investment. This result follows from the assumptions made under A1 and A2 and from the fact that if the growth gap is positive the following is true (see Annex VIII): growth gap is positive the following is true (see Annex VIII): 2023+ B <u>( )</u> 2023 W − W > 0 (5) 2023 2023 DD BB 1+3ii DD WW+B BB WW 2023 AA2 = YY YY 2023+ B <u>( )</u> Where W is the PPG debt-to- GDP ratio including BRI under _A1_ and W is the PPG debt-to 2023 2023 DD DD BB 1+3ii GDP ratio including BRI under WW _A2_ . Therefore, for countries with a positive growth gap, the PPG debt-toWW+B BB YY YY GDP ratio inclusive of BRI effect on growth and debt under _A1,_ equal to the debt ratio reported in WEO, is always smaller than the equivalent debt ratio under _A2._ Out of 43 countries, 12 (7 LIDCs and 5 EMs) or 28 percent are expected to increase their level of indebtedness as a result of BRI investment (Figure 15). The selected countries include four of the five LIDCs with high risk of debt distress and two of the three LIDCs assessed at moderate risk. One low-risk LIDCs has an estimated level of indebtedness projected to exceed 50 percent. Among EMs, four are considered high-scrutiny countries, with an indebtedness ratio above 50 percent in 2018 and one a lowvulnerability country, with PPG debt expected to increase to above 50 percent of GDP by 2023.

In several countries with already elevated debt vulnerabilities the PPG debt to GDP ratio is expected to increase over the period 2019-2023 as a result of BRI debt financing, despite additional positive growth (this is indicated as a positive growth gap) and given their projected fiscal policy stance. The assessment should also consider the fiscal risks, beyond those represented by explicit government debt guarantees, which could result in higher fiscal expenses. It should be noted that there are countries that despite having high level of debt vulnerability are not expected to receive a large amount of BRI-related debt financing. The debt sustainability of these countries should be monitored through the established instruments for low income and market access countries.

BRI recipient countries could be broadly classified along the following lines:

- Countries in low scrutiny or low risk of debt distress, if not substantially increasing their level of indebtedness as a result of BRI, would likely have the necessary fiscal space to increase investment.  However, it is important that projects are well selected and implemented to maximize development gains and that financial terms are appropriate and transparent.

- In addition to a careful project selection and implementation, and evaluation of terms and available options of financing, countries that would increase their level of indebtedness as a result of BRI should carefully evaluate the impact of BRI on their debt sustainability outlook and fiscal risks.

- Countries with limited or no fiscal space would need to limit the number of debt-financed projects, rely on grant or highly concessional financing, favor foreign direct investment over debt financing, and, if possible, increase public savings to finance additional investments.

This simple methodology is selective enough to identify a limited number of countries, and indicate policy options, but important shortcomings need to be highlighted. The analysis and estimates are limited to the medium term, after all BRI financing has already been disbursed, but before the long-term impact of BRI investment is entirely reflected on growth. The impact of higher investment continues over time, which 24