(6) − −1 = + [1−g + 1α ] −1<sup>,</sup> rr where r is the real interest rate given by ddtt ddtt ppddtt +gg +GG ddtt 1 −1 and _i_ is given by equation (3) above. Solving for from 1+ +ii the expression for (1+z) given in the second bullet above, substituting into (6) and rearranging terms ππLL αα gives: (7) − −1 = + 1−g −1 + (1 1+ $� $−1 + (1+ LL$−)(1$ ) $−1 , rr zz ππ ππ <mark>where</mark> ddtt <mark>d</mark> $dd−1tt <mark>= αd</mark> ppdd−1tt<sup><mark>is the ratio of $ debt expressed in local currency at the end of year (t-1) to GDP in</mark></sup> +gg ddtt +gg)� ππ ddtt ππ +GG ddtt <mark>local currency for year (t-1).</mark> tt tt <mark>Equation (7) is the same as the ‘final equation’ used in the MAC SRDSF shown at the top of Box 3 on page 31 of IMF (2022), noting that ∆d ≡ d − d</mark> −1<sup><mark>, -pb=pd,</mark></sup> <mark>d</mark> −1 <mark>= d</mark> $−1 <mark>, and ignoring the stock-flow adjustment term, sfa.</mark><sup>4</sup> <mark>This completes the derivation.</mark> ff tt tt tt tt

**<mark>Note 4:</mark>** <mark>In equation (7), using IMF parlance from Box 3 in IMF (2022), the third term on the RHS “accounts for the real exchange rate” while the last term “corresponds to the relative inflation component”— although the formulas prevent a clean interpretation of these effects. The sum of these two terms, which</mark> equals 1α −1<sup>(compare equations (6) and (7)),  is simply the capital gain or loss as a result of exchange</sup> <mark>rate appreciation or depreciation transmitted via the dollar-denominated component of debt at the end</mark> +GG ddtt <mark>of the previous year—recall Note 3 and equation (2) above. This capital gain or loss is part of the cost of borrowing in $ and should be amalgamated into the effective interest rate on $ borrowing to guide decisions about borrowing in $ versus borrowing in local currency (see Box 1 in Gill and Pinto 2023 for a numerical example).</mark>

<mark>In the next section, we look at the DSA for an AE, Japan, and then for an EM, Sri Lanka, both using the new MAC SRDSF template, and both conducted in 2023. We then contrast the two DSAs to point to improvements that could be made when the DSA template is applied to EMs.</mark> <mark>Japan and Sri Lanka could be considered outliers. We therefore emphasize that our</mark> arguments for making the 2023 MAC DSA template more relevant for EMs do not hinge on the contrast between these two countries _per se_ but on the generic differences between EMs and AEs. The Japan-Sri Lanka comparison merely illustrates these differences, which pertain to macroeconomic vulnerability, the fiscal and monetary space available for preempting crises and the currency composition of public debt.

# **<mark>III. The 2023 MAC DSA Template: A Reality Check from the EM Perspective</mark>**

<mark>We start with the 2023 DSA for Japan and then proceed to the 2023 DSA for Sri Lanka. Our goal is to illustrate the differing implications of the DSA template, not to engage in a detailed macro-debt diagnostic.</mark>

# _<mark>Economic Interpretation—Japan 2023 DSA</mark>_

<mark>Equation (7) forms the basis for the debt decomposition (contribution to the annual change in d by the different variables driving debt dynamics) in the new DSA template. We start with Japan, using the DSA contained in IMF (2023a). The numbers are taken from the baseline DSA in Figure 4, p. 64 of IMF (2023a). Footnotes with the formulas for the contributions of the variables driving debt dynamics are absent, unlike in the old template. This would be a useful addition.</mark> 4 Ignoring sfa is a simplification and is not meant to imply that it is unimportant. Realized contingent liabilities, misreported primary deficits and differences related to end-period exchange rates (used for debt stocks) versus period average exchange rates (used for debt service flows) would all feed into sfa.

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