Commentary
About the data
Definitions
Data sources
When is the burden of debt on a country so great that national solvency is threatened? Debt sustainability analysis looks at the future path of the economy and the expected evolution of the country's current obligations to determine when and if debt service problems are likely to arise.
The method typically used involves choosing a time horizon (often 10-20 years) and projecting the change in the main macroeconomic variables to that horizon. These projections, together with estimates of future inflows of private and official capital, are then used to construct the balance of payments accounts and the estimated financing requirement for the country. This requires much explicit or implicit economic modeling based on assumptions about the indebted country's future economic policy.
For external debt to be judged sustainable, the projected scenario must satisfy two conditions. First, during the projection period balance of payments equilibrium must be achieved without resorting to exceptional financing (such as debt restructuring or emergency borrowing from official sources). Second, indebtedness at the end of the period must be low enough to make future debt service problems unlikely. The second condition is typically evaluated by computing indebtedness indicators such as the ratio of debt to GDP or of debt service to exports (possibly on a present value basis) for the last years of the projection period.
There are no absolute rules on what values are too high for these ratios. But empirical analysis of the experience of developing countries and their debt service performance has shown that debt service difficulties become increasingly likely when the ratio of the present value of debt to exports reaches 200–250 percent and the debt service ratio exceeds 20–25 percent. What constitutes a sustainable debt burden nevertheless varies from one country to another. Countries with fast-growing economies and exports are likely to be able to sustain higher debt levels than countries with inefficient tax systems, distorted prices, and high current expenditure rates.
Data on debt are in U.S. dollars converted at official exchange rates. The data include private nonguaranteed debt reported by more than 30 developing countries and complete or partial estimates for an additional 30 that do not report this type of debt but for which it is known to be significant. Government debt denominated in local currency is not reported here because data availability is poor.
The present value of external debt provides a measure of current and future debt obligations that can be compared with the current value of such indicators as GNP and exports of goods and services. It is calculated by discounting the debt service (interest plus amortization) due on long-term external debt over the life of existing loans. Short-term debt (debt with a maturity of one year or less) is included at its face value. The discount rate applied to long-term debt is determined by the currency of repayment of the loan and is based on the OECD's commercial interest reference rates. IBRD loans and IDA credits are discounted using the latest IBRD lending rates, and obligations to the IMF are discounted at the SDR lending rate. When the discount rate is greater than the interest rate of the loan, the present value is less than the nominal sum of future debt service.
Data on the present value of debt and debt service are from the World Bank's Debtor Reporting System. The ratios shown here may differ from those published elsewhere, however, because estimates of exports of goods and services and gross national product have been revised to incorporate data available as of February 1, 1997.
Definitions
• Present value of debt is the sum of short-term external debt plus the discounted sum of total debt service payments due on public, publicly guaranteed, and private nonguaranteed long-term external debt over the life of existing loans.
• Total debt service is the sum of principal repayments and interest paid in foreign currency, goods, or services on long-term debt and interest payments only on short-term debt.
• Public and publicly guaranteed debt service is the sum of principal repayments and interest paid on long-term obligations of public debtors.
The principal sources of information on external debt are reports to the World Bank through its Debtor Reporting System from member countries that have received IBRD loans or IDA credits. Additional information has been drawn from the files of the World Bank and the International Monetary Fund. Summary tables of the external debt of developing countries are published annually in the World Bank's Global Development Finance (formerly World Debt Tables).