Debt Sustainability
Debt "sustainability" is often defined as the ability of a country to meet its debt obligations without requiring debt relief or accumulating arrears. To assess this type of debt sustainability, three main international methodologies have been developed – Heavily Indebted Poor Countries Debt Relief Analyses , the Low Income Countries Debt Sustainability Framework (LIC-DSF) and the Middle-Income Countries Debt Sustainability Framework (MIC-DSF). They all involve making projections of intended borrowings and economic variables over a maximum 20-year period, and then using ratios comparing debt stock, present value or service with GDP, exports or budget revenue to assess payment capacity. For a discussion of the ratios and sustainability thresholds used in the HIPC and LIC-DSF methodologies, please click here.
These assessments are useful from a financial point of view. However, developing countries see debt sustainability as fully positive only if it is providing enough finance to reach their overall national development goals. Therefore the key aim of assessing debt sustainability should be to reconcile financing needs for development with sustainable debt levels DFI’s work always starts from this perspective and therefore sustainability analysis includes a scenario where the Millennium Development Goals and other national development plans (where these have been costed) are fully funded.
