The debt sustainability analysis Africa actually needs

For years, organizations advocating for Africa's economic health have emphasized the necessity of a debt sustainability analysis (DSA) tailored to African nations. Recently, the World Bank and International Monetary Fund (IMF) have suggested reforms to the Low-Income Country Debt Sustainability Framework (LIC-DSF). While some of these proposed changes are valuable, they do not address the core issues with a framework that continues to suffer from significant flaws.

The primary concern is not that the LIC-DSF may be overly cautious, but rather that it primarily focuses on recording liabilities and vulnerabilities rather than evaluating how borrowing can enhance future repayment capacity. To truly assess debt sustainability, a framework should determine whether a country can generate the necessary fiscal and foreign-exchange resources to meet its obligations without compromising its development goals.

The current framework falls short in four key areas. The first issue is that the LIC-DSF divides countries into low-income and market-access categories, a distinction that was never meant to persist. Prior to the early 2000s, there was no standardized debt sustainability methodology. In 2002, the IMF adopted a unified framework for assessing both public and external debt sustainability.

However, the separation of low-income countries into a distinct process began in 2003, leading to the creation of the LIC-DSF in 2005, which diverged from the general framework. The justification for this split was that low-income countries primarily relied on concessional official finance, while market-access countries obtained funding from international capital markets.

Nevertheless, this distinction oversimplifies reality. Today, it is clear that the LIC-DSF is outdated and does not accurately represent the diverse financing structures of African countries. For example, Kenya, which graduated to lower-middle-income status around 2014 and has since issued multiple eurobonds, is still evaluated using the LIC-DSF framework.

This binary classification does not align with Kenya's mixed financing approach, which includes concessional lending, bilateral non-concessional finance, domestic bonds, regional development bank borrowing, and varying degrees of market access. The second issue with the LIC-DSF is that it treats countries as separate species of borrowers.

Most African sovereigns now combine various sources of financing, such as concessional lending, non-concessional bilateral finance, domestic bonds, regional development bank borrowing, and market access. Kenya serves as an example of this complexity. Despite graduating to lower-middle-income status and issuing eurobonds, Kenya is still subject to the LIC-DSF framework.

This structure creates an artificial categorical distinction that no longer accurately reflects how African sovereigns actually finance themselves. The presence of this bifurcation can serve as a market signal, potentially exacerbating the situation. Of the 70 countries listed on the IMF's September 2025 LIC-DSF list, 39 are African.

Given the framework's concentration on one continent, it cannot adequately address the unique financing realities of African countries. The third problem with the LIC-DSF is that its warning system is often treated as a definitive verdict by markets, rather than a precautionary tool. Since its implementation in 2005, more than one-third of LIC-DSF users have received a "high risk" rating in a given year.

However, only around 5% of these cases led to actual debt distress within the next two years. For Africa specifically, 55% received a high-risk rating, yet only 15% experienced debt distress. This discrepancy highlights the potential for the framework's early-warning system to contribute to the very fragility it aims to prevent.

When a precautionary signal is treated as a near-term default verdict, it can lead to increased borrowing costs, shortened maturities, and restricted access to credit. The current market-access framework already addresses this issue by using probability-weighted assessments across different time horizons instead of a single categorical rating.

To improve the LIC-DSF, the IMF and World Bank should adopt a similar approach while empirically testing the impact of high-risk classifications on borrowing costs and the duration of their effects. The fourth issue with the LIC-DSF is a feedback loop that can reinforce mispricing. The proposed refinements to the LIC-DSF include a variable linking external borrowing costs to the share of external debt in public debt.

While this appears reasonable on its face, it sits atop an indicator heavily influenced by the World Bank's Country Policy and Institutional Assessment (CPIA), a qualitative measure of policy and institutional quality. This creates a circular dependency where borrowing costs are elevated partly due to market mispricing, regional risk premia, or perceptions of institutional weakness.

Feeding these costs back into a capacity score can perpetuate the distortion, leading to a weaker score, higher thresholds for high-risk classification, and increased borrowing costs. To mitigate this issue, borrowing-cost variables should be tested with safeguards such as fundamentals-adjusted inputs, regional benchmarks, and filters for pricing outliers.

Furthermore, both frameworks should reduce reliance on subjective perception measures and increase the weight of direct financial data. In summary, while the recent proposals for reforming the LIC-DSF are steps in the right direction, they do not fully address the underlying problems with a framework that continues to harm African countries.

A truly sustainable debt sustainability analysis requires a universal sovereign DSA framework with differentiated modules based on actual financing structures and risk characteristics, rather than relying on outdated income classification.