impending crisis based on an assessment of public debt dynamics because prevention is far less costly than cure.

The numbers in the paragraph are based on data from the debt sustainability analysis (DSA) for Zambia in IMF (2015), which rated Zambia at moderate risk of external debt distress but overall public debt dynamics as sustainable. Recasting the data to focus on d, pd and (r-g), ADF Lab (2016) described public debt dynamics as “definitely unsustainable”, confirmed by market signals: the secondary market yield on Zambia’s 10-year 8.625 percent Eurobond issued in April 2014 was close to 16% at that time.

Experience also shows that the seeds of crises get sown over several years, notwithstanding the image of a sharp discontinuity that a debt default may convey. This makes early warning essential. With the debt structure of LIC DSF countries now resembling that in emerging market countries (EMs), the examination of public debt dynamics needs to be complemented with a thorough analysis of international liquidity (foreign exchange reserve adequacy), an assessment of market signals on devaluation and default risks, and the monitoring of risks from private sector balance sheets.

We illustrate the obsolescence of the LIC DSF and the desirable direction of reform with the experiences of Ghana, Ethiopia and Zambia, which are now in public debt crises. In addition, a growing number of LIC DSF countries have been grappling with a big deterioration in public debt sustainability that predates the COVID-19 pandemic, but which has been poorly anticipated by the LIC DSF.

The next section shows that the LIC DSF is a _specific analytical framework_ that was appropriate in the pre-HIPC-MDRI and immediate post-HIPC-MDRI eras. A specific framework risks becoming obsolete when the purpose for which it was designed no longer applies. In principle, the solution is to scrap the framework and adopt a new one. In practice, the framework may get entrenched in a bigger context institutionally, resulting in the framework outliving its original purpose. To paraphrase John Maynard Keynes, the problem may lie not in developing a new framework, but in escaping the old one. Getting rid of the current LIC DSF will be neither simple nor costless. But sticking with it is costlier, because it helps neither with assessing debt sustainability nor in supporting economic development.

The rest of the paper is organized as follows. Section 2 provides a brief history of the LIC DSF. Section 3 discusses its obsolescence and sketches out an alternative with desirable properties. Section 4 discusses the 2017 revision of the LIC DSF, while section 5 argues it fell far short of the “significant overhaul” that was claimed. Section 6 demonstrates that one needs to give primacy to public debt and its dynamics even if one is simply an external creditor who does not care about development. Section 7 appraises the LIC DSF templates for the external and public sector DSAs. It illustrates the idea that debt sustainability should not be an end in itself but a platform for development with the experience of Ethiopia. It also discusses Zambia where a high level of private external debt was “discovered” in 2017 and concludes that the Zambian case only reinforces the need for a new LIC DSF. Section 8 concludes with a summary of recommendations.

# **2. A Brief History of the LIC DSF**

The LIC DSF was introduced in April 2005 to carry out public and external debt sustainability analyses in LICs. This was the same year in which the Multilateral Debt Relief Initiative (MDRI) was adopted, under which the IMF, IDA, the African Development Fund (AfDF) and Inter-American Development Bank (IADB) agreed to write off 100 percent of their claims on countries that had reached or would eventually reach completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC).

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