Evolution of Debt Sustainability Analysis in Low-Income Countries: Some Aggregate Evidence

Abstract

The Debt Sustainability Analysis (DSA) for low-income countries (LICs) is a standardized analytical tool to monitor debt sustainability. This paper uses DSAs from three periods around the time of the global economic crisis to analyze the projected trajectories of debt ratios for a sample of LICs. The aggregate data suggest that LIC vulnerabilities improved on the whole during the period prior to the crisis, and that the crisis had a strong short-run impact on key ratios of debt (debt-to-GDP, -exports, and -fiscal revenues) and debt service (debt service-to-exports, and -revenues). Although projected debt burdens increased following the crisis, debt indicators tend to return to their pre-crisis levels over the projection horizon. This may reflect a strong and durable policy response by LICs towards the crisis, or also reflect specific assumptions on the long-run growth dividends of public external debt.

Debt Sustainability Analyses for Low-Income Countries: An Assessment of Projection Performance

“…We also find evidence of faster projected improvements in debt dynamics for DSA vintages produced during 2010/2011 compared to those produced during 2007/2008and 2009/2010. This is in line with findings from Baduel and Price (2012), but based on a broader sample of DSAs that includes newer vintages. 14…”

“…Conversely, DSA projections for a few groups displayed pessimism, particularly those classified as being 'in debt distress' and at 'high risk' of distress (ranked between 18 th and 23 d ), and those defined as fragile states (ranked 20 th and 19 th ). 14 Baduel and Price (2012) found increasing optimism ex ante for unrealized projections, while we find optimism ex post via an assessment of errors. Note that sample sizes and compositions upon which results are based differ across the two papers.…”

“…We are aware of only one published paper that has undertaken a detailed analysis of IMF-World Bank LIC DSAs over multiple vintages-i.e., Baduel and Price (2012): "Evolution of Debt Sustainability Analysis in Low-Income Countries: Some Aggregate Evidence". The paper used LIC DSAs available through 2011 to analyze the evolution of debt projections, including before and after the global financial crisis beginning in 2008-09.…”

“…While Baduel and Price (2012) did not formally attempt to analyze the factors driving this increase in post-crisis optimism in DSA projections, they did put forward a few preliminary hypotheses, including:…”

Is Bangladesh Rolling towards Debt Stress? An Exploration of Debt Sustainability in the Context of Recent External Financial Flows

“…Islam (2007) stressed that public debt was sustainable in Bangladesh from fiscal year 1 FY1981–FY2006 due to attaining an improving primary deficit and having economic growth higher than the real interest rate. Moreover, Baduel and Price (2012) stated that external debt burden was low in low-income countries, such as Bolivia, Cameroon and Tanzania, favourably as the economic growth rates of those countries were higher than the real interest rates on debt.…”