IMF and World Bank Publish Debt Sustainability Review Note; Developing Countries' Net Outflow Hits $741

The World Bank's International Debt Report 2025 shows that from 2022 to 2024, developing countries repaid $741 billion more in principal and interest on external debt than they received in new financing, the highest level in at least 50 years. In 2024 alone, interest payments reached $415 billion. As debt pressure rises, low-income countries still need to raise long-term financing for electricity, transport, education, healthcare and climate adaptation. Balancing risk control with necessary investment has become a central issue in global development finance.

On June 2, 2026, the International Monetary Fund and the World Bank published a background note on the review of the Low-Income Country Debt Sustainability Framework (LIC-DSF), followed by a public consultation from June 5 to July 3. The background note acknowledges that since the current framework became operational, more than one-third of user countries have been classified as high risk in a typical year; under a high-risk rating, the probability of entering debt distress within two years is approximately 5%.

The current LIC-DSF first assesses a country's debt-carrying capacity, then compares indicators such as debt-to-GDP, debt-to-exports, debt service-to-exports and debt service-to-fiscal revenue against corresponding thresholds, and runs stress tests on growth, exchange rates, exports and fiscal shocks. The framework already requires 20-year macroeconomic projections and includes a plausibility check on the investment-growth relationship. However, core risk signals mainly observe the first 10 years, debt use has no formal classification, and public assets and public sector net worth are not mechanical rating variables. When the same amount of sovereign liability is added, railway financing and wage expenditure both first appear as rising debt in the core indicators; the difference between the two must be captured indirectly through growth assumptions, tax projections and professional judgment.

The proposed 2026 reforms provide a clearer institutional entry point for the first time. The new framework plans to add a 'long-term module' that, in relevant countries and scenarios, extends the projection horizon to up to 30 years and assesses the impact of human capital, physical capital, infrastructure, structural reforms and sectoral policies on growth and debt trajectories. The background note provides an example: if a country increases development spending by an amount equivalent to 1% of GDP each year for 10 consecutive years, the initial deficit and borrowing needs rise markedly, but as human capital improves, the feedback from potential output and income gradually strengthens; concessional financing and purely market-based financing also produce significantly different debt paths.

The long-term module is positioned as a supplementary tool, activated on demand; model results do not directly generate mechanical risk signals, and the final impact still depends on professional judgment. The proposed document does not establish 'productive debt' as a formal category, and public asset stocks, utilisation rates and net worth have not yet entered the core structure. For productive debt to gain a stable and credible policy status, a three-tier 'project-sector-country' evidence chain needs to be established. At the project level, it must answer what assets are formed, what the total life-cycle cost is, how cash flows and maintenance expenses are arranged, and who bears exchange rate risk; at the sector level, it must assess whether the project alleviates transport, energy, digital or human capital bottlenecks and whether it drives local enterprises, employment and industrial supporting capacity; at the country level, it must observe whether tax revenue, exports, fiscal revenue and foreign exchange improve, and whether contingent liabilities are controlled. This evidence chain also needs ex-post evaluation: the transport volumes, power generation, employment, tax revenue and exports promised at project approval should be continuously verified after operations begin, and forecast deviations should feed back into the next round of financing conditions and risk ratings.

China's external development financing is largely directed to transport, energy, telecommunications, water conservancy and industrial supporting capacity. If the new framework can more fully reflect long-term growth and fiscal feedback, it will help the international community more completely assess the public asset value of these projects. Rule recognition still depends on transparent, continuous and comparable data. China's policy financial institutions and enterprises could further disclose financing terms, construction costs, asset utilisation rates, local procurement, employment, tax revenue, exports, operations and maintenance, and environmental and social costs, and support country-by-country debt sustainability assessments with full life-cycle project data. Financing structures should also match project attributes: grants can be used for early-stage research and capacity building; concessional loans can support assets with strong public-good characteristics and long payback periods; equity and commercial funds can enter segments with clearer cash flows; and local-currency financing, guarantees and co-financing can mitigate exchange rate and refinancing risks.