What Policy-Makers Should Watch for in the Review of the Low-Income Country Debt Sustainability Framework

The document analyzes the 2026 review of the IMF and World Bank's Low-Income Country Debt Sustainability Framework (LIC-DSF). While acknowledging improvements in domestic debt treatment and country heterogeneity, it argues that the framework fails to conceptually separate public debt sustainability from external sustainability. The authors recommend a 'two-instrument approach' where the LIC-DSF serves as a public DSA and is complemented by a dedicated external DSA to better inform borrowing, fiscal rules, and debt restructuring decisions.

• The 2026 LIC-DSF review introduces several technical improvements to address a more complex debt landscape, including a new domestic debt risk module, separate burden and liquidity indicators for overall public debt (such as face-value public debt-to-GDP and interest payments-to-revenue), and refined composite indicators to better differentiate frontier economies and fragile states.
• The revised framework incorporates new modules to assess how climate-related risks, adaptation policies, and broader development spending affect public debt and gross financing needs, though these are intended to complement rather than determine debt-distress ratings.
• A core weakness of the LIC-DSF is its failure to clearly distinguish between public debt sustainability (focused on fiscal resources and refinancing) and external sustainability (focused on foreign exchange and balance-of-payments), which often require different policy responses.
• The continued reliance on Net Present Value (NPV) indicators is problematic because they are difficult to interpret, rely on fixed discount rates, and do not map cleanly onto the actual fiscal choices and policy questions faced by authorities.
• The authors propose a 'two-instrument approach' where the LIC-DSF is used as a public DSA for fiscal dynamics, while a separate external DSA is used to assess balance-of-payments pressures, foreign-exchange liquidity, and external rollover risks.
• For the design of debt restructuring envelopes, the document argues that transparent stock and flow indicators (e.g., debt-service-to-exports, reserve adequacy) are more operationally useful than NPV indicators, which should only be used later to assess comparability of treatment among creditors.
• Methodological improvements to the LIC-DSF cannot solve institutional incentive problems, such as when the framework's role in determining access to concessional resources encourages the postponement of necessary debt restructurings.

APA

Morra, F., & Wiedenbrüg, A. (2026). What Policy-Makers Should Watch for in the Review of the Low-Income Country Debt Sustainability Framework. International Institute for Sustainable Development. https://www.iisd.org/system/files/2026-06/policy-makers-review-lic-dsf.pdf

Chicago

Morra, Fernando, and Anahí Wiedenbrüg. What Policy-Makers Should Watch for in the Review of the Low-Income Country Debt Sustainability Framework. International Institute for Sustainable Development, 2026. https://www.iisd.org/system/files/2026-06/policy-makers-review-lic-dsf.pdf.

Wikipedia

{{cite report |last1=Morra |first1=Fernando |last2=Wiedenbrüg |first2=Anahí |title=What Policy-Makers Should Watch for in the Review of the Low-Income Country Debt Sustainability Framework |publisher=International Institute for Sustainable Development |date=June 2026 |url=https://www.iisd.org/system/files/2026-06/policy-makers-review-lic-dsf.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{morra2026what, author = {Morra, Fernando and Wiedenbrüg, Anahí}, title = {{What Policy-Makers Should Watch for in the Review of the Low-Income Country Debt Sustainability Framework}}, institution = {International Institute for Sustainable Development}, year = {2026}, month = jun, url = {https://www.iisd.org/system/files/2026-06/policy-makers-review-lic-dsf.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }