Navigating Debt Sustainability: An In-Depth Analysis of the IMF's Debt Sustainability Framework and its Critique

Abstract

This paper evaluates the IMF’s debt sustainability analyses (DSAs), delving into their methodologies and implications and highlighting their problems. Since 2002, the DSAs have been the cornerstone of the IMF programs, providing the primary analytical tool to justify and determine the paths and targets specified. Although the DSAs evolved significantly over time, they have severe foundational problems. They rely heavily on strong assumptions and staff judgments, and thereby, they are primarily non-transparent. Secondly, there are significant issues regarding the conduct of DSAs. They have grown excessively complex, hindering consensus on components without necessarily improving assessment quality. Thirdly, the IMF makes very high-stakes decisions with low precision, relying on persistent over-optimism in growth forecasting and paving the way for tighter fiscal policies. Fourthly, the debt dynamics equation of DSAs is inconsistent with stock flow dynamics because it focuses heavily on the primary balance as the main driver. Fifthly, the IMF’s framework does not pay enough attention to the underlying reasons for accumulating external debt in developing nations. It often treats external borrowing as a substitute for domestic debt without accounting for the asymmetric international financial architecture.