The World Bank and International Monetary Fund have approved a significant overhaul of the framework used to assess whether low-income countries can sustainably manage their debt, as developing economies face increasingly complicated borrowing pressures.
The changes represent the first major review of the joint Debt Sustainability Framework for Low-Income Countries since 2017.
The World Bank’s board approved the proposed reforms on September 15, while the institutions announced on Monday that both executive boards had now backed the changes.
The revised framework is expected to become operational during the second half of 2027, allowing time to develop implementation guidance and train officials who will use it.
Domestic Debt Gets Greater Attention
One of the most important changes is a stronger focus on domestic borrowing.
Low-income countries have increasingly raised money within their own economies rather than relying exclusively on external creditors.
That can create additional vulnerabilities, particularly when domestic banks hold substantial amounts of government debt.
The new framework will introduce a dedicated domestic-debt module designed to assess those risks more systematically, including links between sovereign finances and the banking system.
That issue has become increasingly important as governments facing limited access to international markets turn towards domestic banks, pension funds and other local investors for financing.
Climate and Development Investment Added
The framework will also broaden its analysis of longer-term development requirements.
A new module will examine investments in areas including infrastructure, human capital and climate adaptation, while considering their implications for economic growth and government finances.
This addresses a longstanding tension in debt policy.
Developing countries often need significant investment to increase growth and improve resilience, but additional borrowing can also increase debt vulnerabilities.
A framework focused only on reducing borrowing could therefore discourage investments that might improve long-term economic capacity.
The reforms are intended to provide a more structured method for examining that trade-off.
Debt Risk Assessments to Become More Detailed
The World Bank and IMF also intend to distinguish more clearly between countries experiencing debt stress and those whose debts are fundamentally unsustainable.
Stress-testing and forecasting tools will be updated, while countries will face greater incentives to improve the transparency and completeness of their debt data.
The reforms arrive at a difficult time for emerging and developing economies.
Higher global interest rates and elevated government bond yields have made refinancing more expensive, while many countries continue to carry debt accumulated during earlier economic shocks.
IMF Managing Director Kristalina Georgieva recently warned that higher borrowing costs in advanced economies could undermine progress made by developing countries in restoring debt sustainability.
The new framework will not eliminate those pressures or automatically reduce countries’ debt burdens.
Its purpose is to change how the World Bank and IMF evaluate the risks, particularly as domestic borrowing and long-term development requirements become increasingly important components of government finances.
For low-income economies, that could influence future borrowing decisions, IMF programmes and discussions with creditors when countries experience financial distress.
