Debt Sustainability Assessment: The IMF Approach and Alternatives

Abstract

Debt sustainability is an essential attribute of good macroeconomic policies but its precise definition is elusive and its assessment is even more challenging. The IMF has developed a sophisticated approach but it must be recognized that, because the future is unknown, any debt sustainability assessment is only valid within the bounds of the underlying guesses. There is no support for the view that added complexity allows for more precise assessments. As a consequence, policy conclusions drawn from debts sustainability exercises must be considered with care. Sacrificing growth – in the short and even in the long run – to imprecisely known risks can be very costly.