The World Bank and the International Monetary Fund (IMF) are set to introduce a new framework for assessing the debt situations of low-income countries. The proposed reforms have been approved by the executive boards of both institutions.

The changes come as the global economy faces greater risks than in the past, while debt levels have risen in many countries and the sources of borrowing have changed.

This is the first joint review of the debt assessment framework by the World Bank and IMF since 2017. The review recommended several changes, including a more rigorous analysis of domestic debt in low-income countries and greater consideration of long-term development challenges such as climate change. However, the two institutions said there is no need to overhaul the entire framework.

Under the new framework, a country’s ability to sustain its debt burden will be assessed more accurately. Countries at risk of debt distress will be identified according to their levels of vulnerability, while those with unsustainable debt will be classified separately.

The framework will also strengthen the assessment of debt forecasts through various “stress tests” to determine how countries could withstand economic shocks.

Countries will be required to improve transparency in reporting debt-related information. However, the discount rate used in debt assessments will remain at 5%.

Alison Holland, deputy director of the IMF’s African Department, said the reforms aim to identify debt risks at an early stage. This would enable countries to make better decisions on financing and policymaking.

According to Holland, much of the improvement in debt conditions seen after 2021 has been reversed by recent shocks. She said around 14% of low-income countries are currently in debt distress, while another 33% face a high risk of debt distress. Around 23% of emerging markets are also at high risk in terms of public debt.

New Framework to Take Effect in Second Half of 2027

The new debt assessment framework is expected to take effect in the second half of 2027. It will allow for a more accurate assessment of long-term debt risks and help determine how much countries can invest in development and climate adaptation.

The current debt assessment framework was introduced in 2005. A review completed in July found that the existing system has been effective in identifying debt distress risks at an early stage.

However, the review also identified several limitations. Debt levels have increased in many low-income countries, while the sources of borrowing have changed. These countries are now borrowing more from both domestic and external sources, with some loans being obtained on commercial terms.

The IMF said short- and medium-term economic forecasts are generally reliable, but long-term projections for exports and government revenue have tended to be somewhat optimistic. There are also gaps in debt and financial information related to state-owned enterprises.

The new framework will include a separate module for assessing long-term risks and will provide more detailed measurements of debt vulnerabilities. However, the model that will determine when a country’s debt is considered unsustainable will not be released immediately. The decision is intended to give countries time to adapt to the new approach.