Since the fiscal deficit is the outcome of spending and revenue decisions by the government, it can be thought of as causing the CAD. The government is constrained by the need for balance in its intertemporal budget constraint and the need to avoid disruptive debt crises. Not surprisingly, corrective policies for unsustainable CADs center around changes in fiscal and exchange rate policy.

A reasonable conclusion from Table 1 is that current account deficits and hence the dynamics of external debt in Ghana are driven by fiscal deficits and the dynamics of public (government) debt. Thus, shifting attention from external to public debt would amount to focusing on the fundamental cause— public debt—instead of the symptom—external debt—that is the central concern of the LIC DSF.

# _Present Value (PV) of Debt versus Nominal Debt_

While IMF (2016) does not contain a table showing the composition of Ghana’s government debt by creditor, either in the main text or in the DSA annex, it is a safe bet that much of the government’s debt was owed to private, commercial creditors. This means that the marginal cost of borrowing was determined by the market, not the official sector. This poses a problem. If governments are borrowing from different sources, which interest rate does one choose as the discount rate for calculating the PV of debt? Indeed, what is the rationale for calculating a PV when much of the debt is non-concessional?

Most LICs today borrow at the margin from commercial sources. Even Chad and Zambia, two of the countries that have applied for debt treatment under the Common Framework, have significant commercial debt—Chad from Glencore and Zambia from several Eurobond issues. Many LICs have loans from China or from commercial banks. And local currency debt is significant and typically at market rates. This has rendered the 5% DR arbitrary. If a country gets official USD loans at 2% but the market rate is 12% on a Eurobond of equivalent maturity, then the extent of concessionality is captured by the 10 percentage-point difference, and a 2% loan should be discounted at 12% to obtain its PV, not at 5%.

Apart from the arbitrary choice of the discount rate, another problem is that the LIC DSF discounts official concessional debt to obtain its PV but takes market debt at face value. This asymmetry has no analytical justification. The simplest solution is to eliminate the use of the PV of debt and use nominal public debt-to-GDP instead in debt sustainability assessments. This will make public debt dynamics transparent, based on the standard parameters, pd and (r-g). As shown below, it will also provide more reliable early warning.

If even more persuasion is needed that the PV of debt for sustainability analysis is an outmoded concept, revisiting the original 2004 LIC DSF paper (International Monetary Fund and International Development Association 2004) is useful. Essentially, the PV of debt as a concept _linked to a reliance on predominantly official financing_ is inseparable from the need for a separate LIC DSF: if one goes, so should the other, as paragraph 12 from IMF and IDA (2004) demonstrates (boldface added): " **The concept of debt sustainability in low-income countries is different from that in middleincome countries that rely primarily on private financing.** While low-income countries are a diverse group—ranging from poor countries with weak policy records and histories of war and civil strife to relatively advanced economies that have some access to private capital inflows and are on the verge of becoming emerging markets— **most countries in this group rely predominantly on official financing** . **As a result, the sustainability of their debt** —i.e., the condition that this debt can be serviced without resort to exceptional financing or a major future correction in the balance of income and expenditure— **is largely de-linked from the sentiments of the market, as embodied in spreads on market interest rates.** Indeed, to the extent that donors and creditors base the allocation of new aid flows on the implied net 8