# **Annex III. Thresholds on Public Debt for Mauritania**

We complement our assessment of Mauritania’s sustainability of public finances by estimating _thresholds_ applicable to the total public debt (as a share of GDP), using the econometric methodology laid out in IMF-IDA (2012). This methodology underpins the Debt Sustainability Framework for Low-Income Countries (LIC DSF) jointly developed by the World Bank and the IMF since 2005. Intuitively, the methodology seeks for a _norm_ or _threshold_ level of public debt that, if exceeded, would imply a probability (risk) of experiencing debt distress deemed _high_ or _excessive_ . The threshold gives due consideration to the specificities of Mauritania, most notably its policies, institutions, and growth prospects. Some background about the LIC DSF is worth discussing before estimating debt thresholds.

# _Debt sustainability and LIC DSF_

A forward-looking analysis of public debt sustainability gravitates around a debt indicator, e.g., a country’s stock of public liabilities or flow of financing needs, scaled by a measure of repayment capacity such as nominal GDP or fiscal revenues. The sustainability analysis basically confronts a norm on that indicator against projected debt paths over a medium- or long-term horizon. Whenever the projected debt paths breach the threshold, the public debt is deemed to be reaching an _unsustainable_ trajectory. A country breaching the norm is expected either to preemptively adopt policies aimed at correcting the budget imbalances, or to head towards facing debt servicing difficulties in the future—which in turn might trigger an abrupt fiscal adjustment or some form of debt default. Different approaches to public debt sustainability analysis derive debt thresholds from theoretical arguments or from empirical observations. There is consensus, however, in that the debt thresholds depend on country-specific financial, macroeconomic and institutional variables, as well as on the tolerance of risk of experiencing debt distress.

The LIC DSF provides a set of thresholds on _external public debt indicators_ , derived from econometric studies comparing countries that experienced difficulties to service public and publicly guaranteed foreign liabilities (i.e., an _external debt distress_ episode) against countries that did not [IMF-IDA (2004, 2012)]. These studies formulate probit models to investigate the determinants of debt distress episodes and to estimate their probability of occurrence conditional upon external public debt indicators and other explanatory variables. For instance, IMF-IDA (2004) estimate probability models of _external debt distress_ using a panel of LIC in the 1980s and 1990s. Distress episodes are identified when a country incurs into large arrears on public liabilities to foreign creditors. Parsimonious probit models are specified including one external public debt indicator, the World Bank’s Country Policy and Institutional Assessment (CPIA) score, and a few macroeconomic (control) variables. Debt indicators and policyrelated variables are found to be good predictors of sovereign defaults towards foreign creditors: the probability of debt distress increases with the debt indicator and decreases with the quality of policies and institutions measured by the CPIA score. With the estimated coefficients of the probit models, IMF-IDA (2004) calibrate the value of the external public debt indicator that matches an arbitrarily-chosen value of debt-distress probability and fixed values of other explanatory variables. The calibrated value of the debt indicator is precisely the debt threshold associated with the level of risk implicit in the arbitrarily-chosen debt-distress probability—which is set around 20 percent. The LIC DSF actually confronts debt thresholds thus calculated against long-term projections of external public debt indicators. Next, it classifies LIC as high-, medium-, or low-risk of external debt distress, depending on whether breaches are observed or not. Debt thresholds thus demarcate _danger zones_ that are useful to anchor policy discussions with country authorities and guide resource-allocation decisions by lenders and donors.

The latest revision of the LIC DSF in IMF-IDA (2012) introduces a number of methodological improvements and, in addition, provides a set of thresholds on _total public debt indicators_ . These norms are obtained with an approach along the lines of IMF-IDA (2004) but considering problems to repay public and publicly guaranteed liabilities owed to foreign and domestic creditors (i.e., episodes of _external_ and _domestic debt distress_ ). IMF-IDA (2012) explores probability models of _external_ and 38