Assessing the CPIA-Based Classification of Low-Income Countries in the Joint IMF-World Bank Debt Sustainability Framework

The purpose of the paper is to assess the relevance of the current classification of LICs in three groups based on CPIA thresholds in the Joint IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC DSF). Using exploratory multivariate analysis techniques – the principal components analysis (PCA) and cluster analysis (CA) – on annual country profiles over ten years, we find that the current calculation of the CPIA index is solid and that a classification of LICs in three groups is also sound. However, the composition of the groups derived from the CA is different from the actual composition. In addition, the CPIA thresholds associated with the generated LIC groupings are lower than the actual thresholds. Having in mind calls for more risk rating categories in the DSF, a deeper analysis shows that a classification of LICs in four groups appears to be a better alternative. A grouping in five categories based on the proposed and actual CPIA thresholds in classifications in three clusters is appealing although it does not meet predefined suitability requirements.