The World Bank and International Monetary Fund announced on Monday that their executive boards have approved reforms to their joint framework for assessing the debt of low-income countries. This update aims to better reflect the increasingly complex and riskier financial environment these nations face.
This joint review, the first since 2017, proposed several key changes. These include enhanced analysis of domestic debt and a broader consideration of long-term development challenges, such as climate change. The reforms are designed to improve the evaluation of risks to debt sustainability by refining the measurement of countries’ debt-carrying capacity and introducing new tools for debt sustainability assessment.
Additionally, the World Bank and IMF plan to strengthen the “realism tools” and stress tests used to verify the consistency and accuracy of economic forecasts. They will also encourage countries to increase transparency in debt data reporting.
The debt sustainability framework is a critical tool used by both institutions to evaluate whether a country can safely take on new debt without endangering its ability to repay existing loans. The need for these changes arises from rising debt levels in many low-income countries and a shift toward more domestic and external borrowing on commercial terms.
The updated framework is expected to be implemented in the latter half of 2027. A review completed in July confirmed that the existing framework has been effective in predicting debt distress episodes and aiding countries in making informed borrowing and lending decisions.
However, the review also highlighted areas for improvement to better address emerging challenges amid heightened development needs and a significant reduction in official development assistance.
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