This evaluation is intended to provide input and insight into the upcoming World Bank–International Monetary Fund (IMF) review of the Low-Income Country Debt Sustainability Framework (LIC-DSF) currently planned for fiscal year (FY)23.1 It was requested by the Committee on Development Effectiveness of the Executive Board of the International Development Association (IDA). Consistent with the mandate of the Independent Evaluation Group (IEG) of the World Bank Group, this evaluation will assess only the World Bank’s role in and use of the LIC-DSF. Collaboration with the IMF will be reviewed only to the extent that it informs the World Bank’s role in and use of the LIC-DSF.

Interest is high on this topic given the changing global risk landscape leading up to and after the onset of the COVID-19 pandemic. IDA-eligible countries increased external borrowing in the wake of the 2008 global economic and financial crisis; much of the new borrowing came from non–Paris Club members and from commercial creditors,2 often on nonconcessional terms. Some of this new borrowing has been through complex lending arrangements under opaque terms, including collateralized debt, often reducing budget flexibility through the earmarking of revenues. Debt vulnerabilities increased further with the war on Ukraine, which contributed to a spike in energy and food prices, broader inflation, a tightening in global financial markets, and a global growth slowdown.

Between 2015 and the start of the COVID-19 pandemic, the number of IDA-eligible countries at high risk of or in debt distress more than doubled. More than one-third of IDA countries saw an increase in their debt vulnerability levels, and most of those countries have fallen into high risk of debt distress. Since the start of the COVID-19 pandemic, the number of countries at high risk of or in debt distress has increased further, from 33 in 2019 to 37 in 2021 (figure 1.1). This has been exacerbated by the war on Ukraine, which has contributed to increasing energy, food, and other commodity prices; as well as broader inflation; a tightening of financial conditions and increased volatility in global financial markets; and a global growth slowdown. As a result, many IDA-eligible countries are now facing or expected to face significant debt-related challenges in the near future. At the same time, these countries will need to support economic recovery from COVID-19 and finance investments to support their longer-term development. This will include adaptation to climate change, which will increase the likelihood, severity, and costs of climate-related disasters.

Figure 1.1. Evolution of Debt Distress in International Development Association–Eligible Countries, 2012–21

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Figure 1.1. Evolution of Debt Distress in International Development Association–Eligible Countries, 2012–21

Source: World Bank Debt Sustainability Analysis database.

Note: IDA = International Development Association.

As the main instrument to assess the debt sustainability of IDA-eligible countries, the LIC-DSF is intended to guide the World Bank’s advice and support to these countries. It also provides an important signal to current and potential private sector lenders and investors who are a potentially significant source of financing for development. Because of deteriorating debt sustainability indicators and the forthcoming review of the joint framework, an evaluation of the World Bank’s contribution to and use of the LIC-DSF is both timely and important.

This evaluation assesses the World Bank’s inputs into the LIC-DSF and how it uses LIC-DSF output to inform various corporate and country-level decisions in support of the debt sustainability of IDA-eligible client countries (figure 1.2). In doing so, the evaluation seeks to identify opportunities for the World Bank to strengthen its role in the preparation and use of the LIC-DSF; it also seeks to highlight potentially important issues that may need to be addressed in the upcoming joint review, including the extent to which the LIC-DSF meets the needs of IDA-eligible countries. Although the LIC-DSF is a joint framework elaborated, updated, and implemented by both the World Bank and the IMF, consistent with IEG’s mandate, recommendations from this evaluation focus on aspects of the LIC-DSF that are more clearly within the World Bank’s areas of responsibility.

The scope of the evaluation has been calibrated to focus on inputs into the LIC-DSF that the World Bank is either solely responsible for or has the lead in providing and on how the World Bank uses the consequent outputs. The structure of the LIC-DSF model—which is a joint IMF–World Bank product—and assumptions therein (thresholds, interest rates, and so on) are not assessed. Because official guidance for the LIC-DSF indicates that the IMF generally takes the lead on medium-term projections, these are also not in this evaluation’s scope. As such, this evaluation should be seen as an input to, rather than a substitute for, the scheduled joint evaluation.

Figure 1.2. The World Bank’s Role in and Use of the 2017 LIC-DSF: An Evaluation

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Figure 1.2. The World Bank’s Role in and Use of the 2017 LIC-DSF: An Evaluation

Source: Independent Evaluation Group.

Note: Shaded boxes indicate aspects that are out of scope for this evaluation. ASA = advisory services and analytics; DRS = Debtor Reporting System; DSEP = Debt Sustainability Enhancement Program; IDA = International Development Association; IMF = International Monetary Fund; LIC-DSF = Low-Income Country Debt Sustainability Framework; PBA = performance-based allocation; SDFP = Sustainable Development Finance Policy; SOE = state-owned enterprise.

The guidance indicates that the World Bank leads on long-term growth prospects (and when required, on assessing the investment-growth relationship); therefore, the content and preparation of these projections are in the evaluation’s scope.3Of necessity, long-term projections reflect, among other things, assumptions about the impact of climate change on growth and the investment-growth nexus. Moreover, confidence in the output of LIC-DSF Debt Sustainability Analyses (DSAs) requires an awareness of data quality and debt data coverage. As such, this evaluation will assess the rigor and consistency with which these issues are reflected in country-specific DSAs. In addition, the evaluation focuses on the World Bank’s use of LIC-DSF outputs in corporate decisions, including those pertaining to the Sustainable Development Finance Policy (SDFP) and IDA grant allocation process, to inform country-specific engagement and policy advice with respect to lending, technical assistance, capacity building, and analytical work. Although the evaluation largely focuses on the period after the 2017 reforms were adopted, it includes some comparison with data and analyses before 2017.

The evaluation draws on a broad range of evidence to inform its findings. This includes a review of the most recent DSAs (through June 2022) for all IDA-eligible countries; a balanced panel data set drawn from 52 countries’ DSAs over multiple DSA periods; a survey of World Bank country economists preparing DSAs, to which 67 economists working on 58 countries responded, representing an 87 percent response rate for countries that do Low-Income Country Debt Sustainability Analyses (LIC-DSAs); a survey of IDA clients for which DSAs are prepared; interviews with a range of stakeholders within the World Bank and the IMF; and a set of country cases studies. See appendix A for further details.

The main audience for this evaluation is the IDA Board of Executive Directors and World Bank staff and management. It may also be of interest to governments of IDA-eligible countries; multilateral, bilateral, and (potentially) private sector creditors; and nongovernmental organizations with an interest in the debt sustainability of developing economies.

This evaluation is organized as follows:

• First, the evaluation describes the LIC-DSF, discusses how it has evolved over time, elaborates on the nature of the 2017 reforms, and assesses the extent to which the World Bank has implemented the relevant changes.
• Second, the evaluation examines the World Bank’s role in the preparation of individual country DSAs under the revised (2017) framework to assess the quality and consistency of the inputs for which the World Bank is responsible or has lead responsibility. These inputs include projections of long-term growth and fiscal deficits, and the evaluation assesses the extent to which these projections reflect consistent and credible assumptions about the investment-growth nexus and the impact of climate change. The evaluation also assesses how consistently and clearly the adequacy of data quality and coverage are assessed in DSAs, given their importance to the credibility of DSA findings.
• Third, the evaluation takes stock of how the World Bank makes use of the LIC-DSF in corporate decision-making and, drawing on the case studies, how well DSA findings are used to inform country-level strategies and operational priorities.
• Finally, the evaluation provides findings and recommendations, including to inform the upcoming joint review.