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IMF Executive Board Discusses “Macroeconomic Developments and Prospects in Low-Income Developing Countries—2018”

March 22, 2018

Against the background of a climbing number of low-income developing countries (LIDCs) at high risk or in debt distress, the International Monetary Fund (IMF) Executive Board assessed economic prospects and policy challenges facing these countries.

On March 9, 2018, the Board discussed a staff paper on macroeconomic developments in LIDCs. The paper includes an in-depth look at public debt developments in LIDCs.

Growth improved broadly across LIDCs in 2017, helped by more favorable external conditions including a pick-up in global growth, partial recovery of commodity prices, and benign financing conditions. However, output growth in commodity exporters continues to lag behind levels achieved in 2010-14—by an average of some 2 percentage points in non-fuel commodity exporters and even more in fuel exporters. In countries less reliant on commodity exports, growth remains robust, averaging 6 percent in 2017, but there is marked variation across countries, with smaller countries typically faring less well.

Growth prospects for LIDCs are improving, supported by improved external conditions, while global inflation pressures remain contained. However, this more favorable outlook is subject to a range of risks, including from a reversal of the recovery in commodity prices, an unexpectedly sharp tightening of global financial conditions, domestic policy slippage, internal conflict, weather shocks, and rising financial sector stress.

There has been a broad-based weakening of fiscal positions in LIDCs in recent years, with fiscal deficits widening in some 70 percent of LIDCs between 2010-14 and 2017. In about one-third of these cases, higher public borrowing was fully matched by a scaling-up of investment, but in close to half the cases investment declined, notwithstanding higher public borrowing. Increased fiscal pressures contributed to rising stress in financial sectors in many LIDCs.

Debt burdens and vulnerabilities have risen significantly since 2013 in many LIDCs, reflecting a mix of factors including exogenous shocks and loose fiscal policies. While the majority of LIDCs remain at low or moderate risk of debt distress, the number of countries at high risk or in debt distress has increased from 13 in 2013 to 24 in January 2018.

The composition of public debt in LIDCs continues to shift from traditional sources towards non-Paris Club bilateral lenders, commercial external debt, and domestic debt. Higher interest rates on commercially-priced debt has led to higher debt servicing costs and market risks, while the rising importance of non-traditional creditors poses new challenges for potential debt resolutions, including difficulties in ensuring the creditor coordination needed to produce comprehensive agreements acceptable to all major creditors.

Data on LIDC debt suffer from substantial gaps, notably related to public guarantees and to debt of public sector entities outside the general government. This can result in significant underestimation of public sector liabilities, while undermining the value of debt sustainability analyses. Data gaps have contributed to unfavorable debt surprises in several countries, as public liabilities not captured in the debt data are converted into liabilities of the central government.

Executive Board Assessment [1]

Directors broadly agreed with the assessment of macroeconomic developments in low‑income developing countries (LIDCs) and the identified policy priorities. They welcomed the pickup in growth, but underscored the large diversity of experiences among countries. Directors noted with serious concern the broad‑based increase in public debt burdens in LIDCs, gaps in public debt data, and the increasing number of countries classified at high risk of debt distress, stressing the urgent need for fiscal prudence and improved debt management in many LIDCs, along with greater data transparency on the part of borrowers and creditors. They called for sustained efforts and engagement of the international community, including the IMF, in addressing the increase in debt vulnerabilities before risks intensify. They welcomed the timely opportunity to discuss developments in LIDCs, in particular, ahead of the upcoming review of the Fund’s Facilities for Low‑Income Countries.

Directors were encouraged by the continued strong growth performance in most diversified exporters, and that growth has at least partially recovered in most commodity exporters. Nevertheless, Directors noted that the overall sluggish per capita growth and falling public investment levels represented a setback as countries pursue the Sustainable Development Goals. They also underscored the weaker economic performance of several fragile states, reflecting the especially difficult challenges they face, and called on the Fund, in its engagement to pay close attention to tackling the underlying causes of fragility, including weak government institutions, sharp social divisions, and poor security conditions.

Directors observed that fiscal balances had deteriorated in the majority of LIDCs over the past several years, noting that in most cases, increases in deficits had not been matched by corresponding increases in public investment. They expressed concern that rising interest outlays and a gradual decline in foreign grants and remittances had exacerbated fiscal and balance of payments pressures in many countries. A few Directors called for more work on the factors contributing to the decline in the levels of remittances.

Directors noted with concern that many countries had experienced increased stress in the financial sector, in good part as a result of fiscal pressures. They underscored the importance of tackling fiscal imbalances promptly, and improving financial sector regulation and supervision in most countries. They also noted that inflation levels remained too high in a significant subset of countries, while many countries needed to re‑build depleted levels of foreign reserves.

Directors broadly agreed that the key macroeconomic challenges facing LIDCs are to achieve sustainable fiscal positions, devote increasing resources to development spending (including on infrastructure), and safeguard financial stability. Attaining these goals requires mobilizing domestic revenue to create fiscal space, enhancing the efficiency of public investment spending to improve the growth payoff from investment projects, and maintaining strong oversight of financial systems. A number of Directors called on staff to develop more granular advice on ways to promote economic diversification and strengthen resilience to shock in LIDCs and small states.

Directors expressed concern about the significant increase in public debt burdens across a broad range of LIDCs in recent years. Directors generally agreed that countries now facing elevated debt burdens needed to move promptly to contain further debt accumulation and rely more on the generation of domestic fiscal space to meet development financing needs. While countries at low or moderate risk of debt distress have more room to scale up public investment through borrowing, great care should be taken to use new loans selectively to support projects with high rates of return. They observed that the increasing share of debt on commercial terms from nontraditional sources had intensified borrowers’ exposure to market risks and created new challenges for debt resolution.

Directors called for concerted efforts from the multilateral community, including the Fund, to accelerate the development of debt management capacity in LIDCs and to enhance cooperation on debt issues. They noted that both debtors and creditors should subscribe to global principles for sustainable lending, such as the G20 operational guidelines for sustainable financing. Directors supported efforts to create an improved framework for debt restructuring in cases where debt burdens have become unsustainable, including mechanisms for ensuring effective collaboration and information sharing across official creditors, informed by the work of existing international fora. A number of Directors expressed concern that rising debt burdens in LIDCs could create pressures for another cycle of multilateral debt relief.

Directors stressed the importance of improving data coverage on debt and increased transparency on debt exposures, helped by technical assistance from the Fund and development partners. They noted the need to ensure full coverage of public and publicly‑guaranteed debt in public debt figures to allow full assessment of debt vulnerabilities and contingent liabilities, which is essential for maintaining confidence in the integrity of debt‑sustainability analyses (DSAs). Noting that increased data transparency was a joint responsibility including both borrowers and creditors, Directors called for improved sharing of information among creditors and international financial institutions on amounts, terms, and conditions of debt. They observed that in some cases weak governance had led to the debt build‑up, and called for continued efforts to ensure improved governance and to combat corruption.

Directors noted the record of debt developments under Fund‑supported programs, with debt rising faster than programmed in a considerable number of cases. While recognizing that adverse exogenous shocks had played a significant role in most of these cases, weaknesses in program design, including the specification of the public sector, may have played a role in a number of cases. They called on staff to conduct further analysis in the coming months to develop a deeper understanding of the factors at play and to identify potential implications for program design.

Directors welcomed staff’s ongoing work to better contain debt accumulation and to support efforts to strengthen the architecture for tackling debt resolution issues. These include actions to incentivize and assist borrower countries to compile comprehensive data on public debt and guarantees; the roll‑out of the revised Debt Sustainability Framework for Low‑Incom Countries, with its enhanced analytical tools; systematic outreach to non‑Paris Club official creditors; and a careful examination of debt developments under Fund‑supported programs in the context of the upcoming Review of Conditionality and the Review of the Fund’s Debt Limits Policy. Most Directors called for a strengthened Fund strategy to address rising debt vulnerabilities in LIDCs and called on management and staff to present an action plan on how to address the increased risks.

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