Debt Sustainability Analysis as if Development Really Mattered

Debt Sustainability Analyses (DSAs) are a crucial tool to assess vulnerability to sovereign debt distress, and in case of debt restructuring, the amount of debt relief needed. However, the DSAs performed by the International Monetary Fund (IMF) have fallen short in several aspects, including the exclusion of climate and development financing commitments. Building on the IMF’s DSA for Low-Income Countries, which is currently under reform, this article devises and performs a reformed global external DSA that identifies the level of external debt developing countries can withstand while mobilizing the necessary finance for development and responding to external shocks. Once external debt for climate and development needs are considered, 46 out of 62 economically vulnerable developing countries would face solvency limits and another 16 would face significant liquidity constraints. This research points to the need to reform DSAs and the need to provide significant debt relief alongside new financing.