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Debt Sustainability AnalysisIntroductionLast Updated: March 15, 2012

A new LIC DSF template, recently posted, offers new features: the

inclusion of the external and fiscal DSAs in one template and the

poss ibility to select another foreign language (French, Spanish, and

Portuguese).

The IMF's advice on macroeconomic policiesboth in the

context of IMF-supported programs and surveillanceisanchored in the analysis of a country's capacity to finance itspolicy objectives and service the ensuing debt without

unduly large adjustments, which could otherwisecompromise its stability. To this end, the IMF has developeda formal framework for conducting public and external debt

sustainability analyses (DSAs) as tool to better detect,prevent, and resolve potential crises. This framework becameoperational in 2002.

The objective of the framework is threefold:

Assess the current debt situation, its maturitystructure, whether it has fixed or floating rates,

whether it is indexed, and by whom it is held;Identify vulnerabilities in the debt structure or thepolicy framework far enough in advance so that policy

corrections can be introduced before paymentdifficulties arise;In cases where such difficulties have emerged, or are

about to emerge, examine the impact of alternativedebt-stabilizing policy paths.

The framework consists of two complementary components:the analysis of the sustainability of total public debt and that

of total external debt. Each component includes a baselinescenario, based on a set of macroeconomic projections thatarticulate the government's intended policies, with the main

assumptions and parameters clearly laid out; and a series of

sensitivity tests applied to the baseline scenario, providing aprobabilistic upper bound for the debt dynamics under

various assumptions regarding policy variables,macroeconomic developments, and financing costs. Thepaths of debt indicators under the baseline scenario and the

stress tests allow to assess the vulnerability of the countryto a payments crisis.

DSAs should however not be interpreted in a mechanistic orrigid fashion. Their results must be assessed against

relevant country-specific circumstances, including theparticular features of a given country's debt as well as its

policy track record and its policy space. Thus, two types offrameworks have been designed: those for market-access

countries and those tailored for low-income countries. Inboth cases, the frameworks have been regularly refined witha view toamong other elementsbringing a greater

discipline to the analysis and responding to the changing

http://www.imf.org/http://www.imf.org/http://www.imf.org/http://www.imf.org/http://www.imf.org/external/pubs/ft/dsa/lic.aspxhttp://www.imf.org/external/pubs/ft/dsa/mac.htmhttp://www.imf.org/external/pubs/ft/dsa/templ/dsatemp.xls

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economc an nanc a env ronmen .

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