The 2017 Version of the IMF and World Bank's LIC Debt Sustainability Framework: 'Significant Overhaul' or Obsolete?

Abstract

Public debt sustainability problems are widespread in Sub-Saharan Africa just 10 years after the Heavily Indebted Poor Countries-Multilateral Debt Relief Initiative (HIPC-MDRI) debt write-off. At the same time, public investment needs for the Sustainable Development Goals remain vast. The challenge is to reconcile debt sustainability and development in an environment of dwindling aid, worsening debt sustainability and a weak foundation for long run growth. Although billed a significant overhaul, the 2017 version of the Low-Income Country Debt Sustainability Framework (LIC DSF) is obsolete because it retains an antiquated focus on distress linked to the public and publicly guaranteed portion of external debt. A fundamental rethink rests on two planks. The first plank is a simplified DSF focusing on public debt, which recognizes that the marginal cost of government borrowing even among African Low-Income Countries, is now determined by the market, complemented by an assessment of international liquidity. The second plank is an acceptance by the IMF, the World Bank, the African Development Bank and donor community at large that the present system of aid allocation and policy dialogue is not delivering adequately, and needs to be reformulated. The paper discusses these topics and proposes a way forward, illustrated by Ethiopia.