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Should the failure of the low-income country debt sustainability framework be blamed for the ongoing sovereign debt crisis?

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Should the failure of the low-income country debt sustainability framework be blamed for the ongoing sovereign debt crisis?

Sovereign debt has historically played a crucial role in providing emergency and development finance for budget support[1], monetary policy management, foreign reserves accumulation, and loan refinancing. However, debt accumulation often comes under scrutiny when low-income countries (LICs) experience widespread debt crises, such as the 1999 crisis that led to the Heavily Indebted Poor Countries (HIPC) Initiative. Experts argue that while debt itself is not inherently bad, its sustainability, transparency and responsible management are what matter.

Development of the LIC-DSF: An effort to provide a new solution to an old problem?

The Low-Income Country Debt Sustainability Framework  (LIC-DSF) was introduced in 2005 to assess debt sustainability, set non-concessional borrowing limits and guide aid allocation. A review in 2017 aimed to enhance its relevance in the evolving global financial landscape, yet its core focus on public and publicly guaranteed (PPG) external debt remained unchanged.

As a result, the LIC-DSF has faced mounting criticism for its inability to prevent debt distress and major sovereign debt crises. Today, with 21 African countries either in or at high risk of debt distress, the effectiveness of the LIC-DSF is once again under scrutiny.

Has the LIC-DSF helped to prevent major debt crises?

Numerous experts, including Brian Pinto (2018) and Indermit Gill (2024), have argued that the LIC-DSF has become obsolete and ineffective in preventing sovereign debt crises. Despite multiple reviews intended to enhance its relevance, the number of LICs at risk of debt distress has remained persistently high.

While external factors such as the Global Financial Crisis (2007–2008), the COVID-19 pandemic (2019–2023), and the ongoing Russia-Ukraine war (2022–present) have undoubtedly exacerbated debt vulnerabilities, the framework’s shortcomings are evident.

As seen in Figure 1, since 2013, the number of LICs in or at high risk of debt distress has been steadily increasing, despite comprehensive reviews of the LIC-DSF in 2012 and 2017.

Why has the LIC-DSF failed?

The IMF asserts that Debt Sustainability Assessments (DSAs) should not be interpreted rigidly but should consider country-specific circumstances. However, this contradicts the LIC-DSF’s mechanistic nature, as it relies on static debt burden thresholds and benchmarks. Expecting dynamic analysis from a static framework is unrealistic.

Furthermore, the IMF plays a central role in setting macroeconomic parameters for countries in its programs and advising governments on external debt management through its Article IV consultations. This means the IMF is well aware of the unique circumstances these countries face. However, the LIC-DSF fails to adequately capture these realities, leading to repeated underestimation of debt sustainability risks – as seen when it failed to foresee the severity of the COVID-19-induced recession.

Most of the weaknesses of the LIC-DSF are well summarized in the sharp critique by Brian Pinto (2018). These include the LIC-DSF’s:

1. Obsolete focus on PPG external debt – The unsatisfactory incorporation of total public debt by simply grafting domestic debt onto the present value of external public debt introduces inaccuracies associated with the choice of discount factor and confuses the symptoms with the malady.

2. Failure to integrate market signals – Designed for an era dominated by concessional financing, the framework has not adapted to the growing role of non-concessional debt. Of the total sources of sovereign debt, private lenders (including bondholders) have increased their share from 9% in 2000 to 25% at the start of 2023. Within the same period, Paris Club lenders reduced their share from 39% to 10%.

3. Lack of alignment with the Sustainable Development Goals (SDG’s) – The LIC-DSF does not reconcile debt sustainability with long-term development objectives.

4. Inadequate early warning indicators – The framework has failed to provide timely alerts of impending debt crises.

Is the LIC-DSF solely to blame?

These stark weaknesses beg the question: should the ongoing sovereign debt crisis be solely attributed to the failure of the LIC-DSF?  Certainly not. Sovereign debt distress is a function of numerous factors including a country’s legislative framework and oversight, governance systems, domestic resource mobilization capacity, efficiency of spending, credibility of domestic macroeconomic policies, availability of concessional finance, and exposure to global economic shocks e.g. commodity price shocks, to mention a few.

One may also ask: could a dynamic, responsive and representative DSF have helped to prevent the current crisis? The answer to that question is indeterminate. What is certain, however, is that the current LIC-DSF was completely ineffective in providing early warning of a pending crisis since the insights it provided were not much better than what the simple Debt-to-GDP ratio showed.

In conclusion, the current LIC-DSF should be completely discarded and replaced with a new, dynamic, realistic and responsive DSF that reflects the times we live in – not symbolic, cosmetic fixes through arbitrary reviews that merely give a false appearance of remedial action being taken. Ultimately, as stated in the UN General Assembly resolution 75/153, individual countries remain responsible for their debt sustainability.

Figure 1: Low Income Countries Debt Sustainability Profile (2007 – 2024) https://www.uneca.org/sites/default/files/keyfigures/Picture1.png

City Corridor Development and The Poor

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City Corridor Development and The Poor

Urban development is often heralded as a sign of progress, with city corridors being transformed into hubs of economic activity, transportation, and infrastructure enhancement. However, while such projects bring modernization, they also pose significant challenges for the urban poor, who are often displaced or marginalized in the process.

City corridors, major roads, transit routes, and commercial arteries—are developed to enhance connectivity and economic vibrancy. Governments and private developers invest in these corridors to attract businesses, improve public transportation, and create urban aesthetics that appeal to investors and tourists. The underlying aim is to foster economic growth, reduce congestion, and improve the overall quality of life for city dwellers.

For example, the development of the Delhi-Mumbai Industrial Corridor in India aims to boost industrial growth and create job opportunities, but it has also led to displacement of local communities. Similarly, the expansion of Nairobi’s Thika Superhighway in Kenya improved transport efficiency but resulted in the loss of homes and businesses for many informal settlers.

One of the biggest concerns associated with city corridor development is the displacement of low-income communities. As real estate values rise due to improved infrastructure, property owners often increase rents, forcing poorer residents and small business owners to relocate. This phenomenon, known as gentrification, results in the loss of affordable housing and diminishes economic opportunities for those who rely on low-cost commercial spaces.

Moreover, slum dwellers and informal settlements along proposed development corridors often face eviction without adequate compensation or resettlement options. In many cases, relocation programs push them to the peripheries of the city, away from their workplaces and support systems, exacerbating their economic struggles. A case in point is the development of Brazil’s São Paulo Rodoanel beltway, where thousands of low-income residents were displaced with minimal compensation, disrupting their livelihoods.

While city corridor projects create jobs during construction and in commercial sectors post-development, these opportunities are not always accessible to the poor. Many of the jobs require technical skills or qualifications that low-income residents may lack. Additionally, the businesses that replace informal economies in redeveloped corridors often cater to middle- and upper-income groups, further marginalizing the poor.

For instance, in Manila, Philippines, the redevelopment of key transport corridors has driven small informal vendors out of business as large commercial enterprises dominate the newly developed spaces. Without access to alternative livelihood opportunities, many displaced individuals struggle to regain financial stability.

Improved corridors often bring better transportation systems, healthcare facilities, and educational institutions. However, if the cost of accessing these services increases, they remain out of reach for low-income groups. The introduction of high-end infrastructure often leads to an increase in the cost of living, making it difficult for the poor to benefit from the very developments meant to enhance urban life.

For example, in Johannesburg, South Africa, the Bus Rapid Transit (BRT) system improved public transport, but the fare hikes made it unaffordable for many low-income workers who relied on informal and cheaper transport options.

To mitigate the negative impacts of city corridor development on the poor, governments and urban planners must adopt inclusive policies: Affordable Housing Initiatives: Implementing rent control measures, increasing the supply of low-cost housing, and ensuring relocation plans include adequate housing provisions.

Inclusive Economic Growth: Encouraging mixed-income developments, providing financial support for small businesses, and ensuring job creation programs are accessible to lower-income groups. Community Participation: Engaging local communities in the planning process to ensure their needs and concerns are addressed before redevelopment begins. Social Safety Nets: Establishing welfare programs and legal frameworks that protect the rights of informal settlers and small business owners.

To conclude, City corridor development is essential for urban progress, but it should not come at the expense of the poor. Inclusive planning and policies can help ensure that modernization efforts benefit all city residents, rather than widening the gap between the wealthy and the underprivileged. Sustainable development should be the goal, where economic growth coexists with social equity and justice.

Who are you?

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Who are you?

The past two weeks we looked into stress, factors that cause stress and some ways of managing stress. We classified stress in constructive stress and destructive stress, realizing that stress does not always act as a negative influence on our lives. Constructive stress in fact acts in a positive way for the individual or organization, while destructive stress or distress is dysfunctional for the individual and the organization. Excessive high levels of stress can overload and break down a person’s physical and mental systems. Performance may suffer and workers experience illness brought on by very intense stress and they may react by being absent from work, making mistakes, causing accidents, dissatisfaction, reduced performance or even unethical behaviour, like cheating. Factors that cause stress can be classified into three categories: work factors, non-work factors and personal factors.

We concluded that if all workers face stress to a certain extend it is important that managers recognise stress as people display certain stress related behaviour. The key thing is to look for changes from normal patterns, like from regular attendance to absenteeism, from punctuality to tardiness, from diligence to carelessness, from a positive attitude to a negative attitude, from openness to resistance or from cooperation to hostility. The role of stress in the work setting is complex, with constructive stress facilitating performance and destructive stress reducing performance and impairing the worker’s health.

It is thus very important for management to find a good fit between the individual, the work environment and the amount of job stress involved. Such a fit stimulates productivity without damaging health.

Having said that, people react and respond differently to stress they are exposed to and some people can endure more stress than others. One orientation towards the differences in personalities in relation to stress, is the Type A and Type B orientation. To get a feel for this orientation, take the following quiz. Circle the number that best characterises you on each of the following pairs of characteristics.

Casual about appointments              1  2  3  4  5  6  7  8                               Never late

Not competitive                                   1  2  3  4  5  6  7  8                               Very competitive

Never feel rushed                                1  2  3  4  5  6  7  8                               Always feel rushed

Take one thing at a time                     1  2  3  4  5  6  7  8                               Try to do many things

Do things slowly                                  1  2  3  4  5  6  7  8                               Do things fast

Express my feelings                            1  2  3  4  5  6  7  8                               Hold in my feelings

Many outside interests                       1  2  3  4  5  6  7  8                               Few outside interests

Now total your points for the seven items in the quiz. Multiply this total by 3 to arrive at a final score. Use this total score to locate your Type A/Type B orientation on the following list.

Final points                          A/B orientation

Below 90                               B

90-99                                     B+

100-105                                 A-

106-119                                 A

120 or more                          A+

Individuals with a Type A orientation are characterized by impatience, desire for achievement and perfectionism. In contrast, those with Type B orientation are characterized as more easy-going and as less competitive in relation to daily events.

Think about your Type A/Type B orientation and its implications, both in terms of your work and non work behaviours and your personal health. Type A people tend to work fast and to be impatient, uncomfortable, irritable, and aggressive. Such tendencies indicate obsessive behaviour, a fairly widespread – but not always helpful – trait amongst managers. Many managers are hard driving, detail-oriented people who have high performance standards and thrive on routine. But when carried to the extreme, this may lead to greater concerns for the details than the results, resistance to change, overzealous control of subordinates and various kinds of interpersonal difficulties, which may even include unacceptable behaviour like threats and physical violence. In contrast, Type B managers tend to be much more laid back and patient in their dealings with co-workers and subordinates. 

Now, who are you? Do you recognise yourself in any of the above-described traits and personality orientations? Key again is to find a balance I guess, whereby the most important question to answer is how our behaviour can be applied to contribute most effectively to the purpose of the organization.

Source: Managing Organizational Behavior – Schermerhorn/Hunt/Osborn

Ton Haverkort

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