risks related to the high level of public debt have always been one of the
major concerns for most promising countries all over the world. Its negative
effects on economic activity of country prove the significance of debt
sustainability. Historical confirmation shows that promising countries are more
subject to immediate adverse consequences of high debt level, consequential
debt crisis and extended periods of economic recovery. Thereby, it is remarkably
imperative to measure the degree of debt sustainability for every developing
country. By doing so, countries can prevent debt crisis in the future and
therefore, provide stable development process by creating constructive
investment ambiance. Thus, considered issue is highly vital and requires cautious
examination. Debt sustainability is an essential aspect of good macroeconomic policies,
but its precise definition is hard to pin down and its assessment is
challenging. Nonetheless, the Debt Sustainability Framework (DSF) is a
standardized framework for conducting debt sustainability analysis (DSA) in
low-income countries (LICs) jointly developed by the International Monetary
Fund (IMF) and World Bank in 2005.

Literature Review:

Most of the preceding
literatures relate the peripheral debt sustainability position with country’s ability
to meet the current and future external obligations without running into
arrears and eventually to a radical shift in balance of payment (Arnone et al.,
2005; Akyuz, 2007; Wyplosz, 2007). IMF (2002) also defines the debt
sustainability as a situation in which a borrower is expected to be able to
continue servicing its debt without an impractical large future correction to
the balance of income and expenditure. Meanwhile under the Heavily Indebtedness
Poor Countries (HIPC) initiatives, a country could be defined in a sustainable
external debt position, if a country can meet its current and future external
debt service obligations in full, without recourse to debt relief, rescheduling
of debts, or the accumulation of arrears and without compromising growth (IMF,
1997). Furthermore, Shymanovich and Kirchner (2011) define the debt
sustainability from creditor’s point of view which measured by the ability and
the willingness of the country to service its liabilities, which implies that
the costs of servicing the debt are lower than the cost of bankruptcy. Several
studies conducted by the IMF, World Bank and independent researcher to
establish method for measuring country debt sustainability position. The past
three decades have witnessed the evolution of literature on external debt- growth
related studies. IMF has initiated study on the debt sustainability position
for the low income countries that receive the HIPC initiative. The debt
sustainability analysis is dominated by two streams of approaches namely financial
sustainability and economics sustainability approach (Arnone et al., 2005). The
debt sustainability assessment is based on stress tests from sets of indicator
with reference to a baseline scenario. The debt sustainability assessment
framework largely consists of accounting identities, with few economics
relationship and hence the projections are generated by an underlying economic
structure (Hostland and Karam, 2005). Furthermore, the financial sustainability
analysis is based on estimating and comparing indicator with adopted

In addition, liquidity,
solvency and willingness to pay are the main approach in analyzing country
external debt sustainability position from financial sustainability point of
view (Arnone, 2005; Onel and Utkulu, 2006). However, it is difficult to
correctly predict the level of debt in relation to future growth, revenues,
exports and other economic indicator from the financial sustainability
approach. Thus suggest the solvency approach in analyzing country debt
sustainability position. Unit root and co-integration test provided useful
tools in gaining insight into the long-run implications of a government or a
nation’s inter temporal solvency.


As an exercise in
inter-temporal accounting, assessing debt sustainability is no doubt a overwhelming
task. The economic environment that affects the evolution of debt ratios is
highly variable and uncertain; no government can make a credible commitment for
the foreseeable future to adhere to a particular policy stance. A constant and
even a falling debt ratio may be unsustainable over the longer-term if the
domestic and external environment evolves unfavorably and the government is
unable to respond to changed circumstances by squeezing out the surplus needed.
The level of debt that should be considered as sustainable also varies
considerably across countries as there is no single “safe” debt ratio that
could apply to all. First, the amounts of primary budget and/or current account
surplus needed to stabilize debt can be different in different countries with
similar degrees of indebtedness depending on the terms and conditions of their
debt stocks and potential growth rates. Second, countries differ in their
ability to generate budget and/or trade surpluses needed, depending not only
economic factors such as their tax and export bases, but also socio-economic
characteristics. The standard framework can only tell us how much surplus is
needed to stabilize the debt ratio for given values of its determinants, but
not whether a particular debt profile can be sustained over time. It says nothing
about dynamic interactions among the key variables that determine the evolution
of debt ratios, and treats fiscal and external sustainability independently
without specifying the interactions between the two. The World Bank and
International Monetary Fund work together to support the efforts of low income countries
to achieve their development goals without creating future debt problems. This
work is structured through the Debt Sustainability Framework (DSF), and experts
use a tool called Debt Sustainability Analysis (DSA) to assess individual
countries. One specific goal of this line of work is to ensure that countries
that have received debt relief are on a sustainable development track. It also
allows creditors to better anticipate future risks and tailor their financing
terms accordingly. Finally, it helps clients balance their needs for funds with
the ability to repay their debts. To assess whether countries’ current
borrowing strategy may lead to future debt-servicing difficulties, World Bank
debt experts, in close collaboration with the IMF, conduct annual, structured
analyses called Debt Sustainability Analyses (DSA). As a result of this
analysis, a country is classified according to its risk of debt distress. This classification
is used to determine the share of grants and loans in IDA’s assistance to the country.

To this end, the IMF
has developed a formal framework for conducting public and external debt
sustainability analyses (DSAs) as tool to better detect, prevent, and resolve
potential crises. This framework became operational in 2002.

The objective of the framework is

v  Assess
the current debt situation, its maturity structure, whether it has fixed or
floating rates, whether it is indexed, and by whom it is held;

v  Identify
vulnerabilities in the debt structure or the policy framework far enough in advance
so that policy corrections can be introduced before payment difficulties arise;

v  In
cases where such difficulties have emerged, or are about to emerge, examine the
impact of alternative debt-stabilizing policy paths.





Main features of current Debt
Sustainability Analysis:

Ø  Analytical

Ø  Type
of debt

Ø  Scaling
factors (present value and discount rate)

Ø  Macroeconomic

Ø  Baseline
and stress tests

Ø  CPIA-based
debt thresholds

Ø  Risk

Strengths of current Debt
Sustainability Analysis:

Æ  A
source of cross country information- uniformity of the analyses in the current
DSA allows comparisons across countries and over time.

Æ  Transparency

Æ  Broadly
satisfactory track record

Æ  Regular
review process

Weaknesses of current Debt
Sustainability Analysis:

ª  Neglects
the human development aspect of debt sustainability

ª  CPIA-determined
debt burden thresholds are misleading

ª  Underplays
the growth/development dividends from debt-financed investments

ª  Stress
tests are too mechanistic and standardized

ª  Missing
analysis of dynamics among components of total debt in the DSAs

ª  Net
present value and discount rates

ª  Conflict
of interests

ª  Creditor
co-responsibility and responsible lending



u Human
development approach to debt sustainability- Broader definition of debt sustainability
that prioritizes spending on human development priorities over servicingin
order to determine the affordable level of debt.

u Debt-stabilizing-primary
balance approach to debt sustainability- Approach to debt sustainability which
asks what should happen to the primary balance to achieve a desirable debt
path, given assumptions about the evolution of the interest rate and growth

u Alternative
debt burden thresholds- Structural vulnerabilities and quality of institutions affect
a country’s risk of debt distress and should thus be taken into account when determining
debt burden thresholds.

u Modeling
the links between public investment and economic growth- Development of internally
consistent quantitative macroeconomic framework that captures the growth enhancing
effects of borrowing.

u Country
specific discount rates- Use other discount rates to understand the relative
cost of debt burden at least as a comparator.

u Minimizing
conflict of interests- Alternative institutional set-up so that the major
lender is not also primarily responsible for providing analysis and advice
through the DSA.

u Ensuring
responsible creditor behavior- DSAs should provide more information on where
loans are from, on what terms and for what projects in order to make creditors more
accountable for lending decisions.



The appropriate system
of debt sustainability assessment can serve as an important tool of efficient
public debt management and building financing strategy, aligned to economic
growth of a country. Most of the approaches have both advantages and
disadvantages and it is impossible to emphasize a single framework as being the
most accurate. Consequently, it is necessary for countries to use several
approaches to achieve exact evaluation, though there is always a trade-off
between simplicity and precision. Though an assessment of debt sustainability
is challenging. This can be attributed to the lack of a precise definition of
debt sustainability as well as the fact that operationalizing any definition of
debt sustainability will require making guesses about the future evolution of
several key macroeconomic variables such as interest rates, growth and primary



Akyüz, Y. (November 2007). Debt
Sustainability in Emerging Markets: A Critical Appraisal.

DESA Working Paper No. 61.

Benno Ferrarini, R. J. (2012). Public
Debt Sustainability in Developing Asia. ADB, Routledge.

Debt Sustainability. (2014, October 9).
Retrieved from The World Bank:

Debt Sustainability Analysis. (2013,
November 11). Retrieved from International Monetary


Mustapha, S. (August 2014). What does
the latest literature say on the on the strengths and

weaknesses of the IMF’s Debt
Sustainability Analysis? Economic and Private Sector


Nazim Belhocine, S. D. (May 2013 ). The
Impact of Debt Sustainability and the Level of Debt

on Emerging Markets Spreads. IMF Working
Paper .

The Anatomy Of External Debt Position
Economics Essay. (2015, March 23). Retrieved from



Wyplosz, C. (December 2005). Debt
Sustainability Assessment: The IMF approach and

HEI Working Paper No: 03/2007.

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