## ppea2022054

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### EXECUTIVE SUMMARY — Macroeconomic developments and outlook
- Russia’s war in Ukraine and related fallout have created a challenging external environment for the post-pandemic recovery of low-income countries (LICs).
- Food and commodity prices linger at elevated level with worsening food security.
- Global financial conditions tighten as major economies are fighting against inflation; tightening reduces availability of external financing to LICs and raises sovereign spreads.
- The delay in LICs’ income per capita convergence to that of advanced economies (AEs) is expected to last into the medium term.
- The war is projected to slow down LICs’ recovery from the pandemic: the upside growth surprise in 2021 decelerated in 2022.
- Inflation, initially driven by the economic recovery, accelerated rapidly in 2022, heightening food insecurity and increasing risks of social unrest.
- Current account deficits widened from the low point in 2020, driven by import recovery in 2021, but more by commodity price hikes in 2022.
- Country-group heterogeneity:
  - Small developing states experienced by far the largest decline in growth.
  - Non-fuel commodity and diversified exporters weathered the shocks relatively better.
  - Fragile and conflict-affected states’ growth performance lags behind that of their peers.
  - Higher oil prices would support growth in fuel exporters.
- Tourism: international tourist arrivals to LICs had recovered about half of the lost ground by May-2022, with recovery pace accelerating lately, but remain vulnerable to global slowdown and high energy prices.

### Financing and multilateral support needs
- LICs’ additional financing needs to resume and accelerate income convergence with AEs:
  - Additional financing needs estimated at $440 billion for the period 2022-26, broadly unchanged from the 2021 LIC Report (covering 2021-25).
  - This estimate does not include an additional $57 billion in financing needs in 2022-23 due to the war in Ukraine.
- Breakdown and drivers:
  - Over 2022-26, $170bn to help LICs address the legacy of COVID and rebuild external buffers.
  - Over 2022-26, additional spending needs include $150 billon for vaccine distribution and pandemic preparedness, $20 billion for building external buffers, and about $270 billion additional spending to catch up with EMs’ average spending-to-GDP ratios by 2026.
  - In an adverse slower-recovery scenario, additional financing needs could increase by about $100 billon.
  - LICs’ BoP needs are estimated at $57 billion over 2022-23; about $43 billion can be met with drawdown of reserves, residual financing needs $14 billion.
- IMF and multilateral response highlights:
  - In July 2021, Fund increased by 45 percentage points the normal limits on access to concessional financing and eliminated hard limits for poorest countries.
  - August 2021 SDR allocation: 456.5 billion SDR overall; LICs received about SDR 14.7 billion.
  - As of end-June 2022, LICs used or planned to use SDR 5 billion for budget outlays; total SDR sales during August 2021-June 2022 amounted to SDR 3.7 billion.
  - New, time-bound “food shock window” (approved September 30, 2022) provides low-access emergency financing; available for 12 months from establishment.

### Fiscal and debt vulnerabilities
- Fiscal pressure and debt dynamics:
  - LICs’ fiscal position increasingly under stress as governments ramped up spending for pandemic response and to protect vulnerable households from high food and fuel prices.
  - Public debt in LICs rose steadily over the last decade, with a further increase in 2020-21 due to the pandemic.
  - As of end-2021, almost 60 percent of LICs were assessed at high risk of, or already in, debt distress, up from 30 percent in 2015.
- Drivers of rising debt:
  - Higher external borrowing following low interest rates, high investment needs, limited progress in domestic revenue mobilization, constrained public financial management capacity.
  - Main contributors to rising debt in 2020: high primary deficits, growth contraction, and a large residual component capturing below-the-line pandemic support.
- Medium-term outlook and risks:
  - Projected decline in public debt in medium term reflects post-Covid spending consolidation but is highly uncertain, particularly due to the war in Ukraine.
  - In 2022: expected large real exchange rate depreciation adds to the primary deficit and pushes up debt; higher inflation relative to nominal interest rates helps contain increase in public debt-to-GDP ratio.
  - Downside risks: weaker growth from global demand shock, tighter global financial conditions and elevated rollover risk, fiscal consolidation that is not growth-friendly, failure to undertake structural reforms.
- Domestic debt dynamics:
  - Domestic debt ratio increased from 11 percent of GDP to 15 percent of GDP in 2021 (about 25 percent of total debt).
  - Domestic financing benefits: less rollover and currency risks; downsides: fiscal dominance, crowding out private sector, financial stability implications since most domestic debt is held by banks.

### Policy trade-offs and priorities
- Near-term objectives for LIC policymakers:
  - Fight inflation while preserving growth.
  - Protect the most vulnerable from shocks.
  - Maintain credible policy frameworks to tackle rising debt vulnerabilities.
- Medium- to long-term priorities:
  - Structural reforms to unlock growth potential and address poverty, inequality, climate change, and promote digitalization to accelerate income convergence.
- Fiscal policy guidance:
  - Protect the most vulnerable and preserve investment critical to long-term growth while safeguarding debt sustainability.
  - Design short-term fiscal policies within a credible medium-term strategy and framework and gradually build back fiscal buffers.
  - Prioritize future spending plans, increase domestic revenue mobilization (in particular through progressive taxation), and enhance debt management capacity.
  - Fiscal measures that protect the vulnerable must be counteracted by other measures to maintain the overall fiscal envelope to avoid fueling inflation.
  - Avoid distortive price controls in general; phase them out when used as second-best expedients.
- Monetary and exchange rate guidance:
  - Act resolutely to bring inflation back to target while avoiding over-tightening that may induce recession.
  - For pegged regimes: ensure policies are consistent with maintaining peg credibility and supporting reserves.
  - For flexible arrangements: depreciation can help absorb shocks but large movements may expose fiscal and financial sectors.

### Income divergence, growth, inflation, and social risk (Chapter 5 highlights)
- Growth and convergence:
  - LICs sustain the largest output loss in the medium term; real GDP for AEs projected to get close to pre-pandemic projected level.
  - Together with EMs, LICs’ prospects to claw back this loss in the near-term are described as "slim."
  - The war in Ukraine appears not to slow down the convergence process on top of the pandemic by much in aggregate because of larger-than-expected contraction in AEs rather than LICs catching up.
- Inflation and food insecurity:
  - Inflation surged in 2022 driven by higher food and energy prices, disrupted production networks, accommodative monetary policy, and exchange rate depreciation.
  - In LICs, inflation is driven overwhelmingly by food price hikes due to higher share of food in household consumption baskets.
  - WFP estimate: 345 million people in 82 countries suffering from acute food insecurity and in need of urgent action—an increase of 200 million since 2019.
  - IFAD and FAO projection: nearly 670 million people will still be facing hunger by 2030—8 percent of the world population.
  - World Bank medium-term estimate until 2028: number of severely food insecure people will remain high at around 1 billion in its IDA and IBRD member countries.
- External sector:
  - Median import coverage projected to drop to 4.1 months in 2022 from 4.5 months at end-2021.
  - About one-third of LICs projected to have reserve levels less than threshold of 3 months of imports in 2022.
  - Remittances: resilient during COVID-19 and recovered strongly; average FDI in LICs dropped to 2.9 percent of GDP in 2020 from 3.6 percent in 2019 and projected to remain subdued in 2022.
  - Over 2017–21, remittances were on average more than twice higher than FDI as a share of GDP in LICs.

### Public debt management capacity development (CD): rationale, enabling conditions, and IMF role
- Purpose and scope:
  - Public debt managers should cover sovereign financing needs at the lowest cost subject to an acceptable degree of risk over the medium to long term and identify and monitor debt-related fiscal risks.
  - The IMF delivers CD in all areas of public debt management; bulk focused on technical aspects of debt portfolio management and legal and institutional aspects.
  - Four core CD areas: institutional arrangements, debt strategy formulation and implementation (MTDS), market development, and debt recording.
- Enabling conditions for effective debt management (four dimensions):
  - Governance: adequate legal and institutional arrangements, comprehensive public debt management law delineating responsibilities.
  - Resources: DMO requires adequate human and physical capital commensurate with portfolio complexity.
  - Information: ongoing access to all relevant data and authority to request data across government; capacity to record and manage debt data effectively.
  - Policy: debt policy consistent with macro framework and coordinated with fiscal and monetary authorities; supported/approved by highest levels of government and legislature.
- MTDS and contingent liabilities:
  - MTDS helps meet financing needs at lowest cost subject to acceptable risk; annual borrowing plans implement strategy with short-term cash management.
  - Debt managers must monitor contingent liabilities (central government loans and guarantees to SOEs, PPPs, power-purchase agreements).
  - IMF provides fiscal risk tools including the fiscal risk portal.
- Modalities and delivery:
  - CD is demand-driven and voluntary; tailored to country characteristics.
  - For low-capacity LICs (e.g., some FCS and small economies), CD focuses on foundational aspects; for others, on local currency bond market development, investor relations, and capital market issuance.
  - Number of regional debt management advisors increased from two to five since the outbreak of the Covid-19 pandemic (Caribbean 2020; Pacific Islands 2021; East and Southern Africa 2022; adding to Francophone West and Central Africa).
  - IMF expanded online debt management learning courses; MTDSx created in 2020 as a stand-alone course.
- Financing of CD:
  - Bulk of CD in debt management provided by the Fund is financed by external resources.
  - Funding mix for Debt Management CD (FY22): DMF 13%; Externally financed 63%; IMF financed 24%.
  - Debt Management Facility (DMF), administered jointly by World Bank and IMF, coordinates CD providers.

### Other providers, coordination, and scaling CD (Box 9)
- Other CD providers and partnerships:
  - World Bank is a major partner; other MDBs include AfDB, ADB, EBRD.
  - Commonwealth Secretariat and UNCTAD provide debt recording systems and training.
  - Regional institutes (MEFMI, Western African Institute for Financial and Economic Management) provide substantial TA often collaborating with Fund and Bank.
- Key enabling-condition challenges limiting CD effectiveness:
  - Weak legal and governance frameworks preventing published debt strategies from driving borrowing decisions.
  - Shortcomings in debt recording; DMOs may manage only a fraction of total public debt.
  - Inadequate staffing and high turnover impede DMOs.
  - Fragmented institutional arrangements limiting accountability and expertise development.
- New and growing CD demands:
  - Translating published debt strategies into implementable plans; joint Fund-Bank Annual Borrowing Plan Tool (ABPT) supports cash-debt integration.
  - Local currency bond market development framework (joint Fund-Bank 2021) provides structured approach; progress uneven across LICs.
  - Investor relations capacity and new instruments (ESG-based borrowing, green bonds, state-contingent clauses) create further CD needs.

### Heterogeneity across LIC subgroups and implications
- Subgroup composition and statistics:
  - Over 50 percent of LICs are fragile and conflict-affected states (FCS).
  - Non-fuel commodity and diversified exporters each contain 40 percent of LICs.
  - Only five countries are fuel exporters.
- Subgroup macro highlights:
  - FCS: growth performance lags most LIC subgroups; in 2022 projected to have narrower primary and current account deficits than average LIC partly due to tighter financing constraints; 72 percent of FCS fall into FAO-defined low-income food deficit countries.
  - Small developing states (SDS) and tourism-dependent: worst macroeconomic performance; real GDP growth projected to be the lowest among LICs in 2022; fiscal and external positions expected to deteriorate sharply.
  - Frontier markets: growth flattened in 2022 but projected to remain above other LICs; tapped global financial markets during pandemic; largest primary deficits and debt increases in 2020; fastest consolidation and debt reduction expected.
  - Diversified and non-fuel commodity exporters: relatively resilient; non-fuel commodity exporters expected notable rapid currency depreciation continuing in 2022.

### Fuel exporters (subgroup of 5 countries)
- Growth and external outlook:
  - Growth recovery started in 2021 and projected to continue in 2022, reaching above pre-pandemic levels.
  - Strong oil export revenue expected to keep current account broadly balanced in 2022 and boost reserve coverage.
- Constraints and heterogeneity:
  - Constraints: aging oil fields and weak extractive investment (Chad, South Sudan); depleting reserves (Timor-Leste); high fuel subsidies.
  - Country specifics:
    - Yemen and South Sudan: exceptionally high inflation pressure driven by domestic conflicts, rapid currency depreciation, and very high share of imported foods.
    - Timor-Leste, Chad, Republic of Congo: fixed exchange rate regimes experienced better inflation performance; Timor-Leste persistently runs large primary deficit due to its large sovereign wealth fund; the other three have accumulated primary surpluses over same period.
- Public debt outlook:
  - Public debt expected to decline in all fuel exporters except Timor-Leste going forward, supported by higher oil prices and debt restructuring in Republic of Congo.

### Long-term issues: poverty, human development, schooling, climate, digitalization
- Poverty and human development:
  - Some close to 70 million people pushed into extreme poverty ($1.90/day) during the pandemic (IMF, 2022f).
  - Developing world lost about 5-years progress in poverty reduction and human development as of 2021.
  - Differential impacts: increases in Gini coefficients of 0.6 (EMs) and 1.0 (LICs); country-specific large impacts: 2.9 for Laos and close to 5 for Mozambique.
- Loss-of-learning findings (Box 3, model simulations):
  - “Full pandemic effect”: short-run contraction and public debt-to-GDP jump; output stabilizes around 2-3 percent below pre-pandemic level.
  - Loss-of-learning effect: marginal short-run but widening over time; in long run accounts almost entirely for the “Full pandemic effect”.
  - Psacharopoulos et al. (2021) estimate annualized losses in national income due to school closures ranging from around 0.5 percent of GDP in high-income countries to 2.8 percent of GDP in low-income countries.
  - IMF (2022a) suggests loss of learning effects could reduce long-run output by as much as 3% relative to pre-pandemic levels in advanced economies.
- Policy scenarios and trade-offs:
  - Baseline: output stabilizes below pre-pandemic level; public debt rises.
  - “Fighting back”: scale up basic and secondary education spending financed by external concessional financing and domestic revenue mobilization; helps rebuild human capital but public debt rises above baseline.
  - Recommendation: international community support critical; invest in remedial and sustained medium-term education, public health, and training systems.
- Climate change and resilience:
  - Climate change increases frequency and intensity of shocks; limited fiscal space constrains resilience-building.
  - Shifting to climate-resilient agriculture and renewable energy faces intense budget constraints.
- Digitalization and ICT:
  - ICTs offer opportunities for efficient public services, anti-corruption, financial inclusion, and SME financing.
  - Challenge: in Sub-Saharan Africa only 28 percent of population has access to internet.
  - Significant investments in ICT infrastructure and reliable electricity are key priorities.

### Case studies, lessons, and implementation challenges (Annex V highlights)
- Cross-cutting lessons:
  - Multiple CD providers without coordination can cause duplication and waste.
  - Debt management improvements are not linear; expect setbacks and delays, especially in fragile states.
  - Up-front commitment, sequencing, and political ownership critical; results often observed over years, not months.
- Country examples and outcomes:
  - Somalia: joint Fund-Bank CD focused on legal, institutional frameworks and debt recording; produced comprehensive debt reform plan with timebound recommendations.
  - Papua New Guinea: CD on debt reporting revealed fragmented legal framework and resource constraints; led to implementation plan.
  - Guinea: AFW-supported reforms led to first local currency 5-year treasury bond auction in April 2022 after setbacks from political instability.
  - ECCU: long-term regional approach and JDMP produced durable capacity with near self-sufficiency in preparing MTDS and risk quantification.
  - Democratic Republic of Congo: AFRITAC Central supported reintroduction of treasury bills after nearly 30 years; introduced dollar-indexed and local-currency instruments; highlighted importance of coordination with central bank and transparency on timelines.

### Concluding observations and policy implications
- Fiscal policy remains the main driver of public debt, but effective debt management mitigates vulnerabilities, reduces volatility, and supports growth.
- The transformed creditor landscape (shift from Paris Club to non-Paris Club and private creditors) complicates restructuring and requires enhanced creditor coordination.
- G20 Common Framework (CF) identified improvements:
  - (i) Quicker, time-bound CF processes.
  - (ii) Introduction of a debt service standstill by official bilateral creditors during negotiations, with no penalty interest.
  - (iii) Greater clarity on enforcement and evaluation of comparability of treatment to private creditors.
  - (iv) Expansion of coordinated debt treatments to non-CF eligible countries with debt vulnerabilities.
- IMF CD priorities:
  - Strengthen legal and governance frameworks, improve debt recording/reporting, develop MTDS and annual borrowing plans, integrate cash and debt management, support local currency market development and investor relations.
  - Remain nimble, invest in staff and research (ESG, state-contingent debt, sovereign ALM), and coordinate with other CD providers via the DMF.
- Implementation caveats:
  - CD achievements have improved capacity but progress is gradual; success depends on political support, resourcing, and coordination across providers; CD should be assessed over years, not months.

_Italic: ppea2022054 — MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022 (excerpt)._

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Macroeconomic developments and outlook
- Russia’s war in Ukraine and related fallout have created a challenging external environment for the post-pandemic recovery of low-income countries (LICs).
- Food and commodity prices linger at elevated level with worsening food security.
- Global financial conditions tighten as major economies are fighting against inflation; tightening reduces availability of external financing to LICs and raises sovereign spreads.
- The delay in LICs’ income per capita convergence to that of advanced economies (AEs) is expected to last into the medium term.
- The war is projected to slow down LICs’ recovery from the pandemic: the upside growth surprise in 2021 decelerated in 2022.
- Inflation, initially driven by the economic recovery, accelerated rapidly in 2022, heightening food insecurity and increasing risks of social unrest.
- Current account deficits widened from the low point in 2020, driven by import recovery in 2021, but more by commodity price hikes in 2022.
- Country-group heterogeneity:
  - Small developing states experienced by far the largest decline in growth.
  - Non-fuel commodity and diversified exporters weathered the shocks relatively better.
  - Fragile and conflict-affected states’ growth performance lags behind that of their peers.
  - Higher oil prices would support growth in fuel exporters.
- Tourism: international tourist arrivals to LICs had recovered about half of the lost ground by May-2022, with recovery pace accelerating lately, but remain vulnerable to global slowdown and high energy prices.

### Financing and multilateral support needs
- An updated estimate indicates LICs’ additional financing needs to resume and accelerate their income convergence with advanced economies would amount to $440 billion for the period 2022-26, broadly unchanged from the 2021 LIC Report which covered the period 2021-25.
- This estimate does not include an additional $57 billion in financing needs in 2022-23 due to the war in Ukraine.
- The international community and multilateral institutions, including the Fund, stepped up support to LICs in this challenging time, but more needs to be done.

### Fiscal and debt vulnerabilities
- LICs’ fiscal position is increasingly under stress as governments ramped up spending to address the pandemic and the war in Ukraine, and to protect the vulnerable from high food and fuel prices.
- Debt vulnerabilities have intensified, with an increasing number of LICs being subject to heightened risks of debt distress in a more diverse creditor landscape.
- The envisaged medium-term consolidation is subject to an array of downside risks.
- Public debt management matters more than ever: improvements can play a critical role in mitigating debt vulnerabilities, safeguarding debt sustainability, reducing economic and financial volatility, encouraging development of the financial sector, and supporting long-term growth.

### Policy trade-offs and priorities
- Near-term policy objectives for LIC policymakers:
  - Fight inflation while preserving growth.
  - Protect the most vulnerable from shocks.
  - Maintain credible policy frameworks to tackle rising debt vulnerabilities.
- Medium- to long-term priorities:
  - Structural reforms to unlock growth potential and address poverty, inequality, climate change, and promote digitalization to accelerate income convergence.

### Public debt management capacity development (CD)
- With elevated debt levels, high gross financing needs, and rising global interest rates, effective public debt management has become more important than ever for LICs.
- Effective debt management requires both technical capacity and a strong institutional framework with a clear mandate, resources, and political support.
- The Fund's role and actions:
  - The Fund can play an instrumental role by providing and facilitating capacity development in debt management areas.
  - Specific attention by governments should be given to the basic enabling conditions: Governance, Resources, Information and Policy.
  - The Fund is well positioned to respond to LICs' requests for debt management CD, including strengthening the toolkit in core CD areas such as debt management strategies, investor relations, local currency bond markets and debt reporting.
  - To support implementation, the number of regional debt management advisors has been increased and the number of online debt management learning courses has been expanded to engage a larger audience cost-effectively and improve CD delivery quality.
- Pace and expectations:
  - Public debt management CD can and has improved LICs’ capacity to manage public debt, but progress will remain gradual.
  - Achievements often occur over years rather than months and require steadfast commitment from authorities and CD providers.
  - Country authorities and CD providers should be prepared with contingencies for interruptions, setbacks, and delays.

### Report preparation and coverage notes
- The group of low-income countries in this report is defined as the 69 countries currently eligible to Poverty Reduction and Growth Trust (PRGT) facilities; see Annex I for details.
- The report was prepared by SPR and MCM under the overall guidance of Guillaume Chabert and Miguel Savastano; led by Roland Kangni Kpodar (SPR) and Thor Jonasson (MCM).

*Prepared November 2, 2022 — EXECUTIVE SUMMARY, MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022*

### 5. More broadly, income divergence between advanced economies (AEs) and LICs

### 5. More broadly, income divergence between advanced economies (AEs) and LICs

### Income divergence and convergence
- LICs sustain the largest output loss in the medium term, while real GDP for AEs is projected to get close to the pre-pandemic projected level.
- Together with emerging markets (EMs), LICs’ prospects to claw back this loss in the near-term are described as "slim."
- The war in Ukraine appears not to slow down the convergence process on top of the pandemic by much in aggregate figures, largely because of larger-than-expected contraction in AEs rather than catching up by LICs.
- Delayed vaccination in LICs increases exposure to new emerging variants and raises recovery and convergence risks.

### Growth and inflation
- The spillovers of the war in Ukraine slowed down growth in LICs; the rebound in 2021 weakened in 2022 owing to disruptions to trade, high food and energy prices, and tightening global financial conditions.
- Real GDP growth in LICs is projected to decelerate in 2022, in contrast to the increasing trend in the January 2022 WEO update; revisions reflect materialization of many downside risks that will continue to exert downward pressure on projections.
- Inflationary pressures surged driven by higher food and energy prices, disrupted cross-border production networks, accommodative monetary policy, and exchange rate depreciation.
- In LICs, inflation is driven overwhelmingly by food price hikes due to the higher share of food in household consumption baskets.
- The war reversed a projected retreat in inflation (from the January 2022 WEO) and leads to a sharp increase in projected headline inflation rate in 2022, with persistent higher inflation into the medium term.

### Food insecurity and social risk
- LICs are typically net food importers and face higher pass-through of global to domestic food prices, exposing them to international food price shocks.
- High energy prices have been a key driver of domestic food inflation through increased transport and food distribution costs.
- High food prices leave many vulnerable households at risk of hunger because of the high share of food in consumption baskets of the poorest households.
- Climate change exacerbates downside risks to rainfed agriculture; countries cited with worsening drought or planting delays include Ethiopia, Somalia, South Sudan, Uganda, Burundi, Madagascar, Malawi, Mozambique, Nigeria, Democratic Republic of Congo, parts of Kenya, and countries in the Sahel.
- World Food Programme (WFP) estimate: 345 million people in 82 countries are suffering today from acute food insecurity and are in need of urgent action, an increase of 200 million since 2019.
- IFAD and FAO projections: nearly 670 million people will still be facing hunger by 2030 – 8 percent of the world population.
- World Bank estimate (medium-term until 2028): the number of severely food insecure people will remain high at around 1 billion people in its IDA and IBRD member countries.

### Policy responses and social stability risks
- High food and fuel prices, and the risk of social unrest, prompt many governments to implement measures such as price freezes, tax exemptions, or subsidies.
- These measures are often untargeted and can disrupt market signals and delay demand and supply adjustments; careful design is urged to ensure cost-effectiveness and protection of the most vulnerable.

### Fiscal developments
- LICs’ fiscal position is projected to remain under pressure in the wake of the war in Ukraine but could improve from 2023 onwards, supported mainly by expenditure containment.
- LICs experienced two consecutive years of fiscal pressures to meet health expenditure needs and provide pandemic support, including tax relief for businesses.
- The slight improvement in the primary balance in 2021 is projected to reverse in 2022 due to upticks in government spending for subsidies and social spending.
- Limited capacity to target subsidies implies often higher-than-warranted fiscal costs.
- Favorable terms of trade from higher commodity prices may provide fiscal buffers to natural resource-rich LICs.
- Debt levels soared in many countries, worsening debt vulnerabilities that predate the pandemic and war, limiting policy space for growth-friendly expenditure and shock response.
- In the medium term, fiscal restraint is projected to materialize, hinging entirely on expenditure consolidation with marginal improvements in tax revenues.
- The pandemic and the war pushed LICs to scale back revenue mobilization ambitions by about 1.5 percent of 2019 GDP over the medium term compared to pre-pandemic projected levels, while grants are higher.
- Governments spent more than planned driven by significant expansion in current spending; capital expenditure was postponed, with cuts in the past two years being reversed in 2022 onwards.
- Clawing back current spending can be challenging depending on components (e.g., wages, subsidies), which could jeopardize medium-term fiscal consolidation.

### External sector developments
- LICs’ current account deficits are expected to deteriorate in 2022 on average after easing during the pandemic.
- The pandemic-led collapse in aggregate demand caused sharper import contraction relative to exports in 2020, aided by softening oil prices and strong remittances, improving current accounts in 2020 before widening with reopening.
- Additional upward pressures on commodity prices due to the war will further deteriorate LICs’ external position in 2022, producing a weaker current account path than pre-war projections.

### Remittances and FDI
- Remittances proved resilient during the COVID-19 pandemic and recovered strongly after an initial contraction; remittances supported external financing and cushioning of shocks.
- Average FDI in LICs dropped in 2020 to 2.9 percent of GDP from 3.6 percent in 2019 and is projected to remain subdued in 2022.
- Over 2017–21, remittances were on average more than twice higher than FDI as a share of GDP in LICs.

### Reserves and external buffers
- Median import coverage (stock of international reserves measured in months of prospective imports) is projected to drop to 4.1 months in 2022 from 4.5 months at end-2021, reflecting a widening current account.
- About one-third of LICs are projected to have reserve levels less than the threshold of 3 months of imports in 2022.
- The 2021 SDR allocation helped prop up reserves in 2021.

### Financial sector and macroprudential developments
- Relaxation of macro-prudential policies during the pandemic provided a lifeline to liquidity-strapped firms but increasingly exposes LICs to financial sector risks as pandemic support is withdrawn.
- Growth of private sector credit in LICs rebounded in 2021 to pre-pandemic levels after a sharp decline during the pandemic.
- Financial Soundness Indicators (FSI) up to end-2020 do not indicate significant financial sector vulnerabilities on average, despite declines in profitability.
- Non-performing loans rose modestly from 8.5 percent at end-2019 to 9 percent at end-2020 (average).
- Risks remain that regulatory forbearance and exceptional support measures ending, combined with global downside risks, will increase corporate defaults and financial stress.
- Wider expected current account deficits and weaker reserve coverage could lead to exchange rate depreciation, potentially deteriorating bank and corporate balance sheets in flexible regime countries with high dollarization.

### Sovereign-bank nexus and rising domestic public debt
- Rising domestic public debt, predominantly held by domestic financial institutions, increases financial stability risks.
- Sovereign banks’ exposure has risen in LICs, notably during the pandemic due to on-lending to the government.
- A deeper sovereign-bank nexus could strain bank liquidity, crowd out private lending, and increase vulnerability of the banking system and the overall economy to macroeconomic shocks.

_International Monetary Fund — MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022 (Chapter: 5. More broadly, income divergence between advanced economies (AEs) and LICs)_

### 18. Public debt has risen steadily during the last decade, with a further increase in 2020-21

### 18. Public debt has risen steadily during the last decade, with a further increase in 2020-21

### Recent debt trends and drivers
- Public debt in LICs rose steadily over the last decade, with a further increase in 2020-21 due to the pandemic.
- Key contributing factors: higher external borrowing following low interest rates, high investment needs, limited progress in domestic revenue mobilization, and often-constrained public financial management capacity.
- Despite scaled-up international support, eroded fiscal buffers and limited access to financial markets severely constrained LICs’ response to the pandemic, producing a large output loss that further elevated debt-to-GDP ratios.
- As of end-2021, almost 60 percent of LICs were assessed at high risk of, or already in, debt distress, up from 30 percent in 2015.
- Debt burden indicators (examples cited) rose over the last decade and are projected to remain elevated in the medium term: external debt service-to-export ratio and total interest payment-to-revenue (excluding grant) ratio.

### Medium-term outlook and risks
- The projected decline in public debt in LICs in the medium term mirrors post-Covid spending consolidation but is subject to high uncertainty, particularly from the war in Ukraine.
- Main contributors to rising debt in 2020: high primary deficits, growth contraction, and a large residual component capturing below-the-line pandemic support.
- In 2022:
  - Expected large real exchange rate depreciation (reflecting a strong dollar) adds to the primary deficit, pushing up debt.
  - Economic growth and the decline in real interest rate act as countervailing forces.
  - The impact of real interest rate reflects prevailing high inflation worldwide; with inflation projected to increase more than the average nominal interest rate, it helps contain the increase in public debt-to-GDP ratio in 2022.
- In the medium term:
  - Primary deficit is expected to continue driving debt level up, albeit at a declining rate, with rebounded growth being the offsetting factor.
- Downside risks to debt-to-GDP projections:
  - Uncertainty from the war in Ukraine: weakening global demand may hamper growth; higher commodity prices may strain fiscal consolidation as governments support vulnerable households.
  - Tighter global financial conditions and flight to quality elevate rollover risk for LICs due to private creditors and bondholders rebalancing portfolios.
  - Fiscal consolidation that is not growth-friendly can worsen the debt trajectory through fiscal multipliers.
  - Failure to undertake critical structural reforms could result in lower-than-projected growth, exacerbating debt vulnerabilities.

### Evolving creditor landscape and implications for restructuring
- Although debt burdens are lower compared to the situation that triggered the HIPC Initiative, debt vulnerabilities are elevated and the transformed external debt structure creates new challenges for creditor coordination.
- By end-2020, creditor shares in total external debt changed markedly:
  - Paris Club official bilateral creditors: fell from 39 percent in 1996 to 12 percent in 2020.
  - Non-Paris Club official bilateral creditors: rose from 8 percent to 22 percent.
  - Multilateral debt share: declined from 55 percent in 2010 to 46 percent in 2020.
  - Private creditors' share doubled from 8 percent to 16 percent through LICs’ issuance of marketable bonds.
- The more complex creditor landscape makes debt restructuring processes more difficult because mechanisms to ensure coordination among creditors have not evolved in parallel.
- An important objective of the G20 Common Framework (CF) is to bring together PC and NPC creditors to increase cooperation and facilitate needed debt treatments; implementation of the CF remains challenging and requires effective and timely application to restore stability for many vulnerable countries.

### G20 Common Framework — identified improvements (Box 2)
- IMF and World Bank identified four priorities to improve CF implementation:
  - (i) Quicker and more efficient processes through clear and time-bound steps in the implementation of the CF.
  - (ii) Introduction of a debt service standstill provided by official bilateral creditors for the period of negotiation, to immediately address liquidity needs of countries requesting treatment, with no penalty interest.
  - (iii) Greater clarity on how official bilateral creditors will enforce and evaluate the comparability of treatment to private creditors.
  - (iv) Expansion of coordinated debt treatments to non-CF eligible countries with debt vulnerabilities.
- Fostering trust among creditors is critical to make further progress on the CF.

### Domestic debt dynamics
- Domestic debt has risen alongside external debt as domestic financial and bond markets develop.
- Domestic debt ratio increased from 11 percent of GDP to 15 percent of GDP in 2021 (about 25 percent of total debt).
- Benefits of domestic financing: less rollover and currency risks.
- Downsides: exposure to fiscal dominance, crowding out private sector financing, financial stability implications since most domestic debt is held by banks, and potentially higher average cost than external (particularly concessional) debt.

### Policy tools and capacity building
- Sound debt management is critical alongside fiscal consolidation and debt restructuring when necessary.
- The IMF-World Bank Multipronged Approach to Address Debt Vulnerabilities (MPA) organizes support around four pillars:
  - (i) Strengthening debt transparency.
  - (ii) Strengthening countries’ capacity to manage debt.
  - (iii) Applying accurate debt analysis tools.
  - (iv) Strengthening International Financial Institution (IFI) policies.
- Building capacity is essential; IMF and World Bank are:
  - Developing customized advice to address debt and fiscal risks and adapting modalities of capacity development delivery.
  - Supporting more comprehensive borrower reporting to international statistical databases and strengthening IFIs’ policies on debt reporting and data dissemination.
  - Enhancing outreach to creditors and debtors, including in CF implementation.
- Recent IMF analytical and policy tools referenced: sovereign risk debt sustainability framework reviews for market access countries, the Debt Limits Policy, and the IMF’s Lending into Official Arrears and Lending into Arrears policies.

### Heterogeneity across LIC subgroups and implications for debt and macro outcomes
- LIC subgroups by institutional characteristics: fragile and conflict-affected states (FCS), small developing states (SDS), and frontier markets.
- LIC subgroups by export structure: fuel, non-fuel commodity, diversified exporters, and tourism-dependent LICs.
- Overlap and key subgroup statistics:
  - Over 50 percent of LICs are FCS.
  - Non-fuel commodity and diversified exporters each contain 40 percent of LICs.
  - FCS subgroup consists disproportionately of non-fuel commodity exporters.
  - For tourism-dependent countries, all but one (Cambodia) are SDS.
  - Only five countries are fuel exporters.
- Subgroup macro highlights:
  - FCS: growth performance lags most LIC subgroups; in 2022 projected to have narrower primary and current account deficits than average LIC partly due to tighter financing constraints; 72 percent of FCS fall into FAO-defined low-income food deficit countries.
  - SDS and tourism-dependent: worst macroeconomic performance across LIC subgroups; real GDP growth projected to be the lowest among LICs in 2022; fiscal and external positions expected to deteriorate sharply in 2022 and remain elevated in the medium term; three-quarters of SDS have peg regimes, helping contain inflation.
  - Frontier markets: growth flattened in 2022 but projected to remain above other LICs; they tapped global financial markets during the pandemic, producing largest primary deficits and debt increases in 2020, and smallest decline in growth in 2020; faster consolidation and faster debt reduction expected relative to other LICs.
  - Diversified exporters: growth in 2022 set to be on par with LIC average; they showed resilience in the pandemic with smaller cumulative output loss in 2020-22; inflation marginally higher at peak in 2022 and in the medium term.
  - Non-fuel commodity exporters: similar growth to average LICs in 2022; current account deficit expected to widen in 2022 but remain smaller than most other LICs except fuel exporters; notable rapid currency depreciation expected to continue in 2022.

_International Monetary Fund — MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022 (Chapter content)_

### 31. Unsurprisingly, fuel exporters stand to benefit from higher energy prices. Unlike other

### 31. Unsurprisingly, fuel exporters stand to benefit from higher energy prices. Unlike other

### Fuel exporter subgroup: growth, inflation, fiscal and external outlook
- Subgroup size: 5 countries.
- Growth:
  - The growth recovery started in 2021 is projected to continue in 2022, albeit at a slower pace, and reaching a level above that of the pre-pandemic period.
- External balances and reserves:
  - Strong oil export revenue will help maintain the current account broadly balanced in 2022, while boosting reserve coverage.
- Constraints on benefits from higher energy prices:
  - Aging oil fields and weak extractive investment constraining production expansion (Chad and South Sudan).
  - Depleting oil reserves (Timor-Leste).
  - High fuel subsidies.
- Heterogeneity and country-specific vulnerabilities:
  - Yemen and South Sudan:
    - Exceptionally high inflation pressure.
    - Drivers include domestic conflicts, rapid currency depreciation, and a very high share of imported foods in the consumption basket of households.
    - Both face severe currency depreciation and excessive money growth.
  - Timor-Leste, Chad, and Republic of Congo:
    - All have fixed exchange rate regimes and, as a result, have experienced better performance on the inflation front.
    - Timor-Leste persistently runs large primary deficit due to its large sovereign wealth fund.
    - Yemen has moderate primary deficits since 2019.
    - The other three countries (Timor-Leste, Chad, Republic of Congo) have all accumulated primary surpluses over the same period, unlike most LICs.
- Public debt outlook:
  - Public debt is expected to decline in all fuel exporters except Timor-Leste going forward, supported by higher oil prices and debt restructuring in the case of the Republic of Congo.

*Longer-Term Issues*

### Pandemic and Ukraine war: impacts on poverty, human development, and schooling
- Poverty and human development setbacks:
  - Some close to 70 million people have been pushed into extreme poverty ($1.90/day) during the pandemic (IMF, 2022f).
  - UNDP anticipates that globally, the human development index has also dropped, with much of its socio-economic impacts being expected to have fallen upon LICs.
  - Both indicators suggested that as of 2021, the developing world has lost about 5-years progress in poverty reduction and human development.
- Differential impacts on poverty and inequality:
  - World Bank (2022b; Chapter 4) and Narayan et al. (2022) combine pre-pandemic household surveys with HFPS for 23 EMs and 11 LICs to estimate the probability of experiencing an income loss for households with certain characteristics.
  - Result: the pandemic has led to higher poverty and income Gini coefficient, and more in LICs than in EMs.
  - Corresponding increases in Gini coefficients: 0.6 (EMs) and 1.0 (LICs).
  - Country-specific large impacts: 2.9 for Laos and close to 5 for Mozambique.
- School closures and long-term human capital loss:
  - School closures during the Covid-19 pandemic were particularly severe in developing countries where closures lasted twice as long on average than in advanced economies.
  - At least 1.6 billion students across the world experienced significant disruption to their schooling in 2020 and 2021 (UNESCO, UNICEF and World Bank, 2022), with early evidence from some G-20 countries identifying significant falls in standardized test outcomes.
  - Simulations from a general equilibrium model suggest that the output loss in the long-run can be sizeable for LICs, and that reversing these hysteresis effects requires significant investment in education, for which financing support from the international community is paramount.

### Box 3 — Loss-of-Learning and The Post-Covid Recovery: findings and policy implications
- Key findings from model simulations (Buffie et al. (2022) variant of DIG model for a typical LIC):
  - The “full pandemic effect” shows a short-run sharp contraction in output coupled with a jump in public debt-to-GDP as the tax base collapses; output recovers within a few years before stabilizing around 2-3 percent below its pre-pandemic level.
  - The loss-of-learning effect exhibits high negative persistence: marginal in the short-run but widening over time as affected cohorts enter the workforce; in the long run the loss-of-learning effect accounts almost entirely for the “Full pandemic effect”.
  - Rural and informal sector households are disproportionately affected by the loss of learning, implying income inequality could rise.
- Quantitative evidence cited:
  - Psacharopoulos et al. (2021) estimate annualized losses in national income due to pandemic-related school closures ranging from around 0.5 percent of GDP in high-income countries to 2.8 percent of GDP in low-income countries.
    - These estimates assume: an average rate or return to education of 8%; a working life of 45 years for the affected cohorts; and pandemic-related loss-of-schooling equivalent to one-third of a full school year.
  - IMF (2022a) (focused on advanced economies in the G-20) suggests loss of learning effects could reduce long-run output by as much as 3% relative to pre-pandemic levels, while driving up inequality.
- Policy scenarios and trade-offs:
  - Baseline scenario: government rides out the pandemic without fundamentally changing the stance of domestic public policy — output stabilizes below pre-pandemic level; public debt rises.
  - “Fighting back scenario”: basic and secondary education spending scaled up—financed by external concessional financing and domestic revenue mobilization—helps rebuild lost human capital and bring output back to pre-pandemic level, but public debt rises above the baseline scenario level.
  - Trade-off: limited external concessional finance, especially with high debt vulnerabilities in many LICs, confronts policymakers with an acute trade-off between rebuilding human capital and limiting domestic financing pressures.
  - Recommendation: support of the international community is critical to help LICs alleviate the aggregate welfare cost associated with the pandemic and its adverse distributional effects.
- Policy recommendation:
  - Investment program combining shorter-term remedial investment targeted at cohorts directly exposed to the shock with sustained medium-term investments designed to improve technological capacity and resilience of education, public health, and training systems.

### Poverty and inequality simulation results (Figure references)
- Simulations show COVID-19 induced poverty and COVID-19 induced Gini coefficient changes for EM and LIC samples, with larger impacts in LICs than EMs (as described above).

### Climate change and resilience challenges
- Climate change increases frequency and intensity of droughts, floods, and other shocks that affect LICs disproportionately because of limited fiscal and policy space.
- Efforts to build resilience—shift towards climate-resilient agriculture (adaptation) or promote renewable energy (mitigation)—face intense budget constraints in LICs.

### Structural reforms and policy priorities to boost growth and resilience
- Urgency: Elevated debt and a challenging global environment intensify the urgency of structural reforms to unlock growth potential and resilience in LICs.
- Objectives of reform agenda:
  - Boost competitiveness.
  - Increase public investment efficiency.
  - Promote private sector development.
  - Improve governance and inclusiveness.
  - Foster diversification.
  - Increase growth potential and resilience.
- Emphasis on FCS (Fragile and Conflict-affected Situations):
  - FCS consistently trail behind other LICs; reforms are particularly important for FCS.
  - Reforms should be overarching but calibrated to political and social context; sequencing and prioritization matter given capacity constraints.
  - Policies geared towards improving distributional aspects of macroeconomic adjustments are important to mitigate impacts on the vulnerable and contain risks of political instability and social unrest.
- Box 4 — Structural Reform Priorities in FCS: cross-cutting reform areas
  - Fiscal policy:
    - Define appropriate fiscal framework.
    - Secure tax and customs revenues that can be administered easily.
    - Strengthen core PFM systems for efficient basic spending.
    - Reinforce transparency and accountability.
    - Tackle corruption alongside revenue and expenditure policy reforms.
    - Balance wage and security-related expenditures with social and growth-enhancing spending.
  - Debt management:
    - Borrowing decisions anchored in a coherent and robust medium-term debt management strategy.
    - Strengthen capacity in debt sustainability analysis and improve debt transparency.
    - Develop domestic debt markets as capacities increase.
  - Exchange rate and monetary policies:
    - Calibrate mix of policies to achieve stability under the exchange rate regime.
    - Aim for price stability given the close link between inflation and poverty.
  - Financial sector policy:
    - Develop capacity for supervising and regulating the banking sector and relevant nonbank financial intermediaries (including AML/CFT).
    - Leverage financial inclusion through digital money and fintech.
    - Develop institutions facilitating banking and payments services to promote sustainable financial deepening.
  - Distributional considerations:
    - Safeguard social outcomes through social spending and protection of vulnerable households.
    - Incorporate cohesion-building initiatives addressing inequalities, including targets for poverty reduction (e.g., spending on health, education, and social protection).
    - Carefully calibrate distributional impacts of revenue mobilization to avoid worsening inequality.
    - Strengthen capacity in progressive taxation when possible.
  - Sequencing and ownership:
    - Pace and timing of adjustment and reforms should be calibrated to political and social context.
    - Prioritize feasible short-term objectives to build public support for broader reforms.
    - Align external support, tailored technical assistance, and government ownership to increase likelihood of successful long-term reforms.

*Italic: Macroconomic Developments and Prospects in Low-Income Countries—2022 (excerpt).*

### 38. Digitalization presents tremendous opportunities, but also comes with challenges. The

### 38. Digitalization presents tremendous opportunities, but also comes with challenges. The

### Digitalization and ICT in LICs
- The Covid-19 pandemic demonstrated how countries can leverage information and communication technologies (ICT) to build resilience amid exogenous shocks and keep business running while limiting the spread of infections (e.g., Kenya and Rwanda were particularly successful in developing tracing technologies).
- ICTs constitute a tremendous tool to support development, make public services more efficient and transparent, prevent corruption and enhance financial inclusion by fostering access to individuals, as well as financing for small and medium enterprises.
- Significant challenges need to be addressed to fully reap the benefits of ICTs.
- In Sub-Saharan Africa, only 28 percent of the population has access to internet.
- Significant investments in ICT infrastructure and access to reliable electricity remain key priorities for LICs.

### LICs’ External Financing Needs (Box 5) — key statistics and drivers
- Based on the October 2022 WEO projections, LICs’ gross external financing needs are projected to increase from $103 bn in 2019 to $167 bn in 2026.
- External financing needs are expected to increase on the back of higher current account deficits and rising external debt amortization.
- The average current account deficit in 2022-26 is more than 60 percent higher than the pre-pandemic level.
- The average annual amount of external debt service falling due in 2022-26 is about twice as much as the pre-pandemic average (2010-19).
- LICs as a group are highly exposed to global food prices, particularly the price of wheat, as well as other commodity prices (e.g., oil price), which are expected to remain high throughout the year and into 2023.
- Direct trade and remittance linkages add a further layer of disruptions in a number of LICs.
- Overall LIC’s additional financing need is estimated at $440 billion over the medium-term, of which $170bn to help LICs address the legacy of COVID and rebuild external buffers.
- Over 2022-26, additional financing needs in LICs would support:
  - filling remaining gaps in vaccine distribution and pandemic preparedness ($150 billon),
  - building external buffers ($20 billion),
  - about $270 billion additional spending would be needed for LICs to catch up with EMs’ average spending to GDP ratios by 2026.
- In an adverse scenario of slower recovery, additional financing needs could increase by about $100 billon.
- LICs’ BoP needs are estimated at $57 billion over 2022-23; about $43 billion can be met with the drawdown of reserves, while the residual financing needs are $14 billion.

### IMF and Multilateral Response
- The Fund stepped up its support to LICs:
  - With increased access limits, Fund lending to LICs surged in 2020—bulk through emergency financing instruments during the peak of the crisis.
  - In July 2021, the Fund increased by 45 percentage points the normal limits on access to concessional financing and eliminated hard limits on access for the poorest countries.
  - The August 2021 SDR 456.5 billion SDR allocation—of which SDR 14.7 billion went to LICs—provided additional liquidity to cope with the impact of the pandemic.
  - Voluntary channeling of SDRs is expected to amplify benefits through scaling up the Poverty Reduction and Growth Trust (PRGT) and operationalizing the Resilience and Sustainability Trust (RST).
  - A new, time-bound “food shock window” (approved September 30, 2022) provides low-access emergency financing for urgent BoP needs associated with acute food insecurity; available for 12 months from establishment.
- Box 6: Use of 2021 SDR allocations by LICs — key facts:
  - LICs received about SDR 14.7 billion in August 2021 allocation.
  - The SDR allocation represented on average 2.8 percent of 2020 GDP for LICs.
  - About 62 percent of LICs designated the central bank as beneficiary of the SDR allocation; 16 percent chose the Ministry of Finance.
  - As of end-June 2022, LICs have used or planned to use SDR 5 billion for budget outlays (about a third of their total allocation).
  - LICs’ total SDR sales during August 2021-June 2022 amounted to SDR 3.7 billion.
  - SDR channeling is expected to help mobilize additional resources for the PRGT by about SDR 20-35 billion projected to be channeled in the coming years.
- Official development aid (ODA) and MDB support:
  - ODA rose to USD 178.9 billion in 2021, up by 4.4% in real terms from 2020.
  - As a share of combined donors’ GNI, ODA was 0.33 percent in 2021, unchanged from 2020, still below the 0.7 percent ODA target.
  - In 2020, ODA to LICs went up by 25 percent to USD 85.4 billion.
  - Between April 2020 and December 2021, MDBs’ approved commitments to the world’s poorest countries totaled about USD 100 billion, of which USD 66 billion had been disbursed.
  - An advanced replenishment of the World Bank’s IDA20 was announced representing a $93 billion financing package.

### Conclusion and Policy Issues — challenges and recommended policy directions
- Macroeconomic context and challenges:
  - LICs face fragile growth, widespread inflation pressure, crippling supply disruptions and drying international liquidity while the pandemic continues and the war in Ukraine increases uncertainty.
  - Exhausted policy spaces and rising debt vulnerabilities limit policymakers’ options.
- Near-term and medium-term policy trade-offs:
  - Fighting inflation, supporting post-pandemic recovery, and protecting vulnerable households and firms using fiscal, monetary and exchange rate policies while maintaining credible policy frameworks are main near-term objectives.
  - Prepare medium-term fiscal frameworks to adapt to tighter international financial conditions.
  - Structural reforms to address poverty, inequality, climate change and promote digitalization remain key drivers for income convergence.
- Fiscal policy guidance:
  - Protect the most vulnerable from spillovers from the war in Ukraine and preserve investment critical to long-term growth while safeguarding debt sustainability.
  - Design short-term fiscal policies within a credible medium-term strategy and framework and gradually build back fiscal buffers.
  - Prioritize future spending plans, increase domestic revenue mobilization—in particular through progressive taxation—and enhance debt management capacity.
  - Fiscal measures that protect the vulnerable from the cost-of-living squeeze must be counteracted by other measures to maintain the overall fiscal envelope to avoid fueling inflation.
  - For countries without established social safety nets, build capacity on the basis of existing programs.
  - Avoid distortive price controls in general; when used as second-best expedients, phase them out as soon as possible.
- For commodity-exporting LICs benefiting from higher energy and food prices:
  - Build buffers for bad times and contain energy and food subsidies.
  - Take advantage of positive terms of trade shocks to rebuild policy buffers, particularly where debt vulnerabilities are elevated.
  - Manage impacts from more volatile commodity prices.
- Debt vulnerability management:
  - Prevent debt crises through fiscal restraint, effective public financial management, sustained growth, transparency, sound debt management and responsible borrowing.
  - Calibrate specific policy actions to the nature and magnitude of debt vulnerabilities:
    - Low risk of debt distress: continue fiscal restraint while maintaining pro-growth spending.
    - Medium risk of debt distress: continue building buffers where possible.
    - High risk of debt distress: balance fiscal consolidation with development needs; consider preemptive debt restructuring to free fiscal space.
  - Tools include debt reprofiling operations, swaps, other liability management operations; countries facing solvency or liquidity constraints should restructure their debt, including through Common Framework where relevant.
- Monetary policy guidance:
  - Act resolutely to bring inflation back to target, especially when inflation expectations risk de-anchoring.
  - Defend credible policy frameworks underpinned by strong central bank independency and clear communication.
  - Avoid over-tightening that may induce recession and disorderly adjustment in financial markets.
  - Guard against financial sector risks from higher interest rates and consequences of macro-prudential relaxations during the pandemic.
  - Recognize tenser trade-offs when domestic debt exposure is high.
- Exchange rate considerations:
  - For pegged exchange rate countries, ensure monetary and fiscal policies are consistent with maintaining peg credibility and supporting reserves.
  - For flexible arrangement countries, exchange rate depreciation can help absorb trade shocks and buffer global financial tightening but large movements may expose fiscal and financial sectors to external risks and exacerbate inflationary pressures.
  - Interventions to smooth exchange rate volatility could help stabilize domestic economies and contain financial risks, but countries need to be mindful of reserve buffers and avoid using interventions to support unsustainable policies or substitute necessary macroeconomic adjustment.

*Source: MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022*

### 51. Meanwhile, decisive policy actions are needed to address long-term challenges posed

### ppea2022054 - 51. Meanwhile, decisive policy actions are needed to address long-term challenges posed

### Long-term challenges and policy recommendations (Paragraphs 51–52)
- Key long-term challenges identified:
  - Poverty, inequality, economic diversification, digitalization, climate change and food security.
- Policy actions recommended for governments:
  - Strengthen social protection systems.
  - Improve public services provision.
  - Promote financial and labor market inclusion to tackle rising inequality.
  - Build resilience by shifting towards climate-resilient agriculture and renewable energy.
  - Improve public spending efficiency in green infrastructure.
  - Reform energy subsidies.
  - Incentivize private sector implementation of adaptation and mitigation measures.
  - Invest in ICT infrastructures and access to reliable electricity—identified as key priorities for LICs to reap benefits from digitalization.
  - Strengthen governance and institutions to build better business practices and enable the private sector to thrive.
- International coordinated actions recommended in response to the global food and energy shock:
  - Continue and deepen actions to ensure availability of food, agricultural inputs and energy, including by reducing protectionism and export restrictions.
  - Explore the use of food and energy stockpiles and reserves.
  - Facilitate accessibility of flexible, urgent, and sufficient funding and relief from debt servicing where appropriate.
  - Enhance food production and distribution and invest in climate-resilient agriculture.
  - Increase flows of ODA to LICs.
  - Strengthen cooperation by maintaining an open and rules-based multilateral trade and financial system to support long-term growth and avoid fragmentation.

*Italic: Source — Excerpt from MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022 (paragraphs 51–52).*

### Public debt management capacity development: role and rationale (Paragraphs 53–61)
- Purpose of public debt managers:
  - Cover sovereign financing needs at the lowest cost subject to an acceptable degree of risk over the medium to long term.
  - Establish and execute a debt management strategy and identify and monitor debt-related fiscal risks linked to debt composition (interest rate, currency, and rollover risks) and exposure to contingent liabilities from on-lending and guarantees to SOEs and PPPs.
- Role of debt management relative to fiscal policy:
  - Fiscal policy is the main driver of public debt levels and vulnerabilities, but effective debt management is an important element of a LICs’ toolkit to safeguard debt sustainability by reducing economic and financial volatility and supporting sustainable financial sector development.
  - Ineffective debt management can generate significant fiscal costs, unduly expose countries to changing market conditions, and weaken crisis preparedness.
- Change in borrowing landscape over the last 15 years (Paragraph 54):
  - Composition migrated from traditional multilateral and Paris Club borrowing towards non-Paris Club bilateral and commercial creditors, including a large increase in domestically issued debt.
  - New financing sources have helped limit currency risk and manage rollover risk (e.g., issuing longer-term bonds domestically and bonds with non-bullet principal repayment features in international markets).
  - International bond market issuance increased borrowing costs relative to external multilateral and bilateral loans and raised exposure to changes in foreign investor sentiment.
  - Resulting need: improved debt management practices and greater investor relations functions, including relationship building and information sharing with investors and stakeholders such as credit rating agencies.

### Enabling conditions for effective public debt management (Paragraphs 55–56; Box 7)
- Four enabling dimensions (Governance, Resources, Information, Policy):
  - Governance:
    - Adequate legal and institutional arrangements and authority for debt management activities consistent with best practice.
    - A comprehensive public debt management law that delineates responsibilities, including reporting requirements.
  - Resources:
    - Debt management office requires adequate human and physical capital commensurate with the nature and complexity of the debt portfolio.
  - Information:
    - Ongoing access to all relevant data and authority to request data from multiple parts of government.
    - Capacity to record and manage debt data effectively.
  - Policy:
    - Debt policy must be consistent with the macroeconomic framework through coordination with fiscal and monetary authorities and supported/approved by highest levels of government and legislature.
- Importance of fluid access to data and decision makers (Paragraph 56):
  - Debt managers require full and timely information on the sovereign debt portfolio—size and characteristics (interest rates, currency denominations, time to maturity).
  - Sound portfolio risk management (identification; assessment and quantification; mitigation; reporting and monitoring) is impossible without comprehensive instrument- and portfolio-level information.

### Medium-term debt management strategy (MTDS) and contingent liabilities (Paragraphs 57–58)
- MTDS framework:
  - Helps public debt managers meet financing needs at the lowest cost subject to an acceptable degree of risk.
  - Allows setting medium-term goals or “benchmarks” reflecting cost-risk preferences.
  - Annual implementation via a borrowing plan that is consistent with strategy targets and includes short-term cash management for in-year liquidity needs.
  - Debt managers must monitor exposure to contingent liabilities that can create new debt.
- Examples of contingent liability risks:
  - Central government loans and guarantees to SOEs.
  - Public-private partnerships.
  - Power-purchase agreements.
- IMF tools and expertise:
  - Capacity development in legal frameworks underpinning contingent liabilities.
  - Fiscal risk tools, including the fiscal risk portal that provides a toolkit, reflects lessons learned, and complements work on fiscal transparency and fiscal risk assessments.

### Long-term nature of capacity development and institutional prerequisites (Paragraphs 59–61)
- Public debt management capacity development is a long-term endeavor; numerous technical and institutional elements may take considerable time to take hold.
- Starting conditions vary widely among LICs; building capacity in fragile and conflict affected states (FCS) can be particularly challenging.
- Technical capacity improvements are necessary but not sufficient—supporting legal, governance and institutional frameworks are required.
- Fragmented institutional arrangements in many LICs can segment information, dilute accountability, prevent development of expertise, and complicate coordination among entities with debt management responsibilities.

*Italic: Source — Excerpt from MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022 (Sections A and related text).*

### IMF delivery and approach to debt management capacity development (Paragraphs 61–66; Box 8)
- Scope of IMF CD in public debt management (Paragraph 62):
  - Delivers CD in all areas of public debt management.
  - Bulk of CD focused on technical aspects of debt portfolio management and legal and institutional aspects.
  - Four core areas: institutional arrangements, debt strategy formulation and implementation, market development, and debt recording—with the bulk delivered on debt management strategies.
  - Also provides CD on legal frameworks, strengthening public debt management frameworks, public debt securities and related tax issues, and training courses.
  - Related CD on fiscal risks includes:
    - (i) assessing countries’ risk exposure and its potential impact on public finances;
    - (ii) evaluating adequacy of fiscal risk management framework, practices, and institutional capabilities;
    - (iii) developing action plans for improving risk management processes/practices;
    - (iv) strengthening institutional capacity to better analyze and manage fiscal risks;
    - (v) enhancing disclosure on fiscal risks by developing comprehensive fiscal risk statements and encouraging publication by country authorities.
- Principles and modalities (Paragraphs 63–64):
  - CD is demand-driven and voluntary; it must be requested by a member country and is anchored in the Articles of Agreement allowing the Fund to perform “financial and technical services”.
  - Fund adjusts types, frequency, and modalities of CD to recipient characteristics: creditor landscape, institutional arrangements, and initial debt management capacity.
  - For LICs with limited capacity and early-stage frameworks (e.g., some FCS and smaller economies), CD focuses on foundational aspects: policies, procedures, institutional coordination.
  - For other LICs, CD can target local currency bond market development, international capital market issuance, and investor relations.
- Regional Technical Assistance Centers and advisors (Paragraphs 65; Box 8):
  - Number of regional debt management advisors increased from two to five since the outbreak of the Covid-19 pandemic, with new advisors in:
    - the Caribbean (2020),
    - Pacific Islands (2021),
    - East and Southern Africa (2022),
    - adding to existing support in Francophone West and Central Africa.
  - Regional advisors contribute to:
    - Strengthening preparation and implementation of MTDS in some countries.
    - Improving predictability and transparency of auctions, harmonizing issuance practices, and developing secondary market conventions (example: WAEMU countries).
    - Improving organizational structure of debt offices via internal procedures manuals and coordination between institutions and debt and cash managers.
    - Improving quality of public debt information, reporting and capacity for risk analysis.
  - Regional advisor examples and milestones:
    - Junior debt managers program (JDMP) delivered in-depth training over the course of a year (2016-17); reintegration of JDMP participants boosted skill levels and enabled leadership appointments (example: Saint Vincent and the Grenadines).
    - April 2022 online seminar on debt-for-climate swaps responding to Caribbean interest in innovative instruments to mobilize/redirect financing while keeping debt sustainable.
    - Pacific islands program commenced in 2021; initial impacts from Covid-19 but virtual modalities enabled delivery of CD activities and a regional training workshop focusing on foundational debt management practices.
- Financing of CD (Paragraph 66):
  - Bulk of CD in debt management provided by the Fund is financed by external resources.
  - The Debt Management Facility (DMF), administered jointly by the World Bank and the IMF, is an integral component of these external resources and provides coordination across bilateral, multilateral and regional CD providers.
  - Many development partners have financed regional projects, including the five regional debt advisors in Francophone West and Central Africa, the Caribbean, the Pacific, and in East and Southern Africa.

*Italic: Source — Excerpt from MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW-INCOME COUNTRIES—2022 (Sections B and related text).*

### Box 9. Other Providers of Debt Management CD

### Box 9. Other Providers of Debt Management CD

### Other providers and partnerships
- Capacity development (CD) in debt management is provided by a range of multilateral development banks (MDBs), regional institutions, and other entities, not solely by the IMF.
- The World Bank is a major partner in delivering CD in debt management, with significant collaboration across all topics, funded mainly through the DMF.
- Other MDBs providing CD on debt management include the African Development Bank (AfDB), the Asian Development Bank (ADB), and the European Bank for Reconstruction and Development (EBRD).
- Commonwealth Secretariat (COMSEC) and UNCTAD provide debt recording systems along with training and technical support on using their statistics and records systems.
- Regional institutes in Africa—Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) and the Western African Institute for Financial and Economic Management—provide substantial technical assistance and training, often in collaboration with the Fund and Bank.

### IMF online courses and scaling CD
- In 2013, the IMF began offering online courses in debt management to provide scalable, low-cost training on core concepts.
- In 2020, the IMF created a new stand-alone online course on the MTDS framework and tool (MTDSx); prior to 2020, MTDS content was combined with debt sustainability analysis content in one course.
- MTDSx will serve as a prerequisite for in-person training and technical assistance on MTDS, allowing in-person CD to focus on more advanced concepts and strategy.
- Courses are available in English and are being translated into other languages to benefit FCS; the IMF plans to expand the suite of online courses to include legal, governance and institutional arrangements, investor relations, and local currency bond market development.

### Funding mix for Debt Management CD (FY22)
- DMF 13%
- Externally financed 63%
- IMF financed 24%

### Key enabling-condition challenges limiting CD effectiveness
- Legal and governance framework:
  - Weak legal and governance arrangements often prevent published debt strategies from driving borrowing decisions and managing portfolio risks, so Fund CD recommendations are often not implemented.
- Data recording:
  - Shortcomings in debt recording are common; debt management offices (DMOs) may manage only a fraction of total public debt and lack knowledge about terms and conditions of other public debts contracted by other government entities.
- Human resources:
  - Inadequate staffing and high turnover of skilled staff impede DMOs, reducing CD effectiveness, stalling reform momentum, and diverting resources to onboarding and training.
- Institutional arrangements:
  - Fragmented institutional arrangements limit accountability, slow development of a center of debt management expertise, and often force “second-best” solutions that reduce efficacy.

### Illustrative country experiences (summary of Annex V examples)
- Somalia: Need to coordinate CD providers, strengthen institutional arrangements, and improve debt reporting while working toward HIPC completion point.
- Papua New Guinea: CD sequencing required to address fragmented legal and institutional frameworks before improving public debt recording and reporting.
- Guinea: Political instability stalled reforms, but continued dialogue led to legal and regulatory changes enabling the first local currency treasury bond issuance.
- Eastern Caribbean Currency Union: Regional coordination with a reliable bilateral partner provided sustained medium-term financial support to national debt managers and aided regional local currency bond market development.
- Democratic Republic of Congo: Regional debt management advisor support helped reintroduce treasury bills after a 30-year hiatus; regional advisors can build trust and provide frequent support.

### LIC priorities and survey findings
- The IMF must remain nimble as LIC debt management CD needs evolve; risks include sustainability of external financial support for Fund-delivered CD and attracting sufficient high-quality debt management experts.
- A survey of LIC DMOs (sent to all 69 LICs covered in the report in May 2022; response rate was forty percent) identified development and implementation of debt management strategies and domestic market development as broad areas where Fund CD can help.
- Most notable areas of challenge identified by respondents:
  - Integration of cash and debt management
  - Implementation of annual borrowing plans
  - Issuing benchmark government bonds and reopening securities
  - Engaging in liability management operations to manage redemption profiles
  - Deepening the investor base and supporting local debt market development
- Survey respondents also flagged insufficient resources and inadequate information flows as main obstacles, including:
  - Not enough skilled DMO staff
  - Insufficient resources (e.g., office space, IT equipment, software licenses)
  - Inefficient institutional arrangements
  - Lack of government debt details and difficulty recording/retrieving information from debt recording systems
  - Fragmentation of debt management/reporting responsibilities
  - Difficulty obtaining timely information
- Resource constraints are more evident among fragile and conflict-affected states (FCS) and small and developing states.

### New and growing CD demands
- Increased demand for CD on translating published debt strategies into implementable plans; the joint Fund-Bank Annual Borrowing Plan Tool (ABPT) helps integrate cash management considerations.
- Benefits of good cash management systems include timely payments, reduction in short-term borrowing costs, and avoidance of expenditure arrears.
- Publication of the joint Fund-Bank framework on local currency bond market development (2021) provides a structured approach to market reforms in LICs; progress has been made in some LICs but more is needed for the majority.
- Investor relations capacity is receiving more attention as more LICs access international markets; the IMF published a working paper on sovereign investor relations and delivered new training to support development of an online course.
- Future debt instruments and CD needs:
  - Growth in the range and type of debt securities (including ESG-based borrowing and green bonds) will create new CD needs; issuing such instruments can be challenging for countries with capacity constraints.
  - Incorporating state-contingent clauses in debt securities is another innovation creating demand for CD; while not widely used, such clauses can be useful for LICs prone to environmental disasters.

### Supporting implementation and institutional engagement
- High-level government decisions and financial support are critical to many public debt management reforms; resourcing, IT equipment, and legal framework changes are often beyond DMO authority.
- Country authorities and Fund country teams can disseminate CD mission findings and recommendations and flag institutional weaknesses during bilateral discussions to raise profile and secure resources.
- Discussions in Article IV consultations should more consistently raise and prioritize macro-critical debt management deficiencies and CD needs, following the IEO evaluation of the IMF and Capacity Development.

### Concluding observations and policy implications
- Fiscal policy drives public debt levels, but debt management plays a useful role in mitigating debt vulnerabilities in LICs.
- The debt landscape and sovereign debt structure of LICs have changed fundamentally in the past two decades; shocks (COVID-19, global inflation spike, conflict in Ukraine) compound challenges.
- Effective debt management relies on enabling legal, governance, and institutional frameworks and requires high-level government support.
- Alongside analytical capacity building and staff training, renewed emphasis is needed on improving legal and governance frameworks to expedite reforms and address segmented information, insufficient authority, and inadequate resourcing.
- The Fund should remain nimble, invest in necessary staffing and analytical research (including ESG, state-contingent debt, and sovereign asset-liability management), and secure professional and financial resources for medium-to-long term LIC needs.
- The Fund cannot and should not meet all debt management CD demand; coordination among CD providers is essential. The DMF provides critical coordination across bilateral, multilateral, and regional CD providers to avoid duplication and accelerate reforms.
- Expansion of regional advisors in RTACs has proven useful in coordinating CD delivery and follow-up.
- Fund CD remains well-positioned to meet LIC demand, responding to core areas (MTDS design) and growing needs (annual borrowing plans, cash-debt integration, local market development, investor relations). Implementation support via regional advisors helps with institutional arrangements and enabling conditions.
- Debt management CD achievements in LICs have improved capacity across multiple areas but progress is gradual, with interruptions and setbacks; CD should be undertaken and assessed over years, not months, and success depends on political support and coordination across providers.

*Source: Box 9. Other Providers of Debt Management CD, ppea2022054*

### Annex 1. PRGT-Eligible Country Groups

### Annex 1. PRGT-Eligible Country Groups

### The Impact of COVID-19 on LICs
- The pandemic imposed a heavy toll on LICs despite lower identified cumulative cases; health systems were stretched and non‑COVID deaths may have risen as routine health care was disrupted.
- Containment measures were relatively stringent early on and remained stronger than AEs until fall 2020; at the peak of the lockdown in April 2020, mobility related to retail activity was down by more than 40 percent.
- Labor-market effects:
  - Massive disruptions transmitted macro shocks to households mainly through labor markets.
  - Women, less educated and urban workers and those in the informal sector were the most affected.
  - From April to July (World Bank HFPS sample), shares of respondents who stopped working: 13 percent for agriculture, 26 percent for industry, and 28 percent for services.
  - Among several LICs covered by HFPS, 28 percent of respondents reported stopping work; 13 percent of wage workers reported having received partial or no payments; 9 percent of workers switched their jobs; 63 percent of all respondents suffered from income losses.
  - Farming and non-farm business income losses reported respectively: 41 and 85 percent (Ethiopia); 73 and 84 percent (Malawi); 60 and 90 percent (Uganda).
- Fiscal and policy capacity:
  - LICs entered the pandemic with meager fiscal space; revenue shortfalls were larger and more persistent for LICs than EMs and AEs (measured from January 2020 WEO pre‑pandemic projection).
  - Limited access to financial markets forced LICs to absorb revenue shortfalls by limiting expenditure in 2020 even as fiscal spending was most needed.
  - LICs introduced economic support measures but at a smaller scale than AEs and EMs; administrative capacity constraints and heightened hardship limited sustainment of lockdowns.
- Sectoral and distributional impacts:
  - Industrial and services sectors saw larger declines than agriculture.
  - Tourism—a low‑skill, highly informal sector—was notably hit; it hires disproportionately women and lower‑wage migrant workers.
  - Informal sector: ILO (2020a) estimated about 77 percent of informal workers in LICs were significantly impacted by lockdown and physical distancing; informality often expanded due to forced closures and asset sales, though informality also cushioned some employment losses in the formal sector.
- Recovery and persistent losses:
  - Employment recovered substantially in the second half of 2020 but the rebound stalled from 2020 Q4 onwards.
  - ILO (2022) estimated a persistent gap in working hours of around 5 percent compared to pre‑pandemic levels for LICs.
  - Despite employment recovery, many households still suffered income losses, indicating employment gains did not fully offset other income shortfalls.
- Policy responses for labor markets:
  - Common measures: temporary tax relief, reductions in social security contributions, credit facilities, guarantees, loan payment facilities.
  - Cash transfer programs targeting economically active persons gained popularity to reach informal and self‑employed workers; many such programs were new initiatives rather than expansions.
  - Example: Burkina Faso introduced cash transfers targeting informal workers such as fruit and vegetable vendors.
- Vaccination progress and risks:
  - Barely more than 10 percent population in LICs have been fully vaccinated to date.
  - Most LICs were not able to meet the global agenda of vaccinating 40 percent population by end‑May of 2022.
  - Elevated vulnerability to new variants threatens post‑pandemic recovery; relatively high vaccine hesitancy in many LICs is especially risky.
  - International support for vaccine purchases, distribution, testing and treatment capacity remains important.

### Food Insecurity and Policy Responses to Surging Food and Fuel Prices
- Shock overview:
  - The war in Ukraine, compounded with other factors, is severely threatening LIC recovery and is likely to have a protracted impact on commodity prices.
  - Prices of wheat and corn have almost doubled since early 2020.
  - In sub‑Saharan Africa, around 85 percent of wheat supplies are imported.
  - Higher fuel and fertilizer prices raise costs for domestic food production and transportation and increase vulnerability to supply shortages.
- Scale of food insecurity:
  - WFP estimates 345 million people in 82 countries are suffering from acute food insecurity and are in need of urgent action—an increase of 200 million since 2019.
  - IFAD/FAO projections suggest nearly 670 million people will still be facing hunger by 2030—8 percent of the world population.
  - World Bank estimates that over the medium‑term (until 2028) the number of severely food insecure people will remain high at around 1 billion people in its IDA and IBRD member countries.
- Impact of oil prices:
  - Higher oil prices increase import bills for net importers, worsen trade imbalances, and raise transport and consumer costs.
  - Oil exporters (such as Nigeria) may benefit from higher crude prices.
- Policy actions observed:
  - Measures include price freezes, tax policies, provision of subsidies or transfers, temporary reduction or suspension of import duties on food and containers, support to vulnerable households through targeted cash transfers, subsidies/transfers/financing to producers and importers in energy and food sectors, and trade bans on export of staple food in some cases.
- Policy design principles for LICs:
  - Targeted and direct support to vulnerable households: use targeted and temporary cash transfers where strong social safety nets exist; expand existing social programs (e.g., public transportation and school feeding programs) where safety nets are weak.
  - Gradual pass‑through of international prices to retail prices for governments with existing energy or food subsidies, especially if social safety nets are not well developed or timely expansion is not feasible.
  - International cooperation and external financing are critical for LICs to address the food and energy crisis.

### Debt Vulnerability Today and in Pre‑HIPC Era
- Comparative debt levels:
  - Median debt of low‑income countries today remains lower than debt levels on the eve of the HIPC Initiative in the mid‑1990s.
  - For countries assessed to be in debt distress or at high risk of debt distress, current median public debt‑to‑GDP and other PPG external debt burden indicators are below mid‑1990s pre‑HIPC levels.
- Arrears:
  - Arrears accumulation was widespread among LICs in the 1990s but does not appear as pronounced today.
  - Temporary relief from the G20 Debt Service Suspension Initiative (DSSI) contributed in 2020–2021; arrears on principal and interest payments to both official and private creditors have remained minimal following HIPC/MDRI relief.
- Creditor landscape transformation:
  - Shift away from Paris Club (PC) and traditional official creditors toward non‑Paris Club (NPC) official creditors and commercial creditors.
  - End‑1996 composition (PRGT creditors): PC creditors 39 percent; NPC 8 percent; private creditors 8 percent (of total PPG debt).
  - End‑2020 composition: PC creditors 12 percent; NPC 22 percent; private creditors 17 percent (of total PPG debt).
- Current assessment and risks:
  - Using the Fund’s LIC‑DSA toolkit, debt situation in LICs today is relatively more benign compared to the eve of the HIPC Initiative.
  - Nevertheless, 40 out of 69 PRGT‑eligible LICs are in debt distress or at high risk of debt distress.
  - If current trends persist, debt vulnerabilities could reach levels comparable to the pre‑HIPC period in the medium term.
- Policy guidance:
  - Countries facing rising risk of debt distress would benefit from steadfast implementation of policies recommended in the context of IMF surveillance or IMF‑supported programs to reduce debt vulnerabilities.
  - Countries whose debt becomes unsustainable should consider whether a debt treatment is needed to restore debt sustainability, including through the G20 Common Framework, and actively engage with their creditors.

*MACROECONOMIC DEVELOPMENTS AND PROSPECTS IN LOW‑INCOME COUNTRIES—2022, INTERNATIONAL MONETARY FUND.*

### 5. Looking ahead, the transformed debt landscape in LICs portends challenges to make

### 5. Looking ahead, the transformed debt landscape in LICs portends challenges to make

### Overview: changing creditor structure and coordination
- Rebalancing of creditors away from traditional and official lenders to non-traditional lenders (both official and private) has important implications for the ease of creditor coordination today compared to the mid-1990s when Paris Club lenders, private banks and the multilaterals were the major creditors.
- Initiatives such as the G20 Common Framework can help bring the various groups of creditors together to deliver the required debt relief for eligible LICs.

### Annex V. LIC Debt Management Capacity Development Case Studies — objectives and cross-cutting lessons
- Case studies provide insights into best practices for effective public debt management capacity development (CD).
- Risks highlighted:
  - Multiple CD providers without efficient communication and coordination can cause duplication and waste.
  - Debt management improvements in LICs, especially fragile states, are not linear; CD providers should expect setbacks, course corrections, and support regular communication to overcome obstacles.
  - Up-front commitment to reforms is crucial; transparency about timelines is important because results for fundamental debt management and market reforms often show in years rather than months.
- Reinforces recommendations in the IEO’s report on the IMF and Capacity Development, stressing the need to promote CD ownership, tighter integration with Fund surveillance, and tailoring to country circumstances.1

### A. Somalia: Debt Management Reform Plan and HIPC Completion Point Triggers
- Authorities requested CD to develop a debt reform plan and create a regular debt bulletin.
- Improvements in debt management capacity and debt transparency are critical for post-HIPC normalization; debt reporting is a completion point ‘trigger’ under the HIPC initiative.
- Joint World Bank-IMF mission focused CD on three key areas:
  - (i) the legal framework for debt management;
  - (ii) the institutional framework for debt management;
  - (iii) debt recording, reporting, and monitoring.
- CD outcomes:
  - Preparation of a comprehensive debt reform plan with timebound recommendations across the three main areas and a timeline for follow-up CD.
  - Emphasis on coordination among CD providers, given multiple external partners.
  - Mission noted limitations of virtual missions and additional challenges fragile and conflict-affected LICs may face in virtual participation, including connectivity issues and security challenges.

### B. Papua New Guinea: Debt Reporting
- PNG is relatively advanced for the Pacific region: uses loan financing and an active domestic debt market.
- CD for debt reporting and monitoring was provided regionally and nationally through PFTAC.
- Institutional arrangement challenges created barriers to implementing CD; additional bilateral CD on institutional arrangements was organized.
- Identified weaknesses hampering effective debt management and implementation of debt transparency CD:
  - Fragmented legal framework;
  - Isolated and limited knowledge in the use of the debt recording and reporting system;
  - Lack of resources leading to a clouded organizational structure for debt management;
  - Increasing responsibilities outside specified debt management roles;
  - Absence of a risk management and compliance framework.
- CD assisted authorities to develop a list of necessary reforms and an implementation plan.
- Key lesson: underlying context and structure of debt management provide insights into implementation risks.

### C. Guinea: Developing Local Debt Markets
- AFRITAC West (AFW) supported development and implementation of a reform plan for the domestic government securities market; objective to move to issuances of T-bills through auctions.
- AFW reviewed legal and regulatory framework for government securities in 2020-21; the military coup of 2021 halted LCBM reforms and put the project on hold.
- AFW resumed support in 2022; assisted the Guinean Treasury to set up its first 5-year treasury bond auction in April 2022.
- Lessons:
  - Progress in LIC debt management is not linear; CD providers should be prepared for setbacks and delays in fragile LICs.
  - Benefits of perseverance and maintaining contact with debt management offices during periods of heightened uncertainty.

### D. Eastern Caribbean Currency Union (ECCU): Debt Management Improvements and Climate Swaps
- ECCU example: coordinated regional approach sustained over many years to build government debt management capacity.
- Context: large financing needs, elevated debt levels, limited concessional financing, vulnerability to macro shocks, natural disasters, and climate change; stretched human resources and high turnover in small debt management units.
- Timeline of support:
  - Initial ad hoc headquarters-led assistance followed by an intensive program beginning in 2013, funded by the government of Canada.
  - Junior debt managers program (JDMP) delivered in-depth year-long training in collaboration with World Bank, Commonwealth Secretariat, and ECCB; JDMP concluded four years ago but continues to yield dividends.
  - Successor program funded by Canada launched in late 2020 enabled deployment of a new long-term expert and integration into CARTAC.
- Outcomes:
  - Nearly all ECCU countries can identify and quantify key risks in their debt portfolios and prepare medium-term strategies accounting for risks and financing availability without significant technical assistance as before.
- April 2022 online seminar on debt-for-climate swaps:
  - Responded to regional interest in innovative instruments to mobilize or redirect financing for climate objectives while keeping debt sustainable.
  - Drew on country experiences and recent IMF policy work; a panel discussed practical steps, preconditions, and challenges.
2
- Key lessons from ECCB experience:
  - A reliable bilateral partner committed to multi-year regional CD is important.
  - Regional approaches can be beneficial in contexts like a currency union and facilitate specialized training (e.g., debt-for-climate swaps).
  - Better coordination of CD support through integration with regional programs (CARTAC) has advantages.

### E. Democratic Republic of Congo: Re-Introduction of Treasury Bills and Bonds
- DRC is highly dollarized with several debt management challenges, including lack of diversified funding sources for the budget.
- Since 1991, domestic debt issuances were discontinued as demand for government securities dried up, forcing reliance on non-marketable domestic borrowings and impeding local financial market development.
- In the mid-2010s authorities prioritized resuming government securities issuance.
- AFRITAC Central supported resumption after nearly 30 years; a roadmap for issuance resumption was prepared in February 2015 and endorsed by authorities.
- Milestone: introduction of a 3-month nominal Treasury bill in October 2019.
- Subsequent challenges:
  - Limited supply of local currency and the COVID-19 pandemic prevented Treasury bill issuance from materializing as planned after a few strong months.
- In 2020 and 2021, AFRITAC Central worked with authorities to design a new financing instrument: dollar-indexed Treasury bills and bonds denominated in local currency.
- Lessons:
  - Secure buy-in from authorities via a working group of senior staff and technical experts.
  - Coordination with the central bank and stakeholders to adjust reserve requirements supported the fledgling market.
  - Importance of transparency about timelines: fundamental debt management and local bond market reforms tend to show results over several years rather than several months.

_Italic source attribution: ppea2022054 - 5. Looking ahead, the transformed debt landscape in LICs portends challenges to make_

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_Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022054.pdf_