Expert Paper Series: Debt Sustainability Assessments

Authors: Martín Guzmán and Joseph E. Stiglitz, Co-Presidents, Initiative for Policy Dialogue

Debt Sustainability Analyses (DSAs) are documents that hold serious implications for both debtors and creditors in sovereign debt negotiations. DSAs are not merely technical assessments of countries’ capacity to take on debt but are also grounded in political assumptions. A new study by Martín Guzmán and Joseph E. Stiglitz looks at the practice of the IMF’s debt sustainability analysis. They discuss how incentives and competing interests of stakeholders shape understandings of the debt sustainability constraints, endogenous effects of macroeconomics and fiscal policies, and beliefs on distribution of shocks. They identify areas for improvements in DSAs opportunity and publication timelines, dealing with the IMF’s role as a creditor, the treatment of foreign vs domestic currency debt, choosing correct discount factors, and the causes of over-optimism in baseline growth scenarios. 

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Author: Matthew Martin, Director, Development Finance International

A new study by Matthew Martin makes the case for why and how to adapt DSAs to National Sustainable Development Plans and National Defined Contributions and Adaptation Plans to confront the climate crisis.

The paper addresses three key challenges: adapting DSAs 1) to overall SDG spending needs, 2) to meet urgent environmental crises, including climate change, nature and biodiversity collapse, and the rising incidence of natural disasters, and 3) to meet social crises produced by rising inequality and poverty, as well as pandemics. Mindful of the need for feasible and immediately actionable recommendations, the study has been based on close consultation with civil society experts and representatives of governments and international organizations.

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Author: Gail Hurely, Senior Development Finance Expert

A new study by Gail Hurley examines the transparency of DSAs across three key pillars: public disclosure, data and methodology openness, and engagement processes. Despite recent improvements, Hurley finds that qualitative aspects of transparency are lacking, with differences in disclosure regimes for low-income and market-access countries and limited access to information during debt distress. The paper emphasizes the importance of improved DSA transparency for driving progress, building trust, and informing better policies. It offers recommendations for enhancing transparency and calls for wider efforts across the borrowing cycle, including the production of DSAs by independent entities to alleviate concerns about impartiality.

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Author: Sherillyn Raga, Research Fellow, ODI

In an era of high debts and more shocks, should debt sustainability analyses change to adapt? A new study by Sherillyn Raga proposes four ways it can. One is by correcting the IMF’s over-optimistic growth and public debt forecasts for low-income countries, which underestimate the impact of overlapping shocks. The second is by better incorporating the impact of fiscal policy on baseline projections. The third is to produce a stress-test scenario for large shocks to trigger early action and prevent debt distress. Finally, when judgment rather than objective signals guide policy advice to countries, the reasoning needs to be clearly documented.

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