Foreword by Dr. Reza Baqir - Debt Sustainability Assessments & Their Role in the Global Financial Architecture

Debt sustainability is not just an academic construct—it is a living, breathing concern that shapes the decisions of finance ministers, central bankers, development practitioners, and international creditors every day. For those of us who have worked in the trenches of sovereign finance, whether in ministries, central banks, multilateral institutions, or the field of development policy, the question of how much debt is "too much" is more than a theoretical debate. It influences the space available for investment in public goods, the credibility of reform programs, the risk appetite of investors, and ultimately, the resilience of economies. The decisions we make based on assessments of a country’s debt-carrying capacity can shape the economic destinies of entire nations. And yet, the tool most often used to guide those decisions—the Debt Sustainability Assessment (DSA)—remains imperfect.

This volume brings together an impressive array of papers that examines the DSA methodology, its uses and misuses, and, importantly, how it can be improved. These papers arrive at a critical juncture. The global financial architecture is under strain. The COVID-19 pandemic, the inflation challenges that followed, and ongoing geopolitical tensions have created a perfect storm for debt vulnerabilities in many emerging markets and low-income countries. In this context, DSAs conducted by the International Monetary Fund (IMF) and the World Bank have gained immense prominence. These assessments are not just analytical tools. They act as gatekeepers of financial flows, shape policy conditionality, and define the scope of debt restructuring negotiations in cases where a country has defaulted.  

The DSA was created with good intent: to provide a rigorous, forward-looking framework for assessing debt vulnerabilities and informing policy recommendations for the indebted country. Over time, it has grown into a central pillar of the international financial architecture. It guides IMF lending decisions—whether and how much should the IMF lend to a distressed country, conditions access to concessional finance, defines the envelope of resources available to a country with an IMF-supported program to service the claims to its other creditors, and guides the expectations of private and official creditors alike. In short, it is no longer just a diagnostic tool—it has immense real world policy implications such as determining whether a country’s creditors get bailed out or bailed in.

From my time inside the IMF—including four years as the head of the IMF division in charge of the DSA methodology and its implementation in country programs—I know the care and integrity with which the DSA framework was constructed and has evolved. Each revision of the DSA frameworks for low-income countries and market access countries introduces enhanced methodologies and rigor. The staff of the IMF and the World Bank deserve credit for having made significant advances in the conceptual and practical frameworks for assessing debt sustainability over the years since the DSA was first introduced.  

At the same time, I also know my time as having helped design some of the DSA methodologies at the IMF, that no model can fully capture the complexity of sovereign risk. Making a correct assessment on debt sustainability that will stand the test of time is as much an art as a science. And from my subsequent experience as the Governor of Pakistan’s central bank, a high debt country, and now as an advisor to sovereigns, I have seen how DSA outcomes—when driven by assumptions that may not be fully aligned with domestic realities or methodologies that cannot capture the nature of the risks involved—can constrain options at the very moment when flexibility and judgment are most needed.

Moreover, even when the DSA produces the right outcome at a purely technical level, the politics around the implications of that outcome can lead to the DSA tool itself being stretched to accommodate these considerations. The staff of the IMF often succeed in resisting such pressures from the Executive Board or the senior management of the IMF. However, when the stakes are high it is difficult to protect the purity of the DSA. Ironically it is precisely in such high-profile cases where a wrong call from the DSA causes the most damage to its reputation.

A relevant example comes from the experience in Greece in the early 2010s. At the time, the DSA supported the view that the country’s debt was sustainable, allowing for official financing without the need for upfront burden-sharing from the private sector. But within months, it became clear that those assumptions were too optimistic—growth was weaker, political support was thinner, and the social strain far greater than projected. The DSA had underestimated the fiscal contraction’s macroeconomic feedback loops. It would take a deep and painful private sector haircut, years later, to realign the debt trajectory with reality. In that case, the DSA framework did not just miss the mark—it delayed an inevitable restructuring and deepened the social cost of adjustment.

This book does an excellent job of identifying these and related fault lines in both the methodology and especially the application of the DSA. The papers highlight several important concerns: the ability of the DSA to correctly capture debt dynamics in a large shock—often the circumstances that lead to default, aligning the DSA with development and climate goals, making DSAs more transparent and accountable, and practical issues in the use of DSAs such as the different considerations related to the currency of debt, the appropriate discount rate, the IMF’s own role, and related issues. In highlighting these issues, the authors are not calling for the abandonment of the DSA—they are calling for its evolution with concrete reform proposals.

One particularly relevant theme is the role a DSA end up playing in debt restructuring negotiations. In such circumstances, the DSA can effectively determine how much debt relief a country is “allowed” to seek and the extent of losses that creditors are expected to accept. This gives the framework enormous influence. It also often leads to creditors, particularly private creditors, to complain about the accountability or transparency in the formulation of the DSA and its underlying assumptions. As I saw first-hand in the cases of Greece and Ukraine in my time at the IMF, the interplay between politics, projections, and precedent can profoundly affect both the design of programs and the outcomes for populations. In those moments, the DSA becomes not just an analytical exercise, but a negotiation tool, a bargaining chip, and sometimes, a battleground.

From a practitioner’s perspective, this book is essential reading. It bridges theory and practice, critique and solution. It invites the kind of open, honest dialogue that is urgently needed if we are to improve faith in multilateral frameworks and support better outcomes for countries navigating debt stress. For those of us working on the frontlines of fiscal policymaking and sovereign financing, these papers offer not just critique, but a compass—toward a better way of assessing, and achieving, debt sustainability. I hope this volume will inform and inspire a new era of debt sustainability analysis—one that is not only more accurate, but more equitable and fit for purpose in a world facing multiple, intersecting crises.