The International Monetary Fund (IMF) and the World Bank are strengthening the framework used to assess debt sustainability in low-income countries as governments increasingly rely on domestic borrowing amid higher financing costs and reduced access to external funding.
The IMF Executive Board reviewed the joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF) on September 9, 2026, approving a series of reforms aimed at providing a broader assessment of debt risks.
The revised framework will place greater attention on domestic debt vulnerabilities, overall public debt and the quality and reliability of government debt data. (IMF)
The changes come as debt conditions in low-income countries have become more complex since the framework was last reviewed in 2017. Debt levels have increased in many countries, while governments have also diversified their sources of financing, including greater reliance on domestic markets and commercial external borrowing.
Domestic borrowing has become particularly important since the COVID-19 pandemic. Higher debt-servicing costs and reduced access to external financing have pushed governments towards local markets, creating additional risks that may not be fully captured under the existing framework.
Under the revised system, the IMF and World Bank will introduce a new domestic debt risk module alongside thresholds for assessing overall public debt stress. The changes are designed to provide a more comprehensive picture of vulnerabilities in countries where domestic debt represents an increasing share of government financing.
The institutions will also revise how countries’ debt-carrying capacity is measured and adjust the thresholds used to identify debt stress.
The revised framework will make a clearer distinction between countries experiencing some degree of debt stress and those whose debt is considered unsustainable.
It will also introduce a new debt sustainability model and a mechanical risk signal, supported by additional debt sustainability indicators. However, country-specific judgment will remain part of the final assessment to account for differences among individual low-income economies. (IMF)
Another major addition is a long-term module designed to assess how development and climate-adaptation investments could affect countries’ debt positions.
The module is intended to help policymakers determine how much fiscal space can be used for development and climate-related investments while keeping debt vulnerabilities under control over the longer term.
The reforms will also strengthen the realism tools and stress tests used to evaluate the accuracy of economic forecasts. The IMF and World Bank will refine the criteria used to determine which liabilities are included in debt assessments and encourage governments to improve the quality, coverage, transparency and reliability of public debt data.
Particular attention will be paid to liabilities linked to state-owned enterprises, which can create additional risks when they are not fully reflected in official debt figures.
The revised framework will introduce a confidence flag for debt data and baseline adjustments designed to address gaps in debt reporting and encourage stronger debt-data management. (IMF)
The IMF said the existing framework remains “fit-for-purpose” and has continued to identify debt risks ahead of time, but acknowledged that changes in borrowing patterns and the growing complexity of debt vulnerabilities require the framework to evolve.
The new framework will also change some of the terminology used in debt assessments. Under the revised system, “debt stress” will be distinguished more clearly from “unsustainable debt”. References to “debt distress” in IMF policies will generally be understood as referring to “debt stress”, except when used in the phrase “in debt distress”. (IMF)
The IMF Board has also temporarily restricted the publication of probability thresholds used to generate certain mechanical risk signals for unsustainable public debt. The restriction is intended to give the institutions time to gain experience with the new methodology and determine how best to communicate its results.
The harmonised discount rate used under the framework and the IMF Debt Limits Policy will remain unchanged at 5 percent.
The revised framework is expected to become operational for country documents submitted to the IMF Executive Board after the 2027 summer recess. Until then, the existing framework will continue to be used while the IMF and World Bank finalise operational guidance, update their debt sustainability analysis template and train country teams and government authorities on the new methodology. (IMF)
The changes come as low-income countries face a combination of higher borrowing costs, reduced access to external financing and greater dependence on domestic markets. The revised framework is intended to give policymakers a more forward-looking assessment of these risks while helping governments balance development financing needs with debt sustainability.
