Making the Market Access Countries’ Debt Sustainability Framework Relevant for Emerging Markets

The debt sustainability framework for market access countries has been designed by the International Monetary Fund for all market access countries, a set that includes emerging markets and advanced economies. The debt sustainability framework for market access countries was reviewed in 2021 and renamed the “sovereign risk and debt sustainability framework for market access countries.” A new public debt sustainability analysis template was rolled out in 2022 and became operational in 2023. This paper examines the framework from the perspective of emerging markets, which borrow from and have a policy dialogue with the World Bank. While the debt sustainability analysis template is based on government borrowing in both the home, or local, currency and foreign currency, advanced economies predominantly borrow only in the local currency. Emerging market governments are more likely to borrow in both currencies, are more vulnerable to crises, and have less fiscal and monetary policy space than their advanced economy counterparts. Therefore, a single framework for both advanced economies and emerging markets is unduly restrictive. The paper suggests changes to fit the emerging market debt context better, motivating the recommendations by a contrast between Japan and Sri Lanka. The recommended changes would require a composite real interest rate to be calculated for emerging markets as in the single-currency environment typical of advanced economies. This would facilitate an assessment of debt dynamics based on the debt-to-GDP ratio, primary deficits, and (r-g), or the difference between the real interest and the real growth rate. Further, the composite real interest rate could usefully be broken down into its local and foreign currency components to provide insight into debt dynamics and guide borrowing decisions. These modifications would facilitate a more transparent assessment of near-term risks and medium-term projections, for which the paper suggests that the set of comparator countries exclude advanced economies.