IMF Announces Major Changes to Debt Assessment for Low-Income Countries

The International Monetary Fund (IMF) and World Bank have approved major reforms to the framework used to assess debt sustainability in low-income countries, with the new system expected to become operational in the second half of 2027.

According to a statement dated September 21, the reforms follow a review of the joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF), which was last comprehensively reviewed in 2017.

It was later reviewed by the IMF Executive Board on September 9, 2026 and the World Bank Board approved the proposed reforms on September 15.

The framework is used to analyse public debt risks in countries eligible for concessional financing from the IMF or World Bank and helps inform policy advice, lending decisions and public debt management.

IMF, World Bank to Change How Debt Risks Are Assessed

According to the organization, the review comes amid changes in the debt environment facing low-income countries.

The IMF said debt levels have increased in many low-income countries since the previous review, while financing sources have become more diverse, with domestic borrowing and external borrowing on commercial terms playing an increasingly important role.

Additionally, the institutions said the existing framework has continued to perform well in identifying debt distress episodes and remains fit for purpose, but identified areas where it could be strengthened to reflect the evolving debt landscape.

The proposed reforms will focus on improving the assessment of debt risks while taking into account the different economic circumstances facing individual countries.

IMF noted that one of the key changes will be a more systematic assessment of domestic debt vulnerabilities.

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It will broaden the analysis of debt risks to include domestic borrowing more comprehensively, as low-income countries increasingly rely on domestic sources of financing.

The IMF and World Bank will also refine how countries’ debt-carrying capacity is measured and recalibrate the thresholds used to identify debt stress.

This aims to better distinguish between countries facing elevated debt stress and those whose debt is assessed as unsustainable.

New Debt Model to Strengthen Risk Assessment

IMF further highlighted that the reforms will introduce a new debt sustainability model and mechanical risk signal, alongside additional supporting indicators and more country-specific assessments.

The institutions will also strengthen the tools used to test the resilience of countries’ debt positions under different economic conditions.

These changes are expected to improve the consistency and accuracy of debt sustainability assessments while allowing greater consideration of country-specific circumstances.

Additionally, the revised framework will take into account the long-term development and climate-related needs of low-income countries.

The IMF said the new approach will allow countries to better assess how much fiscal space may be available to support necessary development and climate adaptation investments while maintaining sustainable debt levels.

According to the notice, the reforms will also broaden the assessment of public-sector debt risks by giving greater attention to liabilities linked to state-owned enterprises (SOEs).

The institutions said the revised framework will refine and streamline the criteria used to determine which liabilities are covered in debt sustainability analyses in order to provide a more comprehensive assessment of public debt risks.

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New Tools to Improve Debt Risk Assessments

IMF noted that the framework will also place greater emphasis on the quality and reliability of public debt data.

The IMF and World Bank plan to further develop realism tools and stress tests used to assess the consistency and accuracy of economic forecasts.

Therefore, the reforms will also encourage countries to improve the quality, breadth, transparency and reliability of public debt data used in debt sustainability analyses.

As part of the review, the IMF and World Bank also considered the harmonised discount rate used in applying the LIC-DSF and the IMF Debt Limits Policy, as the discount rate will remain unchanged at five percent.

Meanwhile, before implementation, the IMF and World Bank will finalise operational guidance on how the new framework will be applied and conduct training for country teams and government authorities.

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The World Bank building. PHOTO/World Bank