## pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries ## Source details **Canonical URL:** [pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries](https://www.imf.org/-/media/files/publications/pp/2018/pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2018/pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2018/pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries.pdf.json) --- ### Overview and definition - LIDCs are Fund member countries where gross national income (GNI) per capita lies below a threshold level and where external financial linkages and socioeconomic indicators have not lifted them into emerging market status. - There are 59 countries in the LIDC grouping, accounting for about one-fifth of the world’s population and 4 percent of global output. - Sub-group classifications: - Commodity exporters: commodities account for at least half of goods and services; fuel exporters are commodity exporters with fuel exports comprising at least half of exports; non-fuel commodity (NFC) exporters are commodity exporters that are not fuel exporters. - Frontier market economies and fragile states are identified as separate groupings. - Key counts and shares: - Total LIDCs: 59 countries. - Number of fuel exporters: 6; they account for 25 percent of LIDC PPP GDP and 17 percent of LIDC population. Nigeria accounts for 22 percent of LIDC GDP and 13 percent of population. - Non-fuel commodity exporters: account for 17 percent of LIDC PPP GDP and 27 percent of LIDC population. - Diversified exporters: account for 58 percent of LIDC PPP GDP and 56 percent of LIDC population. - Regional counts: AFR Countries: 35; APD Countries: 11; MCD Countries: 9; Other Regions: 4. - Fragile and conflict-affected situations (FCS) countries among LIDCs: 33. ### Macroeconomic developments and outlook - Growth and composition - Growth in LIDCs picked up in 2017, with average growth in 2017 of 4.7 percent and projected average growth for 2018 of 5.2 percent. - Significant heterogeneity between commodity exporters (including fuel exporters) and diversified exporters. - Median growth is still down some 2 percent from 2010-14 levels in NFC exporters. - Average growth in countries not dependent on commodity exports remains robust (on the order of 6 percent), with significant variation across countries. - Inflation and monetary policy - Median inflation was 5.6 percent in 2017, little changed from 5.3 percent in 2016. - 13 (of 59) LIDCs recorded double-digit inflation rates in 2017 (up from 10 in 2016); 4 had inflation above 20 percent (up from 2). - Median inflation rate set to ease marginally from 5.4 percent in 2017 to 5.3 percent in 2018 (PPP GDP-weighted average inflation expected to decline from 10.3 percent to 8.8 percent). - Easing of monetary policies contributed to a decline in real interest rates in many countries; median real policy rate in a set of nine flexible-exchange-rate, inflation-targeting countries fell from 6.3 percent in 2016 to 4.9 percent in 2017. - External environment and flows - Global growth picked up and commodity prices significantly improved from 2016 troughs; external borrowing conditions improved for LIDCs with some commercial market access. - Official development assistance and remittance flows declined in nominal (USD) terms: aid flows to LIDCs declined from 2.2 percent of LIDC GDP in 2013 to 1.8 percent in 2016; remittances in 2016 were down 6½ percent in dollar terms from 2015 (from 5 percent of GDP in 2015 to 4.7 percent in 2016). - Financial sector - Financial sector stresses have materialized in about 30 percent of countries—mainly in commodity exporters—with deteriorating loan quality and tighter funding often linked to weak fiscal positions. - Since 2015, bank failures occurred in 18 LIDCs; interventions to prevent failures occurred in a further 8 countries. Interventions had significant fiscal costs in two countries (some 6 percent of GDP in both cases); fiscal costs in a third country could reach as high as 13 percent of GDP by end-2018. - Median ratio of private sector credit to GDP across LIDCs remained flat at 25.7 percent in 2016, up by more than five percentage points since 2011. ### Fiscal positions, public investment, and drivers of fiscal pressures - Fiscal trends and drivers - Fiscal pressures have intensified broadly across LIDCs since 2010-14. - Widening fiscal deficits in over two-thirds of LIDCs are fully accounted for by higher public investment in about 30 percent of cases, and by falling public savings (revenues less current spending) in almost half of cases. - Lower grants and higher interest expenditures contributed to fiscal pressures: grants dropped from 1.2 percent of GDP on average in 2010-14 to 0.9 percent in 2017; interest outlays increased by about 0.5 percent of GDP. - Combined budgetary impact of the drop in grants and rise in interest payments ranged from 0.8 percent of GDP in fuel exporters to around 1 percent in NFC exporters. - Budgetary revenues and public investment - NFC exporters: median revenue-GDP ratio was 19.1 percent of GDP in 2017, down from 21.1 percent in 2010-14; median investment-GDP ratio was 5.2 percent of GDP in 2017, down from 5.7 percent in 2010-14. - Diversified exporters: median revenue-GDP ratio was 23.6 percent of GDP in 2017, up from 21.6 percent in 2010-14; median investment was 8.3 percent of GDP in 2017, up from 6.9 percent in 2010-14. - Analysis of 34 cases where fiscal balances deteriorated between 2010-14 and 2017: - Public investment increased by more than the fiscal deterioration in 10 cases. - Public investment increased by less than the fiscal deterioration in 8 cases. - Public investment declined in 16 cases. - Presence of an IMF arrangement in 2017: 7 of the 10 cases where rising deficits were fully accounted for by higher public investment had an IMF arrangement; 3 of 16 cases where investment declined had an IMF arrangement. ### Rising debt vulnerabilities and composition of public debt - Extent and evolution of vulnerabilities - Public debt and debt service levels have risen across a wide range of LIDCs since end-2013. - Some 40 percent of LIDCs now face significant debt-related challenges, up from 21 percent in 2013. - Eight countries (14 percent of LIDCs for which DSAs are available) are now in debt distress. - Sixteen countries (29 percent of LIDCs with DSAs) are assessed to be facing high risk of debt distress. - Eleven LIDCs (20 percent of LIDCs with ratings) are assessed to be at low risk of debt distress. - Stylized facts and magnitudes - From end-2013 to end-2017, the median public debt-GDP ratio increased by 13½ percentage points in LIDCs, to reach 47 percent of GDP. - The debt-GDP ratio increased by at least 10 percentage points in 29 countries; increased by less than 10 percentage points in 19 countries; and declined/remained unchanged in 8 countries. - Interest expense as a share of budgetary revenue rose to a median 5.3 percent of revenues in 2017, up 2 percentage points from 2013. - Fiscal gross financing needs approached 9 percent of GDP in 2016, the highest level in at least a decade. - Changing creditor composition and implications - Composition of public debt shifted toward larger shares held by non-Paris Club official bilateral creditors, foreign commercial creditors, and domestic creditors (mainly banks). - Increased reliance on commercially-priced debt has raised debt servicing costs and risks and created new challenges for debt resolution. - Rising domestic borrowing concentrated in banks creates restructuring-related solvency risks for domestic financial sectors. - Emerging “race to seniority” risks from collateralized debt and unclear status of new plurilateral lenders complicate restructurings. ### Debt data gaps and transparency - Data coverage deficiencies - Three-quarters of LIDCs report only central government debt rather than general government. - One-third of countries do not report guaranteed debt. - Fewer than one in ten countries report non-guaranteed debt of public corporations outside the general government. - Only two-thirds of IMF country teams viewed information on bilateral lending terms as reasonably clear; fewer than half found terms of commercial credits to be clear/fairly clear. - Consequences - Guarantees called or SOEs needing support can produce adverse shocks to measured debt stock when not consolidated (examples cited: Madagascar and Togo). - Commitments not disclosed can hide future liabilities (example: still-to-be-disbursed external debt contracted by Cameroon estimated at 24 percent of GDP in 2017). - Rapid growth in PPPs is rarely captured in contingent liability analyses. ### Policy recommendations and operational priorities - Fiscal policy and public investment management - Contain debt accumulation, particularly on commercial terms, by boosting budgetary revenues to create space for growth-enhancing outlays. - Increase public savings, including by expanding domestic revenue mobilization. - New borrowing on commercial terms should be used only for investment projects with credibly high economic rates of return. - Investment projects in high-risk countries require rigorous assessment and prioritization given limited borrowing space. - Improve public investment efficiency and scrutinize PPPs carefully to avoid contingent fiscal liabilities. - Creditor coordination and lending practices - Lenders should consider subscribing to principles for sustainable lending and borrowing and work with existing international fora for creditor information sharing and coordination. - Non-Paris Club bilateral and plurilateral creditors should exercise due diligence in lending decisions and prepare modalities for engagement in restructuring operations. - Lenders and borrowers should improve transparency on loan terms and tracking of commitments and disbursements; lenders could facilitate information sharing with international financial institutions while preserving confidentiality. - Debt data and technical assistance - Strengthen compilation and monitoring of public debt and guarantees in LIDCs, supported by technical assistance instruments such as the IMF-World Bank Debt Management Facility. - Expand coverage of debt data to cover all public and publicly guaranteed (PPG) debt and systematically track contingent liabilities, including SOEs and PPPs. - Use the Fund’s Fiscal Transparency Code for guidance on risks disclosure and analysis. ### Risks, heterogeneity, and development implications - Risks - External risks: reversal of the recovery in commodity prices; an unexpectedly sharp tightening of global financial conditions. - Domestic risks: fiscal slippage, internal conflict, weather shocks, and rising financial sector stress. - Projections are predicated on fiscal consolidation and stronger growth in many cases; failure of these assumptions would increase the number of countries facing debt distress. - Heterogeneity and development implications - Many LIDCs—particularly fragile states—are falling behind in progress toward the Sustainable Development Goals due to sluggish per capita income growth and falling investment. - Some countries (Bangladesh, Ethiopia, Cote d’Ivoire) record strong and sustained income growth despite group-wide setbacks. - For LIDCs as a group, the median debt level is projected to decline by 2 percent of GDP over the next 5 years—predicated on stronger growth (up by 0.7 percentage points), improved fiscal balances (up by 1 percent), and stable real exchange rates. - Historical perspective and feasibility - Large debt reductions without debt relief or restructuring are rare; since 2000 fewer than 20 percent of cases where staff projected a decline of 10 percentage points or more were eventually realized. *International Monetary Fund. EXECUTIVE SUMMARY and selected sections of "Macroeconomic Developments and Prospects in Low-Income Developing Countries" (pp021518).* ### EXECUTIVE SUMMARY ### pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries - EXECUTIVE SUMMARY ### Overview and definition - LIDCs are Fund member countries where gross national income (GNI) per capita lies below a threshold level and where external financial linkages and socioeconomic indicators have not lifted them into emerging market status. - There are 59 countries in the LIDC grouping, accounting for about one-fifth of the world’s population and 4 percent of global output. - The analysis draws on the World Economic Outlook (WEO) database and drills down into the WEO database to examine LIDC experience in detail. ### Macroeconomic developments and outlook - Growth and composition - Growth in LIDCs picked up in 2017, with average growth in 2017 of 4.7 percent and projected average growth for 2018 of 5.2 percent. - Significant heterogeneity persists between commodity exporters (including fuel exporters) and other (diversified) exporters. - Median growth is still down some 2 percent from 2010-14 levels in non-fuel commodity (NFC) exporters. - Average growth in countries not dependent on commodity exports remains robust (on the order of 6 percent), albeit with significant variation across countries. - Inflation and monetary policy - Inflation has remained contained in most LIDCs, allowing room for monetary easing in several cases. - 13 (of 59) LIDCs recorded double-digit inflation rates in 2017 (up from 10 in 2017), with inflation drifting upwards in some large commodity exporters. - External environment and flows - The global economic environment is becoming more supportive for LIDCs, with global growth picking up and commodity prices significantly improved from 2016 troughs. - External borrowing conditions have improved for LIDCs with some access to commercial markets. - Official development assistance and remittance flows have declined in nominal (USD) terms (aid since 2013; remittances since 2015), pressuring budgets and balance of payments in aid-reliant countries. - Financial sector - Financial sector stresses have materialized in about 30 percent of countries—mainly in commodity exporters—with deteriorating loan quality and tighter funding often linked to weak fiscal positions. - Problem banks have generally been handled by national authorities at modest fiscal cost in the preponderance of cases. ### Fiscal positions, public investment, and drivers of fiscal pressures - Fiscal trends and drivers - Fiscal pressures have intensified broadly across LIDCs since 2010-14. - Widening fiscal deficits in over two-thirds of LIDCs are fully accounted for by higher public investment levels in about 30 percent of cases, and by falling public savings (revenues less current spending) in almost half of cases. - Looser fiscal policies, adverse exogenous shocks (falling commodity prices, civil conflict), and fraud/corruption in a handful of cases have been key drivers of rising debt levels. - Outlook and risks - Fiscal positions are projected to improve somewhat among commodity exporters and remain unchanged elsewhere; debt accumulation would slow markedly if fiscal plans are implemented as planned. - Key domestic risks: fiscal policy slippages (recorded in both 2016 and 2017), conflict and social unrest, and other non-economic shocks. - A further pick-up in oil prices would improve the outlook for fuel exporters but would not necessarily resolve solvency problems for countries in debt distress. ### Rising debt vulnerabilities and composition of public debt - Extent and evolution of vulnerabilities - Public debt and debt service levels have risen across a wide range of LIDCs since end-2013. - Some 40 percent of LIDCs now face significant debt-related challenges, up from 21 percent in 2013. - Nine of twelve countries that moved from “low/moderate risk” to “high risk/in debt distress” are in sub-Saharan Africa. - There are downside risks to the debt vulnerability assessment if fiscal adjustment and growth projections fail to materialize. - Fiscal space and implications - Countries at high risk of debt distress face a tight fiscal envelope with limited borrowing space; investment projects need rigorous assessment and prioritization. - Countries at low/moderate risk have more space to fund public investment via borrowing, but room for maneuver is narrowing in many cases. - Changing creditor composition and implications - The composition of public debt in LIDCs has shifted toward larger shares held by non-Paris Club official bilateral creditors, foreign commercial creditors, and domestic creditors (mainly banks). - Increased reliance on commercially-priced debt has raised debt servicing costs and risks and created new challenges for debt resolution. - The increasing role of non-Paris Club bilateral lenders and plurilateral creditors in difficult debt cases points to the need for these creditors to exercise due diligence and to develop modalities for engaging in debt restructuring. ### Policy recommendations and data priorities - Lending and creditor coordination - Lenders should consider subscribing to principles for sustainable lending and borrowing and work with existing international fora for creditor information sharing and coordination. - Non-Paris Club bilateral and plurilateral creditors should exercise due diligence in lending decisions and prepare modalities for engagement in restructuring operations. - Fiscal policy and public investment management - To increase space for public investment, countries will need to boost public savings, including by expanding domestic revenue mobilization. - New borrowing on commercial terms should be used only for investment projects with credibly high economic rates of return. - Investment projects in high-risk countries require rigorous assessment and prioritization given limited borrowing space. - Public debt data and transparency - There are important gaps in data on public and publicly-guaranteed (PPG) debt in LIDCs—coverage of public sector entities is usually too narrow and public guarantees are often not adequately captured. - Tackling gaps in PPG debt data available to finance ministries and the Bretton Woods institutions is a high priority. - Strengthen compilation and monitoring of public debt and guarantees in LIDCs, supported by technical assistance instruments such as the IMF-World Bank Debt Management Facility. - Creditors can contribute by facilitating information sharing with international financial institutions. ### Risks, heterogeneity, and development implications - Heterogeneity and winners/laggards - Many LIDCs—particularly fragile states—are falling behind in progress toward the Sustainable Development Goals (SDGs) due to sluggish per capita income growth and falling investment levels. - Some countries (Bangladesh, Ethiopia, Cote d’Ivoire) record strong and sustained income growth despite group-wide setbacks. - Downside scenario considerations - Projections assume fiscal consolidation in the majority of moderate/high-risk cases and stronger trend growth where sizeable fiscal consolidation is planned; failure of these assumptions would increase the number of countries facing debt distress. *International Monetary Fund. EXECUTIVE SUMMARY of "Macroeconomic Developments and Prospects in Low-Income Developing Countries" (pp021518).* ### Box 1. What are Low-Income Developing Countries? 1/ ### Box 1. What are Low-Income Developing Countries? 1/ ### Definition and scope - The term “LIDC” refers to countries with low per capita Gross National Income and comparatively weak socioeconomic indicators. - The list of LIDCs was revised in 2017 and now includes 59 countries, down from 60 as Bolivia and Mongolia were dropped, and Timor-Leste was added (Annex 1). - LIDCs account for about one-fifth of the world’s population and 4 percent of global output (PPP-based). ### Sub-group classifications - Commodity exporters: countries where commodities account for at least half of goods and services; all others are classified as diversified exporters. 2/ - Fuel exporters: commodity exporters where fuel exports comprise at least half of exports. - Non-fuel commodity exporters: commodity exporters that are not fuel exporters. - Other groupings: - Frontier market economies: characterized by more developed financial systems and closer linkages to international financial markets. 3/ - Fragile states (countries in fragile and conflict-affected situations): weak institutional capacity, armed conflict, or both. ### Key counts and shares - Total LIDCs: 59 countries. - Fuel exporters: - Number of fuel exporters: 6. - Account for 25 percent of LIDC PPP GDP. - Account for 17 percent of LIDC population. - Nigeria accounts for 22 percent of LIDC GDP and 13 percent of population (dominating the fuel exporter group). - Non-fuel commodity exporters: - Account for 17 percent of LIDC PPP GDP. - Account for 27 percent of LIDC population. - Diversified exporters: - Account for 58 percent of LIDC PPP GDP. - Account for 56 percent of LIDC population. - Regional counts: - AFR Countries: 35. - APD Countries: 11. - MCD Countries: 9. - Other Regions: 4. - Fragile and conflict-affected situations (FCS) countries among LIDCs: 33. ### Transfers, aid, and remittances (selected statistics) - Aid flows to LIDCs in 2016 were unchanged in dollar terms from 2015 levels, but have slipped significantly since 2013—declining from 2.2 percent of LIDC GDP in 2013 to 1.8 percent in 2016. - Remittance flows in 2016 were down 6½ percent in dollar terms from 2015 levels (from 5 percent of GDP in 2015 to 4.7 percent in 2016). - Remittances from non-fuel exporting host countries declined in 2016, having risen steadily through 2015; remittances from fuel exporting host countries have been falling since 2013. ### Notes on labeling and definitions - A more accurate but cumbersome label for the “diversified exporters” grouping would be “countries less reliant on commodity exports.” Some countries in this grouping are heavily reliant on a few non-commodity exports (e.g., garments in Bangladesh and Haiti). 2/ - For definitions of frontier markets and fragile states groupings, see IMF (2014a). 3/ *Prepared by Atticus Weller and Weijia Yao (SPR).* ### 16. Lower grants and higher interest expenditures contributed to the fiscal pressures ### 16. Lower grants and higher interest expenditures contributed to the fiscal pressures ### Fiscal pressures: grants and interest payments - Grants to LIDCs dropped from 1.2 percent of GDP on average in 2010-14 to 0.9 percent in 2017. - Interest outlays increased by about 0.5 percent of GDP, driven by higher debt stocks and increased reliance on more expensive commercially-placed debt. - The combined budgetary impact of the drop in grants and rise in interest payments ranged from 0.8 percent of GDP in fuel exporters to around 1 percent in NFC exporters. ### Budgetary revenues - Revenue-GDP ratios diverged across country groups (Figure 9): - NFC exporters: median revenue-GDP ratio was 19.1 percent of GDP in 2017, down from 21.1 percent in 2010-14. - 2017 revenues exceeded 2010-14 averages in 9 of 20 cases. - Diversified exporters: median revenue-GDP ratio was 23.6 percent of GDP in 2017, up from 21.6 percent in 2010-14. - The weighted-average revenue-GDP ratio rose 1 percent. - The revenue ratio increased in 16 of 32 countries. ### Public investment - Public investment broadly moved with revenues (Figure 10): - NFC exporters: median investment-GDP ratio was 5.2 percent of GDP in 2017, down from 5.7 percent in 2010-14. - Revenue rises in nine NFC countries facilitated higher public investment in seven cases; investment cuts were recorded in a majority of cases where revenues fell. - Diversified exporters: median investment was 8.3 percent of GDP in 2017, up from 6.9 percent in 2010-14. - Increases concentrated in smaller countries; GDP-weighted average increased only modestly. - In the majority of countries where revenues rose (fell), investment levels also increased (declined). ### Public savings, investment and fiscal deficits - The change in the fiscal deficit equals the change in public investment minus the change in public savings (budgetary revenues minus current spending). - Analysis of 34 cases where fiscal balances deteriorated between 2010-14 and 2017: - Public investment increased by more than the fiscal deterioration in 10 cases. - Public investment increased by less than the fiscal deterioration in 8 cases. - Public investment declined in 16 cases. - Presence of an IMF arrangement in 2017: - 7 of the 10 cases where rising deficits were fully accounted for by higher public investment had an IMF arrangement. - 3 of 16 cases where investment declined had an IMF arrangement. - Country group composition of the 34 cases where deficits rose: - The 10 countries where rising deficits were fully accounted for by higher public investment include 2 NFC exporters (Guinea-Bissau, Mali) and 8 diversified exporters (Cameroon, Cote D’Ivoire, Kenya, Madagascar, Bangladesh, Moldova, Nepal, Nicaragua). - The 8 countries where rising deficits reflected a mix of rising investment and falling public savings include five NFC exporters (Burkina Faso, Niger, Sierra Leone, Zambia, Zimbabwe) and three diversified exporters (Benin, Comoros, Tajikistan). - The 16 countries where deficits rose and investment declined include 3 fuel exporters, 6 NFC exporters, and 7 diversified exporters. - Summary: although borrowing increased investment compared with a counterfactual, only in a minority of cases was incremental borrowing used entirely to finance investment scaling-up. ### Public debt - Fiscal trends contributed to a significant increase in public debt levels in LIDCs in recent years (Figure 12). - The evolution of debt stocks and debt vulnerabilities is analyzed in chapter 2 (referenced in source). ### External position in commodity exporters - Commodity exporters—especially fuel exporters—achieved significant external adjustment in the last two years through import compression and partial commodity price recovery (Figure 13a). - Fuel exporters: current account balance returned to a small surplus. - NFC exporters: current account deficit narrowed from the 2015 trough. - Diversified exporters: current account deficit fluctuated with little net change relative to pre-price-decline years. - Structural changes in current account (2010-14 to 2017, Figure 13b): - Fuel exporters: large declines in exports of goods and services offset by import compression and improvement on the income/transfer account (likely helped by falling profit transfers to oil parent companies). - NFC exporters: about a 1 percent of GDP improvement in the current account deficit (some 4 percent of GDP in 2017); import compression improved the trade balance despite weaker exports, partly offset by a decline on income/transfers from abroad. Foreign direct investment levels are down significantly from 2010-14 levels. - Diversified exporters: little net change in current account deficit (some 3½ percent of GDP in 2017); rising exports improved net exports but were offset by a sizable decline in income/transfers abroad (likely linked to weakening aid flows and remittances). Foreign direct investment levels are up slightly from 2010-14 levels. ### Real exchange rates and reserves - Real exchange rate (RER) adjustment: - Median commodity exporter: RER depreciated by about 11 percent between December 2015 and December 2016, then stabilized; RER largely range bound in diversified exporters over the past two years (Figure 14). - Significant variation around the median in both groups (Figure 14c). - Foreign reserves (import coverage): - Median import coverage showed little change since 2013, improving somewhat for frontier markets (Figure 15). - Reserve coverage estimated below the conventional benchmark of three months of imports in 21 countries at end-2017 (down from 24 at end-2016). - Median level of import coverage in the bottom quartile was 1 month. - Reserve coverage levels are more often low in fragile states (60 percent are below the benchmark) and in countries hit most severely by the decline in commodity prices. ### Inflation and monetary policy - Inflation: - Median inflation was 5.6 percent in 2017, little changed from 5.3 percent in 2016. - Dispersion of inflation rates narrowed in 2017 as several countries reduced high inflation (e.g., Malawi and Zambia). - 13 countries had inflation over 10 percent in 2017 (up from 10 in 2016); 4 had inflation above 20 percent (up from 2). - Inflation was most severe in conflict-affected countries (South Sudan, Yemen). - Monetary policy and real interest rates: - Easing of monetary policies contributed to a decline in real interest rates in many countries. - In nine countries with flexible exchange rates and explicit inflation targets: - Seven countries had lower average policy rates in 2017 than 2016 and had declining or low to moderate inflation (below 8 percent). - Two countries (Mozambique and Nigeria) had higher average policy rates and high inflation. - Median real policy rate in this group fell from 6.3 percent in 2016 to 4.9 percent in 2017. ### Credit growth and non-performing loans - Credit to the private sector: - Real stock of credit declined in 2017 in commodity exporters; grew at a slightly slower pace in diversified exporters during 2016-17 (Figure 18a). - Considerable variation: 11 countries registered real credit growth above 10 percent (including Cambodia, Nepal, Myanmar, Cote d’Ivoire); eight experienced a decline in excess of five percent (Zambia, Mozambique, Moldova). - Median ratio of private sector credit to GDP across LIDCs remained flat at 25.7 percent in 2016, up by more than five percentage points since 2011. - Non-performing loans (Figure 18b): provided as an indicator of banking sector asset quality in the source. ### Financial sector stress and stability - Prevalence and outlook: - Number of LIDCs assessed to be in financial sector stress rose to about 30 percent of countries (survey-based). - Fall 2016 survey: about 20 percent experiencing stress, expected to rise to about 40 percent in 12-18 months. - A year later survey: some 30 percent assessed as experiencing stress, expected to rise to 45 percent by end-2018. - Stress more likely in commodity exporters but increasing in other countries (Figure 19). - Main drivers of rising stress (Figure 20): - Deteriorating loan quality driven by: - Weak fiscal positions with government arrears to private companies (e.g., Chad, Malawi, Zambia). - Sluggish economic activity (Congo Republic, Malawi, Nigeria). - Exchange rate depreciation impacting corporate balance sheets (Nigeria, Mozambique). - Tighter funding conditions driven by: - Weak fiscal positions (government deposits drawn down). - Private deposit withdrawals (especially for small banks). - Reduced access to external funding in some cases (Burundi, Congo Republic, Zimbabwe). - Relationship between stress and credit growth: - Negative relationship: higher reported stress associated with lower credit growth, especially pronounced for commodity exporters. - Bank failures and interventions: - Since 2015, bank failures occurred in 18 LIDCs. - Interventions to prevent failures occurred in a further 8 countries. - Interventions included temporary administration, emergency liquidity assistance, forced mergers, and required recapitalization. - Interventions had significant fiscal costs in two countries (some 6 percent of GDP in both cases); fiscal costs in a third country could reach as high as 13 percent of GDP by end-2018. *Source: MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018 (IMF staff estimates and WEO data as presented in the source content).* ### 34. Concerns about the health of non-bank financial institutions (NBFIs), including micro- ### MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018 ### Financial sector stress and non-bank financial institutions (NBFIs) - Concerns about the health of non-bank financial institutions (NBFIs), including micro-finance institutions, have increased substantially since end-2015. - NBFIs are a significant feature of financial systems in about one-half of LIDCs, although banking systems usually play a dominant role (in quantitative terms) in financial intermediation. - Stress on NBFIs is assessed to have increased in 16 countries since end-2015, although staff rated the vulnerability of NBFIs as being high in only 6 countries. - Weak economic management is viewed as a key contributor to rising concerns about financial sector stress, with tightening global financial conditions and commodity price declines also seen as important risks. - Rising financial sector stresses increase the challenge for regulatory authorities. Key priorities identified by IMF country teams include: - Tackling budgetary arrears via fiscal policy adjustments. - Intensified supervision. - Scaling back of regulatory forbearance. - Strengthening of bank resolution mechanisms. - Weaknesses in regulation and supervision systems in LIDCs are discussed further in IMF (2017a, Section 2.C). ### IMF financial support for LIDCs (2017 trends) - New IMF lending commitments to LIDCs remained high relative to historic averages in 2017. - The IMF approved eight new financial arrangements with LIDCs in 2017, along with one drawing under the Rapid Credit Facility; there were also five augmentations of financial support under existing programs. - Members of the two CFA currency zones accounted for five of the eight new arrangements (two in CEMAC, three in WAEMU) and for four of the five augmentations (two in CEMAC, two in WAEMU). - All new commitments of financial support were to countries in Africa. - Box 4: New IMF lending commitments totaled SDR 1.8 billion in 2017 (with SDR 1.7 billion from the PRGT); this was above the 2010-16 average of SDR 1.3 billion. Disbursements to LIDCs amounted to SDR 1 billion, up from the 2010-16 average of SDR 0.7 billion. - PRGT and GRA commitments to LIDCs, 2014–2017 (in millions of SDRs) are reported in the source. - Most new commitments in 2017 were provided through the Extended Credit Facility (ECF): - Eight new ECFs in 2017, totaling SDR 1.5 billion; almost half accounted for by programs with two CEMAC members (Cameroon, Chad). - New ECFs for Benin, Guinea, Mauritania, Niger, Sierra Leone, and Togo. - An RCF of SDR 12 million to The Gambia. - Five augmentations of access under existing arrangements, totaling SDR 332 million (Cote d’Ivoire, Central African Republic (twice), Madagascar, and Mali). - The majority of IMF financial assistance to LIDCs in 2017 was directed to countries in fragile situations; five out of eight new ECFs went to members of CEMAC and WAEMU. - Several requests for new Fund financial assistance were expected in 2018, particularly from commodity exporters undertaking continued adjustment efforts. ### The outlook (growth, inflation, fiscal, and external) - Aggregate growth: - The (weighted) average growth rate across LIDCs is projected to rise by half a percentage point in 2018, to 5.2 percent. - Supply-side factors include a rebound in the volume of fuel production (Nigeria, Republic of Congo) and easing of drought conditions (Kenya, Malawi, Zambia). - Inflation: - Median inflation rate set to ease marginally from 5.4 percent in 2017 to 5.3 percent in 2018. - PPP GDP-weighted average inflation expected to decline from 10.3 percent to 8.8 percent. - Inflation would remain in double-digits in 10 countries (down from 13 in 2017), and above 20 percent in 4 cases (unchanged from 2017). - Fiscal balances and public debt: - Fiscal balances expected to improve somewhat in commodity exporters in 2018, but show little change among diversified exporters. - The (weighted) average public debt-GDP ratio is forecast to rise by a half a percentage point, to 41 percent of GDP. - The aggregate projection assumes fiscal consolidation in many LIDCs, particularly commodity exporters. - Current account and reserves: - Current account positions expected to weaken among commodity exporters as domestic demand reverses recent import compression. - Some widening of current account deficits in diversified exporters is envisaged, facilitated by higher external borrowing. - Import coverage ratios would strengthen somewhat on average; the number of countries with import coverage ratios of less than 3 months of goods and services would decline from 21 countries in 2017 to 19. - Table 2 key selected macroeconomic indicators (as reported): - Growth (Percent), LIDCs (59): 2010-14 = 6.0; 2015 = 4.7; 2016 = 3.7; 2017 = 4.7; 2018 = 5.2; 2019-21 = 5.3. - Inflation (Percent), LIDCs: 2010-14 = 9.3; 2015 = 7.4; 2016 = 9.9; 2017 = 10.3; 2018 = 8.8; 2019-21 = 7.9. - Fiscal Balance (Percent of GDP), LIDCs: 2010-14 = -2.5; 2015 = -4.1; 2016 = -4.4; 2017 = -4.2; 2018 = -4.1; 2019-21 = -3.7. - Current Account Balance (Percent of GDP), LIDCs: 2010-14 = -1.9; 2015 = -4.2; 2016 = -2.6; 2017 = -2.3; 2018 = -3.1; 2019-21 = -3.5. - (Additional subgroup and memorandum figures are reported in the source table.) ### Risks and vulnerabilities - External risks: - Reversal of the recovery in commodity prices. - An unexpectedly sharp tightening of global financial conditions. - A stronger pick-up of commodity prices would favor stressed commodity exporters. - Domestic risks: - Fiscal slippage (relative to current targets). - Internal conflict (including spillovers from neighbors). - Weather shocks. - Rising financial sector stress. - Growth Decline Vulnerability Indicator (GDVI): - The GDVI shows some improvement as of 2018, most notably in commodity exporters. - The GDVI is based on vulnerabilities at the sectoral level: external, fiscal, and “real economy” sectors; mapped into risk ratings of low, moderate, and high. - Fiscal slippages in 2016–17: - Median fiscal deficit exceeded one-year forward projections by 1.2 percent annually in NFC exporters, with larger slippage in smaller countries. - Deviations were more modest among diversified exporters, averaging 0.35 percent of GDP. - A repeat of such slippages in 2018 could stimulate short-term output but raise debt levels, with output costs likely pushed to 2019 or 2020. - Growth projection bias: - For NFC exporters, the median growth rate fell short of one-year forward projections by an average of 0.75 percentage points in 2016-17; the corresponding average shortfall was 0.5 percent for diversified exporters. ### Conclusions and policy messages - Impact of commodity price declines: - Declines in commodity prices from mid-2014 had substantial effects on LIDC economic performance; commodity-dependent countries are growing significantly slower than in 2010-14. - Countries less reliant on commodity exports are growing at some 6 percent per annum, a pace maintained since 2010. - Development concerns: - Sluggish per capita income growth and falling investment across many LIDCs represent a setback for early SDG pursuit. - Declining aggregate remittances and aid inflows are troubling; falling aid flows to the world’s poorest countries raise questions about commitments to “leave no-one behind.” - Fragile states are falling behind, while countries such as Bangladesh, Ethiopia, and Cote d’Ivoire record strong sustained growth. - Key macroeconomic policy challenges: - Achieve sustainable fiscal positions. - Devote increasing resources to development spending (including infrastructure). - Safeguard financial sector stability. - Policy actions include boosting domestic revenue mobilization, enhancing public spending efficiency, and maintaining effective oversight of financial systems. - Monetary and reserve priorities: - Reduce high inflation levels and rebuild foreign exchange buffers where needed: double-digit inflation persists in one-fifth of countries, while reserve coverage is low in about one-quarter of cases. - Monetary tightening supported by fiscal adjustment is recommended in such cases, with Fund-supported arrangements as a potential source of support. - Longer-term messages: - Importance of economic diversification for growth and resilience over the medium term. - Need to build strong reserve buffers and maintain borrowing space in “good times” in countries with highly concentrated exports. ### Chapter 2: Rising debt vulnerabilities — introduction and main findings - Chapter focus: - Examines evolution of public debt levels in LIDCs and assesses implications. - Context: - Broad-based increase in debt levels across LIDCs has raised concerns about fiscal sustainability, diversion of budgetary resources to debt service, and risks from changes in borrowing structure. - Relation to prior work: - Builds on a 2015 IMF-World Bank paper which found debt ratios and vulnerabilities had declined during 2007-14 but flagged emerging risks from commodity price declines and expanded commercial borrowing. - Main findings: - Debt and debt service levels have risen across a wide range of LIDCs since end-2013. Key drivers: adverse exogenous shocks (falling commodity prices, civil conflict) and looser fiscal policies; fraud/corruption played a key role in a handful of cases. - Larger fiscal deficits are fully explained by the increase in public investment in about 30 percent of cases, and partially explained in one quarter of cases, with investment falling in the remainder. - Rising debt levels have resulted in increased debt vulnerabilities in many countries: about 40 percent of LIDCs now face significant debt-related challenges, up from 21 percent in 2013. Ten of the thirteen countries that moved into “high risk” or “in debt distress” are in sub-Saharan Africa. - Debt levels are projected to fall gradually over coming years, but often predicated on significant fiscal consolidation and a solid pick-up in growth. - LIDC debt is increasingly held by non-Paris Club official bilateral creditors, foreign commercial creditors, and domestic creditors (mainly banks). Greater reliance on commercially-priced debt has translated into higher debt servicing costs and risks, and new challenges for potential debt resolutions. - Deepening of domestic financial markets has allowed governments to more actively tap domestic savings. - Important data gaps exist on PPG in LIDCs: coverage of public sector entities is typically too narrow, coverage of guarantees is limited or omitted, and information on loan terms and collateralization is often missing—revealed belatedly when debt distress occurs. *Italic: Content derived from the IMF chapter "MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018" (selected sections).* ### 53. Key policy messages include: ### Key policy messages include: ### Fiscal space, borrowing, and public investment - Countries in high risk of debt distress face a tight fiscal envelope, with limited borrowing space. Increasing public savings over time is needed to create space for raising public investment. In the meantime, investment projects need careful assessment and prioritization if the limited borrowing space is to be used to effectively support growth. - Countries in low/moderate risk of debt distress have some room to scale up public investment via borrowing—but the room for maneuver is narrowing in many cases, again underscoring the importance of using new borrowings to finance only investment projects with credibly high economic rates of return. - Where deficits have increased, in most cases this reflects at least in part a decline in public savings—raising debt levels without expanding the capacity to meet debt service obligations. ### Creditor composition, transparency, and coordination - The increasing importance of non-Paris Club bilateral lenders and plurilateral creditors, including in difficult debt cases, underscores the importance of these creditors exercising due diligence in their lending decisions and in developing contingency plans for engaging in debt restructuring deals. - Lenders need to consider the potential benefits of subscribing to principles for sustainable lending and borrowing, such as those being championed by the G-20; and working with existing international fora for creditor information sharing and coordination. - Greater transparency on the scale and terms of lending is needed to avoid further debt surprises and support cooperative solutions to debt workout situations. Lenders can play an important role in this regard, including by sharing information with international financial institutions. - More effort is needed to strengthen the compilation and monitoring of public debt and guarantees in LIDCs; there are well-established technical assistance vehicles to deliver this assistance, but a coordinated push from IMF and World Bank staff may be needed to accelerate progress. ### Stylized facts on recent debt accumulation (summary of findings) - From the early 2000s through end-2013, the median public debt-GDP ratio for LIDCs declined from a high of 94 percent of GDP in 2001 to some 33 percent of GDP during 2010-13. - From end-2013 to end-2017, the median public debt-GDP ratio increased by 13½ percentage points in LIDCs, to reach 47 percent of GDP. - The debt-GDP ratio increased by at least 10 percentage points in 29 countries; increased by less than 10 percentage points in 19 countries; and declined/remained unchanged in 8 countries. - Among regions, LIDCs in sub-Saharan Africa have recorded the fastest rise in debt levels. Median debt levels have risen markedly, from already elevated levels, in the Middle East/Central Asia. Debt levels increased more modestly among Asia/Pacific LIDCs, and remain substantially lower than in other regions. Debt has remained broadly unchanged, at elevated levels, in the handful of LIDCs in other regions. - The debt buildup has been broad-based but slightly larger among commodity exporters: among the 24 commodity exporters, debt rose by a median 15 percent of GDP, compared to 13¾ percent in diversified exporters. - Interest expense as a share of budgetary revenue rose to a median 5.3 percent of revenues in 2017, up 2 percentage points from 2013. - This 5.3 percent median is above the advanced economy median ratio of 4.1 percent but below the 8.3 percent ratio observed in emerging markets. - Fiscal gross financing needs approached 9 percent of GDP in 2016, the highest level in at least a decade. - In six commodity exporters (Chad, Republic of Congo, Niger, Nigeria, Papua New Guinea, and Zambia), dollar GDP fell relative to 2013 levels by a median 16 percent of GDP, as did fiscal revenue by a median 4½ percent of GDP; the median debt-GDP ratio for these countries is now 23 percent of GDP above 2013 levels. ### Drivers of debt accumulation and debt surprises - Growth-interest rate dynamics were generally benign, with the favorable impact of GDP growth more than outweighing the adverse impacts of interest obligations (thanks in part to concessional borrowing terms). - In diversified exporters, sustained large fiscal primary deficits have been the main driver of debt increases, with residuals (fiscal operations not included in primary deficits) featuring significantly. - In commodity exporters, the 2014 commodity price shock had a major impact: contributing to sluggish growth, sharply higher fiscal deficits in 2015, and real exchange rate depreciation that further raised the debt burden. - More granular drivers in the 29 countries where debt-GDP rose by at least 10 percentage points of GDP: - Four countries were affected by internal conflict (Yemen and Burundi) or epidemics (Liberia, Sierra Leone); debt increased by 35 percent of GDP in Yemen and an average of 22 percent of GDP in the two Ebola-hit countries. - In three cases, fraud/corruption made a key contribution to the debt buildup (e.g., unreported debt in Mozambique; banking fraud and bailout in Moldova; governance issues and embezzlement in The Gambia). - Six commodity exporters were badly hit by sustained declines in commodity prices (see list above). - In the remaining 16 countries (all but one diversified exporters), larger on- and off-budget fiscal deficits were a key contributor to debt accumulation—driven by weaker fiscal revenue in roughly half the cases and by current spending overruns or higher capital spending in others. - Higher levels of public investment contributed to the build-up of debt in many countries, but were a key driver in only a minority of cases: fiscal balances deteriorated in 40 LIDCs between 2010-14 and 2017; only in 30 percent of cases was the deterioration fully matched by higher investment, while public investment levels declined in almost half of the cases. - The increase in debt over recent years has exceeded projections: - WEO projections of late 2013 envisaged little change in LIDC debt ratios through end-2017, compared with a realized median increase of 14 percent of GDP. - The Fall 2015 WEO projections underpredicted end-2017 median debt by 4 percent of GDP. - In 28 countries where 2017 debt levels exceeded 2013 projections by at least 10 percentage points of GDP, commodity price declines and non-economic shocks (conflict, epidemics, fraud/corruption) were important causes of the “debt surprise” in 13 cases; weaker-than-projected fiscal policies, including extra-budgetary operations, were key in 15 countries. ### Role of Fund programs and program performance - Fund financial arrangements have helped contain debt accumulation, but there have been significant slippages vis-à-vis debt objectives in a sizeable number of programs. - A survey of 27 programs in 23 LIDCs (2010-16) found: - 16 programs envisaged a reduction in the public debt-GDP ratio over the course of program, with a median decline of 2.3 percent of GDP per year; 11 programs envisaged debt burdens increasing at a median rate of 1.5 percent per year. - Debt-burden targets were missed by at least 3 percent of GDP in 10 of the 27 programs. - Shocks were key contributors to unexpected debt accumulation in 8 cases (internal conflict, epidemics, severe drought, deterioration of terms of trade); weak fiscal policies (fiscal slippages, materialization of contingent liabilities, elevated SOE borrowings) played a key role in 5 cases. - Debt accumulation was lower during program periods than outside program periods: where programs envisaged a falling debt burden, debt increased at a median rate of 1.1 percent of GDP during program years versus 1.7 percent during non-program years; where programs envisaged rising debt, debt grew by 1.8 percent of GDP per year during program years versus 3.3 percent during non-program years. *MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018, INTERNATIONAL MONETARY FUND* ### 64. We turn in this section to examine the evolution of debt vulnerabilities in LIDCs, ### pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries - 64. We turn in this section to examine the evolution of debt vulnerabilities in LIDCs, ### Evolution of Debt Vulnerabilities - DSA methodology and scope: - DSA analyses assess current and projected evolution of debt levels in present value terms, making due allowance for the concessionality of a significant (but declining) share of external debt. - As of now, DSAs are available for 56 of the 59 LIDCs. - Overall risk distribution and trends: - Two-fifths of LIDCs now face significant debt challenges; three-fifths remain at low or moderate risk of debt distress, although safety margins have been eroded in many cases. - Eight countries (14 percent of LIDCs for which DSAs are available) are now in debt distress. - There were 4 countries in debt distress in 2013 (Eritrea, Somalia, Sudan, and Zimbabwe). By end-2017, Chad and South Sudan had been rated as in debt distress, while the Republic of Congo and Mozambique were in default to creditors and are classified here as in debt distress. - Sixteen countries (29 percent of LIDCs with DSAs) are assessed to be facing high risk of debt distress. - Since 2013, nine countries shifted from moderate to high risk of debt distress: Central African Republic (2014); Cameroon, Mauritania, and Ghana (2015); Yemen (2016); The Gambia, Lao P.D.R., and Zambia (2017); and Ethiopia (2018). - Only in two of these cases were larger fiscal deficits linked to higher public investment, either in full (Cameroon) or in part (Zambia). - Some 22 countries (39 percent of LIDCs with DSAs) are assessed to be at moderate risk of debt distress, including 5 countries rated at low risk and 2 countries rated at high risk in 2013. - The median increase (over 2013-17) in public debt levels for countries that have remained at moderate risk throughout the period is 8 percent. - For these countries, the “distance” of current debt solvency indicators in the baseline scenario from the threshold levels associated with high risk of debt distress has narrowed in a majority of cases, and in a preponderance of cases regarding liquidity indicators. - The shift of five countries from low to moderate risk since 2013 reflects factors including lower oil prices (Timor-Leste), the Ebola outbreak (Liberia), and debt accumulation linked in part to higher public investment in Benin and Madagascar. - Eleven LIDCs (20 percent of LIDCs with ratings) are assessed to be at low risk of debt distress; all but one were similarly rated in 2013. - Group 1 (debt broadly unchanged): Bangladesh, Cambodia, Myanmar, and Nepal — fiscal deficits close to debt-stabilizing levels and distances from “high risk” thresholds having changed little since 2013. - Group 2 (debt rose significantly): Seven other low-risk countries have seen debt rise, often reflecting renewed investment financed through increased commercial borrowing, including from domestic markets (as in Kenya and Uganda). Safety margins have narrowed but not sufficiently to create serious stresses under adverse shock scenarios. - Regional and other patterns: - Most countries that moved into high risk or into debt distress since 2013 are in sub-Saharan Africa: 10 of these 13 countries are in SSA. - Conflict and political turmoil contributed significantly in 4 of the 13 deteriorations (Central African Republic, The Gambia, South Sudan, and Yemen). - HIPC/MDRI outcomes: - Fourteen of the 34 LIDCs that received HIPC/MDRI debt relief are now in debt distress (Chad, Mozambique, Republic of Congo) or at high risk of debt distress (Afghanistan, Burundi, Cameroon, Central African Republic, Ethiopia, Ghana, The Gambia, Haiti, Mauritania, Sao Tome and Principe, and Zambia). - The ratio of stressed countries to all post-HIPC countries (two-fifths) is similar to that for LIDCs as a whole. ### Selected Recent Debt Difficulty Cases (Box 6) - Common themes: - Commodity price shock, delayed policy response, and lack of control over SOE spending are key themes behind recent new cases of debt difficulties. - Case summaries and salient figures: - Chad: - Public debt increased significantly in 2013-14 following two non-concessional advance oil sale operations. - Domestic debt rose from 9 percent of GDP in 2013 to 24 percent in 2016 due to statutory advances from BEAC and issuance on the CEMAC regional market. - External payment arrears accumulated in 2016-17 despite HIPC and MDRI relief and a 2015 rescheduling agreement. - Republic of Congo: - Debt declined to just over 20 percent of GDP in 2010 (HIPC Completion Point), was 34 percent in 2013, and shot up to more than 115 percent of GDP by end-2016. - Private and non-Paris Club bilateral creditors hold the lion’s share of total debt. - Vulnerabilities: oil generated two-thirds of fiscal revenue; pro-cyclical scaling up of public investment and public-sector wages prior to oil price decline; use of central bank assets, statutory advances, oil-backed loans, and accumulation of domestic arrears after the shock. - Congo is in arrears to official bilateral, multilateral and external private creditors and is seeking to engage to restructure its debt. - The Gambia: - Domestic debt rose from 33 percent of GDP at end-2012 to 62 percent of GDP at end-2016, borrowing mostly through costly short-term treasury bills. - Interest payments on domestic debt consumed 42 percent of government revenue in 2016. - Commercial banks hold about three-quarters of T-bills (around one-third of assets) and additional SOE debt, implying potential financial stability risk from high sovereign exposure. - Mozambique: - Total public debt jumped from 53 percent of GDP in 2013 to 128 percent at end-2016. - Contributing factors: delayed fiscal response to weaker commodity prices, poor SOE expenditure control, real exchange rate depreciation, and undisclosed external loans to 2 SOEs. - Depreciation from 2013 to 2016 added 51 percent of GDP to public debt; primary deficits added 21 percent; undisclosed SOE loans added 11 percent. - Mozambique is in arrears with six official creditors, on Eurobond coupons, and on the recently disclosed loan to SOEs, and is seeking to restructure its debts. ### Risks to the Outlook - Current assessment summary: - Some 40 percent of LIDCs are now at high risk of/in debt distress, while some 60 percent are assessed to be at low or moderate risk. - Severe difficulties are concentrated in a minority of cases — a mix of new problem cases (Chad, Mozambique, Republic of Congo), conflict-affected countries (C.A.R., Yemen), and long-standing high debt/arrears cases (Sudan, Zimbabwe). - Staff projections and assumptions: - Collective staff projections envisage that debt burdens will reverse their upward trend and begin to ease. - For LIDCs as a group, the median debt level is projected to decline by 2 percent of GDP over the next 5 years — predicated on stronger growth (up by 0.7 percentage points), improved fiscal balances (up by 1 percent), and stable real exchange rates. - Debt-GDP ratios are predicted to peak in about half of all LIDCs in 2017 or 2018. - Note: the discussion of debt projections draws on country team projections in the WEO database and is based on the evolution of nominal debt stocks, rather than the present value measures used in DSAs. - Downside risks and drivers: - For commodity exporters, projected modest declines in debt rely on sizeable improvements in fiscal balances and a reversal of real exchange rate depreciations. - For diversified exporters, stabilization of debt assumes marked improvements in fiscal balances and some pick-up in growth. - The broad-based increase in fiscal deficits in recent years, even in fast-growing economies, implies staff projections are predicated on a significant shift in fiscal policy compared to recent past. - Narrowing focus on moderate/high risk countries: - Staff projections for 2018-20 envisage improved fiscal balances in more than two-thirds of LIDCs at moderate or high risk, while average growth is set to exceed levels achieved in 2010-14. - The growth pick-up is larger in the 11 countries undertaking large fiscal adjustment (2 percent of GDP or more), where the median growth rate is to rise 2 percentage points above the average over the last decade. - Given plausible multiplier effects from fiscal consolidation, this surge in growth seems to be at risk, absent a sizable boost to export prices. - Public sector capital stocks in these LIDCs are expected to grow more slowly over the next five years relative to the average over the last decade, implying capital accumulation will contribute less to growth. - Historical record on projected debt reductions: - Current projections envisage that 9 LIDCs will reduce debt-GDP ratios by at least 10 percentage points during 2016-21 without recourse to debt relief or restructuring. - Since 2000, fewer than 20 percent of cases where staff projections envisaged a decline in the public debt-GDP ratio of 10 percent or more in LIDCs without debt relief or restructuring were eventually realized. - Large debt reductions without debt relief or restructuring are rare: the entire WEO dataset contains only ten such cases for LIDCs. - The seven cases since 2000 where such a reduction was achieved reflected favorable circumstances and strong policies; key factors included favorable prices for export commodities, negative real interest rates on debt, and sustained fiscal tightening, with one-off factors (financial repression in Myanmar, privatization receipts in Djibouti) also playing a role. *Source: MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018, INTERNATIONAL MONETARY FUND* ### 77. In conclusion, current staff assessments of debt sustainability, based on staff ### MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018 ### Debt sustainability risks and medium-term outlook - Current staff assessments of debt sustainability for LIDCs are subject to important downside risks. - Key takeaway: achieving higher growth and/or targeted fiscal consolidation in countries where debt has reached, or is nearing, the debt risk thresholds is overarching to contain increases in debt burdens. - Historical note: In Fund arrangements with LICs since 1989, fiscal adjustments of at least 2 percent of GDP over a three-year period were seen in only a quarter of cases, most often in times of strong global growth. ### Debt reduction without debt relief or restructuring (Box 7 findings) - Seven post-2000 cases achieved substantial and sustained debt reduction without debt relief/restructuring. - Country-specific mechanisms identified: - Papua New Guinea, Uzbekistan, Solomon Islands: decline facilitated by rising export commodity prices and fiscal policies that saved much of the associated revenue increase. - Nepal: fiscal consolidation supported by an increase in tax revenue (surge in relatively easy to tax imports and revenue administration measures) and expenditure restraint partly reflecting limited capacity to execute investment spending. - Djibouti, Lao PDR: high investment levels produced robust GDP growth that lowered debt ratios; in Lao major hydroelectric works had large private investment components; in Djibouti privatization receipts contributed to debt reduction even as large public investment weighed on fiscal accounts. - Common contributors: - Negative real interest rates lowered debt; exceptionally so in Myanmar where very high inflation eroded domestic public debt. - The accounting contribution of growth to debt reduction exceeded 10 percentage points of GDP in all countries other than Papua New Guinea. - Shock/contribution quantification (selected results reported in the source): - The simulation of PPP distress assumed government assumption of debt equivalent to 35 percent of the PPP capital stock. - For a country with the median level of PPP capital stock relative to GDP, materialization of this shock would raise public debt by 1.2 percent of GDP. - For a handful of countries with relatively large PPP capital stocks, the estimated fiscal impact of this shock would exceed 10 percent of GDP. ### Changing composition of public debt and implications - LIDCs have increased access to non-traditional external creditors and deeper domestic financial markets, enabling expanded development-oriented borrowing. - Composition shifts noted: - Traditional multilateral creditors declined as a source of credit (HIPC/MDRI effects), while “plurilateral” creditors expanded. - NPC bilateral creditors are now dominant among official bilateral credits; in some commodity exporters NPC official creditors account for over half of external debt stock. - External commercial creditors have grown quickly from a low base (Eurobonds, syndicated loans, commodity traders among creditors). - Domestic debt (currency basis) increased significantly as a share of public debt; holders include domestic financial system, non-banks (including suppliers where government arrears have been securitized), and foreign portfolio investors in some frontier markets. - Risks from composition change: - Refinancing risk, interest rate risk, and capital flow reversal risk have risen due to higher borrowing at shorter maturities and a rising share of variable interest rate debt. - Growing non-resident participation in domestic debt markets increases vulnerability to sudden capital outflows. - Debt resolution challenges increased: important official bilateral creditors are not part of creditor coordination mechanisms; Paris Club creditors typically hold limited shares; diversity of private creditors (bond-holders, bank loans, commodity traders) complicates workouts. - Rising domestic borrowing concentrated in banks creates restructuring-related solvency risks for domestic financial sectors. - Emerging “race to seniority” risks: collateralized debt (noted in Chad, Republic of Congo) creates creditor hierarchy complications; status of new plurilateral lenders in creditor hierarchy is unclear and untested. ### Public sector debt data gaps and transparency issues - High-quality DSAs require public and publicly guaranteed (PPG) debt coverage where public sector includes central government, state and local governments, social security funds, and public corporations. - Data coverage deficiencies: - Three-quarters of LIDCs report only central government debt rather than general government. - One-third of countries do not report guaranteed debt. - Fewer than one in ten countries report non-guaranteed debt of public corporations outside the general government. - Consequences of data gaps: - Guarantees called or SOEs needing support can produce adverse shocks to measured debt stock when guarantees and SOE debt are not consolidated in data (examples cited: Madagascar and Togo). - Weak attention to extra-budgetary operations and SOE finances can lead DSAs to miss fiscal activities “below the line,” enabling debt surprises where governance and central oversight are weak. - Gaps in loan terms information: - Only two-thirds of IMF country teams viewed information on bilateral lending terms as reasonably clear. - Terms from Paris Club members generally clearer than those from NPC members. - Fewer than half of country teams found terms and conditions of commercial credits (including syndicated loans) to be clear/fairly clear. - Country teams know little about collateral requirements; some analysts suggest up to one-third of lending by new creditors in LIDCs may involve some form of collateral. - Gaps in loan commitment/disbursement information: - Information often limited to disbursed amounts; commitments not fully disclosed. Example: still-to-be-disbursed external debt contracted by Cameroon estimated at 24 percent of GDP in 2017. - PPPs and contingent liabilities: - Rapid growth in PPPs is rarely captured in contingent liability analyses, complicating risk assessment (see PPP shock quantification above). ### Conclusions and policy recommendations - Status and risks: - Debt vulnerabilities remain contained in the majority of LIDCs, but a substantial minority now face significant debt-related challenges. - If fiscal adjustments embedded in current staff projections are not vigorously implemented, the number of countries facing serious challenges will increase. - Public debt has risen significantly across many LIDCs due to shocks and expansive fiscal policies; some 40 percent of countries are at high risk of/already in debt distress—up from 21 percent in 2013. - Debt burdens are projected to be contained in coming years only if significant fiscal adjustment and a pick-up in growth are implemented. - Policy recommendations: - Contain debt accumulation, particularly on commercial terms, by boosting budgetary revenues to create space for growth-enhancing outlays. - Improve public investment efficiency to build public capital in a tightened budgetary environment. - Scrutinize investment plans closely to ensure only projects with credibly high economic rates of return are undertaken. - Use PPPs cautiously: they can build infrastructure outside the budgetary envelope but require skilled negotiation and rigorous risk assessments to avoid contingent fiscal liabilities. - Avoid over-reliance on collateralized borrowing: while it can improve terms on specific loans, it weakens current creditors’ positions, deters other creditors, creates rigidities, and poses serious risks if debt service becomes unsustainable. - Make use of the newly revised IMF-World Bank Debt Sustainability Framework for Low-Income Countries (IMF, 2017c), which contains an expanded set of tools to assess debt vulnerabilities and inform budget and borrowing decisions. *Prepared from "MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018."* ### 90. The increasing importance of new lenders, and their exposure in difficult debt cases, ### pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries - 90. The increasing importance of new lenders, and their exposure in difficult debt cases, ### New lenders, due diligence, and participation in debt restructurings - Findings and rationale: - The increasing importance of new lenders, and their exposure in difficult debt cases, has made clear the need for them to exercise due diligence in lending and develop modalities for participating in debt restructuring operations. - Recommendations for lenders: - Monitor the evolution of debt vulnerabilities in borrowing countries, including assessing the impact of potential new lending on vulnerabilities. - Consider the potential benefits of subscribing to principles for sustainable lending and borrowing, such as those being championed by the G-20. - Develop plans for participating in debt restructuring operations given the increasingly challenging debt environment among LIDCs. - Prioritize timely resolution of debt restructuring to lower costs for both the debtor and creditors; timely resolution generally requires efficient creditor coordination. - Agree in advance among official creditors on general “rules of the game,” including principles for sharing information and approaches to burden-sharing, to facilitate work-outs in individual country cases. - Consider the potential benefits of joining or working with existing international fora for creditor information sharing and coordination. ### Data gaps and improving public sector debt monitoring - Actions needed (national authorities, working with IMF and World Bank staff): - Expand the coverage of debt data to cover all public and publicly guaranteed debt. - Improve reporting of both the amounts and the terms and conditions of loans. - Lenders could develop mechanisms for sharing information on terms and conditions with international financial institutions while preserving confidentiality. - Borrowers could find ways to share such information while preserving confidentiality, for example by aggregating across several loans. - Systematically track lending commitments as well as disbursements. - Make greater efforts to project and report contingent liabilities, including those arising from state-owned enterprises and PPPs. - Use the Fund’s Fiscal Transparency Code for guidance on risks disclosure and analysis (IMF, 2014c). ### Methodological notes: realism tools used to examine WEO forecasts - Cyclically adjusted primary balances: - Primary structural balances are estimated under the common assumption that the elasticity of revenues to output is 1 and the expenditure elasticities are zero. - Formula: psb_t = pb_t − gap_t ⋅ ex_t - Where pb is the primary balance in percent of GDP, gap is the output gap, and ex is primary expenditures in percent of GDP. - Output gaps are estimated by applying the HP filter to annual real GDP series in the WEO database, using a smoothing parameter of 100, and extending the endpoints of the series 5 years using average growth rates to avoid endpoint bias. - Multiplier calculations: - Assumptions: impact multiplier of 0.4 and a persistence term equal to 0.6. - Impact of fiscal policy in year t: m_t = Σ_{i=0}^{10} 0.4 ⋅ Δpsb_{t−i} ⋅ 0.6^{i} - Estimates of public sector capital stocks and contribution to growth: - Public capital stocks derived using the FAD dataset (extends through 2015); capital-to-GDP ratios extended until 2017. - Perpetual inventory equation: K_t^G = (1−δ) K_{t−1}^G + q I - Where I is public investment to GDP, δ is the depreciation rate (5 percent), and q is the efficiency of government investment (set to 1). - Growth contribution estimated using a pseudo-production function with output iso-elastic in public capital: - Y_t = (K_t^G)^β ⋅ f(z, K_P, L) - Elasticity of output to public capital (β) is set at 0.15. ### Coverage of public sector debt in LIDCs (summary indicators) - The document presents a country-by-country coverage table indicating whether public sector debt coverage includes: central government, sub-national government, general government, nonfinancial public corporations, and guaranteed debt. (Source: 2017 LIDC desk survey, and IMF Fiscal Monitor.) - The LIDC grouping contains 59 countries (noted elsewhere in the chapter). ### Multilateral and plurilateral lending institutions (coverage table highlights) - A listing of institutions by remit (Global/Regional/Intermediate) and member counts is provided; examples and exact institutional rows include: - International Monetary Fund — Global — 189 members - World Bank Group — Global — 189 members - International Fund for Agricultural Development — Global — 179 members - African Development Bank — Regional — 80 members - Asian Development Bank — Regional — 67 members - New Development Bank — Global — 5 members - BRICS Contingent Reserve Arrangement — Intermediate — 5 members - Islamic Development Bank — Intermediate — 57 members - (Additional institutions and member counts appear in the source table.) ### Debt developments in PRGT-eligible small states - Scope and context: - Annex assesses debt developments in 13 middle income small states that are eligible for concessional PRGT financing but have income levels well above the LIDC cut-off level. - “Small states” in this annex refers to the subgroup of 13 small states that are eligible for PRGT financing. - Key findings and statistics: - The median level of public debt in this grouping has fallen slightly since 2013, albeit with marked variation across countries. - Median public debt increased from 42 percent of GDP in 2006 to a peak at 57 percent in 2013. - Since 2013, median public debt declined by 4 percentage points to 53 percent of GDP in 2017. - Tourism-based small state median public debt to GDP increased modestly from 2013 to reach 78 percent of GDP in 2017, compared to 44 percent in other small states. - Cabo Verde has the highest debt levels and experienced the largest buildup in public debt since 2013. - External debt vulnerabilities in PRGT-eligible small states have risen considerably since 2016: - Ten out of 13 small states were at high risk of external debt distress or in distress in 2017, up from six in 2013. - This compares to some two-fifths of LIDCs classified similarly. - Definition notes: - The IMF membership includes 34 small developing states with population less than 1.5 million; 20 are deemed PRGT-eligible. Seven small states are classified as LIDCs, while 13 are middle income countries whose income level exceeds the LIDC per capita threshold. - Of the 13 PRGT-eligible small states, the four largest members (Maldives, Guyana, Cabo Verde and St. Lucia) account for 74 percent of the PPP-weighted GDP of the group. - All 13 small states are island states except Guyana; 8 are tourism-based economies (tourism contributes at least 15 percent of GDP and 25 percent of total exports). ### Annex I — Update of the LIDC grouping: methodology and outcomes - Purpose: - Revisit the 2014 classification of the “Low-Income Developing Countries (LIDCs)” grouping to reflect economic developments since 2014. - Key methodological points: - Primary determinant for inclusion remains a level of gross national income (GNI) per capita below a threshold, adjusted to reflect average growth in per capita income in LIDCs since 2014. - Socioeconomic indicators are used to assess reclassification when income data suggests a change. - Adjustments are incremental: remove countries when income levels grow rapidly above the threshold and structural features resemble EMEs; add countries when per capita income falls to LIDC-like levels and structural features match typical LIDCs. - Threshold and composition outcomes: - Original LIDC grouping was based on 2011 GNI per capita of $2,390. - Median growth in GNI per capita during 2011–16 was some 12 percent. - New income threshold is set at $2,700. - The updating exercise results in an LIDC grouping that contains 59 countries—with Bolivia and Mongolia exiting the group and Timor-Leste being added. - Additional facts and figures: - Four countries in the 2014 LIDC group are no longer eligible for concessional PRGT financing: Bolivia, Mongolia, Nigeria, and Vietnam all graduated in 2015. - The income threshold for the 2015 PRGT eligibility review was $2,430. - Median GNI per capita for the group increased by 12 percent between 2011 and 2016; the mean increased by 19 percent. - The group excluded India, Pakistan, and the Philippines in 2014 despite income criterion due to their treatment as EMEs by market analysts. *International Monetary Fund — pp021518: Macroeconomic Developments and Prospects in Low-Income Developing Countries (selected excerpts).* ### 10. There were 60 countries in the 2014 LIDC grouping. Two of these countries—Bolivia and ### 10. There were 60 countries in the 2014 LIDC grouping. Two of these countries—Bolivia and ### Changes to the LIDC grouping - There were 60 countries in the 2014 LIDC grouping. - Bolivia and Mongolia had 2016 GNI per capita income levels that exceed the proposed threshold level, by 14 percent and 31 percent, respectively. - Bolivia and Mongolia are dropped from the LIDC grouping. - Two countries not included in the 2014 LIDC grouping—Timor-Leste and Ukraine—have per capita income levels below the proposed threshold level, by 19 percent and 14 percent, respectively. - Timor-Leste is included in the revised LIDC grouping; Ukraine is not included. ### Rationale and structural indicators - Bolivia and Mongolia: on key structural features—absolute poverty levels, share of employment in agriculture, education levels, and life expectancy—both countries look much more like a typical, if somewhat poorer, EME than a typical LIDC (Annex I. Figure 2, Panel A). - Timor-Leste and Ukraine: examination of the same structural factors yields divergent conclusions (Annex I. Figure 2, Panel B). - Timor-Leste’s poverty levels, role of agriculture, and education levels are similar to those of a typical LIDC. - Ukraine’s poverty levels, employment structure, life expectancy, and educational levels are similar to those of a typical EME. - Explanations for income declines: - Timor-Leste: fall of income reflects the large fall in output of oil, with current oilfields nearing depletion; income is not expected to rebound quickly given depleting production in current oilfields and the outlook for oil prices. - Ukraine: fall of income mainly reflects the impact of armed conflict; the income decline in Ukraine reflects exceptional circumstances and is likely more transitory. ### Threshold and related numeric notes - Rounding from $2,687. - In both Timor-Leste and Ukraine, income levels have fallen below the former cut-off point of twice the IDA operational threshold ($2,330 or two times $1,165). ### Updated grouping and key statistics - In conclusion, the updated LIDC grouping contains 59 countries, all with a GNI per capita of less than $2,700. - Two countries were dropped from the group (Bolivia and Mongolia), while one was added (Timor-Leste). - The absolute size of the grouping (in terms of GDP and population) is not significantly affected by these changes. ### Annex Figure 2 — indicator normalization note - Each indicator is normalized from 0 to 100, with a higher number indicating a higher level of development. - Corresponding values for 0 and 100 used in normalization: - GNI per capita: $1,000 and $10,000 - Poverty share: 60 percent and 0 percent - Education index (a component of the Human Development Index): 0 and 1 - Life expectancy: 40 years and 80 years - Agricultural employment share: 60 percent and 0 percent *MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LIDCS—2018 INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/files/publications/pp/2018/pp021518-macroeconomic-developments-and-prospects-in-low-income-developing-countries.pdf_