The IMF’s website, updated after the 2017 revision of the LIC DSF (IMF 2017), notes that the goal of the LIC DSF is <mark>“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 circumstances.” It defines the twin challenges of LICs as “meeting their development objectives, including the Sustainable Development Goals (SDGs), while at the same time ensuring that their</mark> _<mark>external debt</mark>_ <mark>remains sustainable.”</mark><sup>3</sup> <mark>This raises two questions: First, who are the main borrowers in LIC DSF countries and, second, what is the connection between borrowed resources and the SDGs? The answer is that the government and state corporations are the main borrowers and that the connection to development is through public spending on human development—education, health, and social welfare—and infrastructure with the goals of poverty reduction and private sector led growth. Since the public sector is the main borrower and the objective is economic development, the main variable should be</mark> _<mark>public</mark>_ <mark>debt and not</mark> _<mark>external</mark>_ <mark>debt.</mark> <mark>External debt is the stock of borrowings from non-residents and is mainly the integral of past current account deficits.</mark><sup>4</sup> <mark>Before HIPC-MDRI and soon after it, the public sector in LICs borrowed almost exclusively from official creditors, multilateral and bilateral, with little domestic borrowing. So it made sense to focus on external debt sustainability, especially as the private sector was unlikely to borrow externally—something that remains largely true today (Zambia, discussed below, is an exception). Thus, external and public debt were more or less synonymous, with the bulk of the external debt owed to official creditors. But this started changing dramatically well before 2017, which the IMF website acknowledges. It notes that the 2017 revision was to “ensure that the DSF remains appropriate for the rapidly changing financing landscape facing LICs and to further improve the insights provided into debt vulnerabilities”.</mark> <mark>Yet, the website persists: “Given the</mark> _<mark>central role of official creditors and donors in providing new development resources</mark>_ <mark>to these countries, the framework simultaneously provides guidance for their lending and grant-allocation decisions to ensure that resources to LICs are provided on terms that are consistent with their long-term debt sustainability and progress towards achieving the SDGs.” The website further notes: “Given that concessionality is an important element in financing LICs, the debt concept used in the template focuses on the present value (PV) of debt.”</mark> <mark>Concessionality is important because LIC DSF countries are poor with insufficient domestic saving, necessitating external funds to enable critical investments at home. Borrowing from official sources means savings relative to the market, justifying the use of the PV of debt. Calculating the level of concessionality of debt, or its “grant element”, is a way of recognizing the efforts of official donors. But this “financing landscape” began changing well 2017, with borrowing by the public sector from both external and domestic markets growing in importance. Markets began increasingly to define the marginal cost of borrowing for LIC DSF countries.</mark>

# _<mark>Problems with the Discount Rate</mark>_

<mark>The profusion of borrowing sources at different interest rates and in different currencies for the government and large state-owned enterprises has implications for the choice of discount rate used to compute the PV of external debt.</mark> In 2004, when the LIC DSF was being launched, the discount rate

> 3 The quotes are from the IMF’s LIC DSF website https://www.imf.org/external/pubs/ft/dsa/lic.htm. Italics added. 4 Factors such as FDI, a non-debt financing source, and valuation changes result in the change in external debt being less (FDI) or more than the current account deficit CAD.

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