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

This policy brief by the International Institute for Sustainable Development (IISD) analyzes the 2026 review of the Low-Income Country Debt Sustainability Framework (LIC-DSF) conducted by the IMF and World Bank. While the authors welcome improvements regarding domestic debt and country heterogeneity, they argue that the framework fails to distinguish between public debt sustainability and external sustainability. The brief recommends that policy-makers use the revised LIC-DSF primarily as a public debt sustainability analysis (DSA) tool and pair it with a separate, dedicated external sustainability framework to avoid ambiguous policy signals.

• The 2026 review of the Low-Income Country Debt Sustainability Framework (LIC-DSF) introduces several improvements to address a more complex debt landscape, including a new domestic debt risk module and separate burden and liquidity indicators for overall public debt such as face-value public debt-to-GDP and interest payments-to-revenue.
• The revised framework attempts to better account for country heterogeneity by refining the composite indicator of debt-carrying capacity with additional variables, such as output volatility and exposure to global macro-financial conditions, to differentiate frontier economies and fragile and conflict-affected states.
• The review incorporates new modules to assess the impact of climate-related risks, adaptation policies, and development spending on debt dynamics, though these are intended to complement rather than determine debt-distress ratings.
• A core weakness of the revised LIC-DSF is its failure to clearly separate public debt sustainability (focused on fiscal resources and refinancing) from external sustainability (focused on foreign exchange and balance-of-payments), which can lead to ambiguous policy signals.
• The authors argue that the continued reliance on Net Present Value (NPV) based indicators is problematic because they are difficult to interpret, rely on fixed discount rates, and do not map cleanly onto the actual fiscal choices governments make.
• The brief recommends a 'two-instrument approach' where the LIC-DSF is used primarily as a public DSA, while a separate external DSA is used to assess balance-of-payments pressures, foreign-exchange liquidity, and external rollover risks.
• The authors suggest that for the purpose of fiscal rules and anchors, policy-makers should use a simplified public DSA based on transparent stock and flow indicators rather than the complex hybrid signals of the full LIC-DSF.
• Methodological improvements to the LIC-DSF may be undermined by institutional incentives, as the framework's role in determining access to concessional multilateral lending can encourage the postponement of necessary debt restructurings.

APA

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

Chicago

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

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=What Policy-Makers Should Watch for in the Review of the Low-Income Country Debt Sustainability Framework |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{internationalinstituteforsustainabledevelopmentndwhat, author = {{International Institute for Sustainable Development}}, title = {{What Policy-Makers Should Watch for in the Review of the Low-Income Country Debt Sustainability Framework}}, institution = {International Institute for Sustainable Development}, 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} }