World Bank and IMF to update debt assessments of poor countries — Asharq Al-Awsat
The World Bank and the International Monetary Fund have approved reforms to their joint debt sustainability assessment framework for low-income countries. The changes are intended to account for the more complex and riskier environment in which these states obtain financing, Asharq Al-Awsat reports.
What will change in the methodology
The reform предусматривает strengthening the analysis of domestic debt in low-income countries and broader consideration of long-term development challenges, including climate change. At the same time, the World Bank and the IMF do not plan to completely redesign the existing framework.
The updated methodology is intended to refine assessments of countries’ ability to service debt and help more clearly distinguish between countries facing a certain risk of debt distress and states whose debt is considered unsustainable. The organizations are also to improve tools and stress tests to increase the consistency and accuracy of forecasts, as well as encourage countries to improve reporting and transparency of debt data.
The discount rate used in such assessments has been kept at 5%. The new framework will also include a long-term module for a more detailed assessment of risks and separate thresholds for overall public debt stress.
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Launch in 2027
The updates will begin to be applied in the second half of 2027. According to the World Bank and the IMF, this should help countries better determine possible levels of investment in development and climate change adaptation measures, while containing debt risks over the long term.
The joint review of the framework, the first since 2017, was completed in July. It confirmed that the mechanism introduced in 2005 had generally helped identify cases of debt difficulties early and make informed borrowing and lending decisions. At the same time, experts recommended taking into account higher debt levels in many low-income countries and changes in the financing structure, including an increase in commercial domestic and external loans.
Allison Holland, deputy director of the IMF’s African Department, said that recent shocks had brought the number of countries at high risk of debt difficulties or already experiencing them back to pre-pandemic levels. According to her, about 14% of low-income countries are already in debt distress, while another 33% are at high risk. Among emerging market countries, 23% face a high risk of overall sovereign stress.
Members of the IMF Executive Board also agreed to temporarily refrain from publishing models for assessing unsustainable debt in order to allow time for adaptation to the new methodology. For now, data will be provided to the board in separate staff notes from the fund.
