World Bank, IMF approve debt framework overhaul for poor countries

The World Bank and International Monetary Fund on Monday approved reforms to their joint framework for evaluating the debt of low-income countries, the first overhaul of the system since 2017, as rising debt levels and shifting financing sources create new risks for developing nations.reuters

Both executive boards signed off on changes that will incorporate better analysis of domestic debt and broaden assessments to account for long-term development challenges, including climate change, according to Reuters. The debt sustainability framework is used to determine whether a country can take on new borrowing without jeopardizing its ability to repay existing loans.reuters

What Changes

The reforms will refine how countries' debt-carrying capacity is measured and introduce new tools to assess sustainability risks. The World Bank and IMF will also enhance the "realism tools" and stress tests used to ensure the consistency and accuracy of economic forecasts, while encouraging countries to improve debt data transparency.marketscreener+1

The changes were prompted by a shift across many low-income countries toward more domestic and commercial borrowing, moving away from traditional concessional lending from official creditors. The revised framework is expected to become operational in the second half of 2027.reuters+1

Growing Debt Pressures

A review completed in July found that the existing framework had performed well in identifying debt distress episodes ahead of time and helping countries make informed borrowing and lending decisions. However, the review also flagged areas where the framework needed updating to account for elevated development needs and what the World Bank described as "a sharp decline in official development assistance".reuters+1

The overhaul comes at a time when many of the world's poorest countries face mounting fiscal pressures from overlapping crises, including the lingering effects of the pandemic, food and energy price shocks, and the growing costs of adapting to climate change. By folding domestic debt dynamics and climate risks into its assessments, the framework aims to provide a more complete picture of fiscal vulnerabilities before they escalate into full-blown crises.