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Debt Sustainability in Low-Income Countries—Proposal for an Operational Framework and Policy Implications

This paper develops an operational framework for debt sustainability assessments in low-income countries and draws policy implications for donors,creditors, and borrowers. Low-income countries face significant challenges in meeting their development objectives, especially the Millennium Development Goals (MDGs),while at the same time ensuring that their external debt remains sustainable. The aim of the proposed framework is to guide borrowing decisions of low-income countries in a way that matches their need for funds with their current and prospective ability to service debt,tailored to their specific cumstances. Given the central role of official creditors and donors in providing new development resources to these countries, the framework simultaneously provides guidance for their lending and grant-allocation decisions to ensure that resources to low-income countries are provided on terms that are consistent with their long-term debt sustainability and progress towards achieving the MDGs.