The World Bank and International Monetary Fund announced Monday that their executive boards have approved sweeping reforms to the joint framework used to evaluate the debt of low-income countries, marking the first major overhaul since 2017 and introducing new tools to reflect a more complex and riskier borrowing environment.
The reforms to the Debt Sustainability Framework for Low-Income Countries (LIC-DSF) come as nearly 60 per cent of low-income countries are either at high risk of debt distress or already in distress, with debt ratios in sub-Saharan Africa climbing sharply over the past decade. The changes are expected to become operational in the second half of 2027.
Four Key Areas of Reform
According to the World Bank, the approved reforms introduce significant upgrades in four critical areas.
First, the framework will strengthen the analysis of domestic debt, which has become an increasingly critical source of vulnerability. Public domestic debt in low-income countries has risen from 8 per cent to 17 per cent of GDP over the last decade, with the share of LICs whose domestic debt exceeds external debt doubling between 2014 and 2024. A new domestic debt module will provide a more systematic assessment of risks, including those arising from the sovereign-bank nexus — the dangerous intertwining of government and banking sector health that has reached a decade high across emerging markets and developing economies.
Second, the reforms broaden the analysis of long-term development challenges, including climate adaptation and other development needs. A new long-term development module will help countries assess how much fiscal space may be available to support investments in infrastructure, human capital, and climate adaptation, while providing a more structured basis for considering the longer-term growth and fiscal implications of these investments.
Third, the framework will bring greater rigour to the analysis of risks by better distinguishing debt stress risk from debt unsustainability. This is done by refining the measurement of countries’ debt-carrying capacity, recalibrating and expanding the scope of thresholds, and introducing new tools to assess debt sustainability.
Fourth, the reforms enhance the “realism tools” and stress tests that support the consistency and accuracy of forecasts. They also refine the criteria for debt coverage and incentivise countries to improve debt data transparency — a critical gap, as a World Bank report from March 2026 showed that while the proportion of low-income countries publishing some debt data has grown from below 60 per cent to more than 75 per cent since 2020, only 25 per cent disclose loan-level information on newly contracted debt.
A Changing Debt Landscape
The reforms respond directly to a fundamental transformation in how low-income countries borrow. The 2026 review takes place “amidst elevated debt vulnerabilities, more differentiated financing sources and creditor composition, including increased reliance on domestic and external borrowing on commercial terms,” the World Bank said.
In sub-Saharan Africa, governments are increasingly shifting borrowing away from external debt and toward domestic debt, with the sovereign-bank nexus growing faster than anywhere else in the world. In Kenya, Malawi, Sierra Leone, Uganda, and Zambia, reliance on expensive domestic financing has resulted in significant debt service pressures, with about 40 per cent of new domestic debt placed at short maturities by 2025.
The shift has been accelerated by tighter external conditions and a sharp decline in official development assistance. Net ODA fell by 23.3 per cent in 2025 — its largest drop ever — following an 8.5 per cent reduction in 2024, and is projected to decrease by a further 6.9 per cent in 2026. Bilateral ODA to sub-Saharan Africa and the least developed countries is projected to fall by 11.6 per cent and 10.9 per cent respectively.
IMF Managing Director Kristalina Georgieva has described the aid shock as “unprecedented in scale, speed, and uncertainty,” with low-income and fragile states hit hardest yet having limited policy space.
Why the Framework Matters
Since its introduction in 2005, the LIC-DSF has been the cornerstone of the international community’s assessment of risks to debt sustainability in low-income countries. Multilateral lenders, including the International Development Association, link their lending policies to the DSF results. The risk assessment derived from the framework informs the IMF’s debt limits policy and the World Bank’s non-concessional borrowing policy.
The framework was previously reviewed in 2006, 2009, 2012, and 2017. The 2017 review introduced a revised approach to assessing countries’ debt-carrying capacity based on an expanded set of variables and adjustments to improve the framework’s accuracy in predicting debt distress. However, critics noted that the 2017 update kept the basic structure intact, with four out of five debt distress indicators pertaining to public and publicly guaranteed external debt.
The latest review, launched in April 2024, benefited from extensive internal and external consultations with creditor and borrower countries, development partners, academia, civil society, and the private sector, including a public consultation held from June 5 to July 3, 2026.
What Happens Next
A review completed in July confirmed that the framework had worked well to identify debt distress episodes ahead of time and help countries make informed borrowing and lending decisions. But it also identified several areas where the framework could be improved to account for new challenges at a time of elevated development needs and declining official development assistance.
The revised framework will become operational in the second half of 2027, allowing time to finalize revised operational guidance and undertake extensive capacity building for users of the framework.
For the world’s poorest countries, the stakes could hardly be higher. With debt service payments now exceeding combined spending on health, education and social protection in many developing nations, the credibility and accuracy of the framework will determine whether they can access the financing they need to grow — without jeopardising their ability to repay.
