Nature at risk, debt at risk: towards integrating nature into the Low-Income Country Debt Sustainability Framework

Abstract

Nature-related risks can affect sovereign debt sustainability directly through their impact on productive capacity and indirectly via the fiscal balance, the external balance, and financing conditions. Nonetheless, nature-related risks are not yet systematically operationalized within the IMF–World Bank Low-Income Country Debt Sustainability Framework (LIC-DSF). This paper develops a DSF-compatible framework linking economic dependence on nature, the state of natural capital, socio-economic vulnerability, and environmental hazards to a set of macro-fiscal transmission mechanisms. It then identifies how these effects can be incorporated within the existing LIC-DSF architecture, distinguishing chronic pressures that may warrant adjustments to baseline assumptions from acute, recurrent, and compounding shocks that may be best addressed through stress tests and customized scenarios. Finally, it proposes a tiered approach in which materiality screening determines the appropriate level of analysis, ranging from adjustments to existing DSF assumptions to the use of auxiliary macroeconomic models to construct internally consistent scenarios.