Review of Bank-Fund Debt Sustainability Framework for Low Income Countries - Public Consultation on Staff Reform Proposals - LIC-DSF Primer

Jul 19, 2026

Public consultation materials review the Bank-Fund Debt Sustainability Framework for Low Income Countries (LIC-DSF) and outline proposed staff reforms. The document explains the LIC-DSF purpose, its analytical role in assessing debt vulnerabilities for countries eligible for concessional financing, and the framework outputs on debt distress and sustainability. It details realism tools such as debt-carrying capacity grouping, thresholds, mechanical risk signals, stress testing, and how judgment is applied. Strengths and trade-offs are assessed, with next steps for implementation.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages34

Reading Time1 h 26 min

LIC-DSF Primer

What is the LIC-DSF?

Outputs

Realism tools

Thresholds for DCC categories

Baseline macro and debt projections

Debt carrying capacity and CPIA

Stress tests

Market financing module

Mechanical risk signals and risk flags

Mechanical risk signals based on debt burden indicators

Baseline versus shock breaches

Overall vs external risk signals

Assessment of debt distress and role of judgment

Before application of judgment

Overall debt sustainability

LIC-DSF Strengths and Trade-Offs

Strengths

Trade-offs

Next Steps

Pub lic Disc losure Authorized Review of Bank-Fund Debt Sustainability Framework for Low Income Countries: Public Consultation on Staff Reform Proposals 􀂉 LIC-DSF Primer 􀂉 Impact of Changing Debt Landscape on LIC-DSF Implementation 􀂉 Backward-Looking Analysis of Current LIC-DSF 􀂉 Reform Proposals • Mechanical risk signals •Auxiliary modules and other enhancements • DSA workflow 􀂉 Next Steps Bank-Fund Debt Sustainability Framework for Low Income Countries (LIC-DSF) 􀂉 What is the LIC-DSF? •Analytical tool for assessing debt vulnerabilities • Jointly developed by IMF and WB in 2005 and periodically updated • Used by countries eligible for IMF/WB concessional financing •Objective •Guides borrowing and lending decisions 􀂉 Outputs •Assessments of risk of public debt distress and sustainability • Public debt distress • Materialization of acute fiscal or market pressures, without presupposing how it can be resolved • Debt unsustainability • When public debt distress cannot be resolved without recourse to debt restructuring 3 Realism tools Thresholds for three DCC categories: Weak Medium Strong Baseline macro and debt projections Debt carrying capacity based on CPIA and other key fundamentals Stress tests Standardized and tailored tests Judgement Enhanced guidance Market financing module Final Risks of external & overall public debt distress Low Moderate High In debt distress Final Overall debt sustainability Sustainable Unsustainable 4 Grouping of Countries by Debt-Carrying Capacity (DCC) Current LIC-DSF: Composite Indicator of Debt-Carrying Capacity Institutional quality •WB Country Policy and Institutional Assessment (CPIA) Index | Economic Fundamentals<br>• Real GDP growth | | External Buffers<br>• Reserve Coverage (in level and squared)<br>• Remittances-to-GDP | | Exposure to Global Conditions<br>•World growth | | --- | --- | --- | --- | --- | 􀂉 Countries are classified by Debt Carrying Capacity into three groups (Weak, Medium, and Strong) based on relative ranking on Composite Indicator • Reflecting institutional strength, economic fundamentals, and buffers to absorb shocks 􀂉 Composite Indicator is calculated twice-a-year, using data from Spring and Fall WEOs 5 Debt Burden Indicators with DCC-Specific Thresholds Current LIC-DSF: Debt Burden Indicator Thresholds by Debt Carrying Capacity 1/ (Index) Debt Carrying Capacity (DCC) Type of Risk Debt Burden Indicator Weak Medium Strong | | | | | | | --- | --- | --- | --- | --- | | Solvency | PV of Total Public Debt-to-GDP | 35 | 55 | 70 | | | PV of External Debt-to-GDP | 30 | 40 | 55 | | | PV of External Debt-to-Exports | 140 | 180 | 240 | | Liquidity | External Debt Service-to-Revenue | 14 | 18 | 23 | | | External Debt Service-to-Exports | 10 | 15 | 21 | Note: 1/ The shown ratios for the PV of total public debt-to-GDP are referred to as “benchmarks,” as they are not derived from the full estimation of a separate model, but by noise-to-signal approach. 6 Mechanical Risk Signals are Based on Comparing Five Debt Burden Indicators to Thresholds by DCC … Threshold Baseline Shock breach Threshold t t + 10 Threshold breaches over any horizon raise red flags Macro framework (baseline + alternative scenarios) Debt indicators under those scenarios (baseline + stress tests) Relative to country thresholds / benchmarks 7 … Underpinning Assessments of Risk of Debt Distress and Debt Sustainability … | Risk Flags | Baseline Breaches (number of debt indicators) | Shock Breaches (number of debt indicators) | | --- | --- | --- | | Low | 0 | 0 | | Moderate | 0 | 1+ | | High | 1+ | 1+ | 􀂉 Separate overall and external mechanical risk signals • External risk signal (primary DSF output) determined by examining any breaches of four external debt burden indicators over 10-year timeframe • Overall risk signal (supplementary inform

FAQs

What is the LIC-DSF and what is it used for?

The LIC-DSF is an analytical tool for assessing debt vulnerabilities, jointly developed by the IMF and World Bank and periodically updated. It guides borrowing and lending decisions for countries eligible for concessional financing, producing assessments of debt distress risk and sustainability.

How are countries grouped under the framework?

Countries are classified into Weak, Medium, and Strong groups based on a composite indicator of debt-carrying capacity. The composite indicator is calculated twice a year using data including the CPIA and other economic fundamentals, external buffers, and exposure to global conditions.

How do mechanical risk signals and judgment work together?

Mechanical risk signals compare five debt burden indicators to DCC-specific thresholds using baseline and shock scenarios over a defined horizon. Judgment then incorporates country-specific considerations not fully captured by models, using guidance principles, to determine overall debt sustainability.

Jul 19, 2026

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