IMF introduces new framework for debt sustainability 

• SRDSF to analyse risk of sovereign debt-related stress and public debt sustainability
• New model replaces its former Debt Sustainability Framework

By Imesh Ranasinghe 

The International Monetary Fund (IMF) has introduced a new Sovereign Risk and Debt Sustainability Framework (SRDSF) for market-access countries, which will analyse the risk of sovereign debt-related stress and public debt sustainability, replacing its former Debt Sustainability Framework. 

Accordingly, the SRDSF introduces improvements in organisation, methodology, transparency, and communication when analysing public debt issues in countries that mainly finance themselves with market-based debt. This encompasses all advanced economies and 

most emerging market economies.

The framework acts as an early warning system gauging debt-related risks, and when risks are detected, the framework can help identify policy recommendations to prevent potential stress from materialising.

When a member is already experiencing debt-related stresses that lead to a request for a IMF-supported programme, the SRDSF helps assess public debt sustainability, a requirement for all IMF lending. Where public debt is found to be unsustainable, the framework provides a methodology for setting targets to guide debt restructurings undertaken in the context of IMF-supported programmes.

Also, the IMF said that a core subset of the framework is applicable to all countries and informs the assessments undertaken at the near- and medium-term horizons. Additional specialised analyses help gauge broader risks at the medium- and long-term horizons. These tools are supported by enhanced debt disclosures, indicators of the public debt profile, and forecast realism tools.

How it applies in cases such as Sri Lanka’s is that when debt is unsustainable and country authorities have decided on debt restructuring, the SRDSF tools should inform the determination of targets for debt relief. Because the medium-term tools link naturally with the sustainability definition, they do not require major modification in order to provide information about the magnitude of required debt relief.

However, it would be generally appropriate to use a longer (10-year) horizon, which is common in restructuring processes. This 10-year baseline should include the costs associated with essential adaptation investments to respond to climate change, which is a convenient starting point to verify that the resulting financing needs after the restructuring are indeed manageable, including under adverse circumstances. 

Subsequently, a post-restructuring debt trajectory can be readily derived from the new debt structure that would attain the Gross Financing Need (GFN – the main tool for assessing liquidity risks at a medium-term horizon) targets. The new debt trajectory would then be analysed through the Debt Fanchart Module (analyses risks arising from the evolution of indebtedness over the medium term) to assure that there is an appropriately high probability of debt stabilisation. 

If this is the case, the debt trajectory can be used to set an additional target for the future debt level (along with the GFNs); otherwise, the debt relief envelope would need to be adjusted accordingly until both the GFN module and the fanchart module signal sustainability. 

Judgment and complementary targets to address specific country vulnerabilities should also inform the targets, when warranted. The targets derived according to the SRDSF are in line with the IMF’s usual role in restructurings to define the needed envelope of debt relief to restore sustainability. However, specific restructuring decisions will remain the responsibility of country authorities, in consultation with their legal and financial advisors.