF Executive Director

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Environment

Background

24 September 2009 | Minutes

Meeting on the World Bank between UK NGOs and Douglas Alexander, Secretary of State for Internationa

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Conditionality

Background

11 October 2008 | Minutes

Combating tax flight: ending evasion and reducing avoidance

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IFI governance

Background

1 February 2008 | Inside the institutions

The IFIs and Islamic finance

The World Bank Group and the IMF have become more involved in assistance to and oversight of Islamic financial institutions.

Finance

Background

26 October 2007 | Minutes

Macroeconomic aspects of aid scaling up and the role of the Fund

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Conditionality

Background

26 October 2007 | Minutes

Wage bill ceilings, fiscal and monetary policies and absorbing aid inflows - updates and next steps

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Environment

Background

5 October 2007 | Minutes

Highlights of BWI-UK network meeting with Douglas Alexander

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Accountability

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25 June 2007 | Minutes

Highlights of UK NGO meeting with UK Executive Director to the WB/IMF Tom Scholar

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Finance

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24 May 2007

Growth Commission case studies unveiled

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Conditionality

Background

20 April 2007 | Minutes

Fiscal space and fiscal priorities: Infrastructure, trade and poverty

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Finance

Background

16 April 2007 | Minutes

Civil society meeting with German Minister for Economic Cooperation and Development and Liberian Min

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Finance

Background

2 April 2007 | Inside the institutions

The IDA replenishment

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Infrastructure

Background

15 November 2006 | Minutes

Highlights of UK NGO meeting with Paul Wolfowitz

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IFI governance

Background

26 October 2006 | Minutes

Highlights of Hilary Benn meeting with UK NGOs

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IFI governance

Background

26 September 2006 | Minutes

Highlights of Tom Scholar meeting with UK NGOs

Highlights of quarterly meeting between UK executive director to the World Bank and IMF and UK NGOs. Topics covered include CSO access to annual meetings, IMF strategic review, conditionality, anti-corruption and education.

Accountability

Background

28 April 2006 | Minutes

Debt, conditionality and corruption: Civil society strategy session

Highlights of a 20 April civil society strategy session in Washington on debt, conditionality and corruption.

Environment

Background

12 January 2006 | Minutes

Highlights of UK NGO meeting with executive director to the World Bank and IMF, Tom Scholar

Brief minutes of UK NGO meeting with Tom Scholar

Environment

Background

28 June 2005 | Minutes

Highlights of meeting between Tom Scholar and UK NGOS

Highlights of meeting between Tom Scholar and UK NGOS

Environment

Background

28 April 2005 | Minutes

UK NGO meeting with executive director Tom Scholar: uncorrected highlights 4 April 2005

Minutes of Spring meeting with Tom Scholar and UK NGOs in London

Social services

Background

22 April 2005 | Resource

IMF in low-income countries

Environment

Background

16 December 2004 | Minutes

UK NGO meeting with Executive Director Tom Scholar

Uncorrected highlights of a 14 December meeting between UK NGOs and UK Executive Director to the World Bank and IMF, Tom Scholar.

Environment

Background

8 October 2004 | Minutes

Meeting between UK NGOs and Secretary of State, Hilary Benn

Summary of key points discussed at the meeting on 20 September between Secretary of State Hilary Benn, and UK NGOs

Environment

Background

8 October 2004 | Minutes

Meeting with UK Executive Director to the WB and IMF, Tom Scholar

Meeting with UK Executive Director to the WB and IMF, Tom Scholar, Annual Meetings 2004, 14 September

Finance

Background

6 October 2004 | Minutes

2004 NGO-Roundtable with German Federal Minister for Economic Cooperation and Development

German minister for economic cooperation and development, Heidemarie Wieczorek-Zeul held a now-customary meeting with NGOs. On the agenda was debt, financing of the MDGs and so-called 'voice' issues.

IFI governance

Background

6 October 2004 | Minutes

Grants or Loans? The Full Debate

The session considered the arguments surrounding the provision of grants or loans by IDA. It considered the recent call by President Bush for the World Bank and other development banks to provide more of their funds to the poorest countries as grants, in recognition of the pivotal role that grants play in providing prudent financing for pressing development needs.

Conditionality

Background

8 May 2002 | Minutes

The Ugandan PRSP Experience

Meeting with Rick Rowden, RESULTS, 31 May 2002

Latest articles on this issue

Managing Director Kristalina Georgieva clasps hands with World Bank President Ajay Banga at the Global Sovereign Debt Roundtable during the 2024 Annual Meetings of the World Bank Group and International Monetary Fund in Washington, DC, on 23 October 2024. Credit: IMF Photo/Allison Shelley

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Analysis

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30 October 2024

IFI governance

Analysis

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16 October 2024 | Inside the institutions
cover illustration of the Observer Summer 2024

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Analysis

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Finance

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16 October 2024

Finance

Analysis

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3 July 2024 | Guest analysis

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Finance

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24 April 2024

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9 April 2024 | Guest comment