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.”