POLICY, VULNERABILITY AND THE NEW DEBT SUSTAINABILITY FRAMEWORK

We investigate the empirical foundations of the New Debt Sustainability Framework(NDSF). which was recently endorsed by the IMF and the World Bank in support of low-income countries' (LICs) debt sustainability. Our empirical re-assessment questions the existence of a probabilistic relationship between the quality of countries' policies and institutions and their risk of debt distress. In contrast, we find that indicators of economic vulnerability are more significant predictors of debt distress among LICs. We argue that the NDSF is bound to distort aid allocation away from the country-specific circumstances which truly matter for the achievement of debt sustainability. Copyright (C) 2008 John Wiley & Sons, Ltd.