Press Release No. 13/408

Press Release: IMF Approves Unification of Discount Rates used in External Debt Analysis for Low-Income Countries

October 18, 2013

On October 11, 2013, the Executive Board of the International Monetary Fund (IMF) approved the proposed Unification of Discount Rates Used in External Debt Analysis for Low-Income Countries. The proposal was approved by the Executive Board of the World Bank on the same day.

The Unification of Discount Rates Used in External Debt Analysis for Low-Income Countries modifies and simplifies the system of discount rates used by the World Bank and the IMF in analyzing external debt issues in low-income countries. Analytical tools affected by these changes include joint Bank-Fund Debt Sustainability Analysis (DSAs) and the computation of loan concessionality. Following the approach proposed in Review of the Debt Limits Policy in Fund-Supported Programs, discussed by the IMF’s Executive Board in March 2013, a single uniform discount rate will now be used for operational purposes. The new unified discount rate is set at 5 percent, a level broadly aligned with the discount rate currently used for calculating the grant element of long-term U.S. dollar-denominated loans.

Following an extended period of historically low interest rates in the advanced economies, the discount rate used in DSAs had become a weak measure for discounting cash flows over the longer term. Estimates of the burden of debt service had been inflated, leading to an unjustifiable narrowing of the assessed borrowing space available to countries under the Debt Sustainability Framework for Low-Income Countries (LIC DSF). The complex system of discount rates used for computing the grant element of individual loans also gave rise to anomalies, while frequent updating of these rates created operational difficulties.

The new unified discount rate will remain unchanged until the completion of the next review of the LIC DSF by the Executive Boards of the World Bank and the IMF, scheduled for 2015.