## ppea2025008 ## Source details **Canonical URL:** [ppea2025008](https://www.imf.org/-/media/files/publications/pp/2025/english/ppea2025008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2025/english/ppea2025008.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2025/english/ppea2025008.pdf.json) --- ### EXECUTIVE SUMMARY — Recent developments and outlook in LICs - Universe and aggregate performance - The 70 low-income countries (LICs) experienced steady but modest growth in 2024. - LICs’ GDP-weighted average growth in 2024: 4.4 percent (unchanged from 2023). - Growth in 2024 was one point below the average growth experienced over the 2010s. - Divergence: 11 of the 20 fastest growing countries in the world in 2024 were LICs; many poorest LICs—often fragile and conflict-affected states (FCS)—recorded very low growth. - Subsample divergence: 38 more advanced LICs showed income convergence during the 2010s and again since 2022; the poorest 32 LICs saw virtually no improvement over the past 15 years. - Inflation, external vulnerabilities, and shocks - Disinflation took hold across LICs. - Significant external vulnerabilities persisted: exposure to extreme climate events, high dependence on agriculture, limited adaptation capacity. - Greater scarring from the Covid-19 pandemic than higher-income peers. - Political events: 21 LICs had parliamentary or presidential elections in 2024; fiscal deficits in election countries exceeded October 2023 WEO forecasts by a median of 0.2 points of GDP. - Policy and reform efforts to date - Gradual fiscal consolidation in about half of LICs, supporting stabilization of public debt levels. - Adjustment relied on both tax revenue increases and modest expenditure compression. - Funding squeezes continue to constrain priority spending for sustainable development and growth. - Monetary policy supported disinflation; growth-enhancing structural reforms proceeded, often slowly. - Medium-term outlook and conditional projections - Staff projection—LICs’ GDP-weighted growth over 2025-29: average 5.7 percent (median 4.5 percent). - Projections underpinned by strong forecasts for 13 countries, some exiting conflicts and fragility and Frontier Markets, expected to grow at an annual 6 percent or more. - Key downside risks: global growth path, international financial conditions, exchange rate movements, availability of external financing including aid, policy and reform implementation (including decisive fiscal adjustment in 2025), and absence of major shocks. ### Reinvigorating inclusive growth — priorities and policy agenda - Two overarching policy priorities - Implement necessary fiscal consolidation with minimal negative impact on growth and vulnerable households, while supporting consumption and investment by mobilizing growth-enhancing external financial inflows and developing domestic financial markets. - Improve productivity to raise LICs’ growth potential, with special attention to total factor productivity (TFP), which has contributed negatively to growth since the COVID-19 pandemic. - Policy and reform agenda (country-specific fine-tuning needed) - Enhance spending efficiency and prioritization; mobilize domestic revenue where needed. - Improve economic institutions, including through technology, to support external capital inflows and domestic financial market development. - Boost TFP via governance, education, health, capital formation, and innovation. - Facilitate broad labor force participation. - Analytical finding - Aggregate demand and productivity analyses indicate that without policy measures to support all factors of production—and especially TFP—LICs will not generate the levels of growth needed to durably improve standards of living for fast-growing populations. ### Exchange rate and FX market operations in LICs - Exchange rate arrangements and nominal anchors - Trend: LICs moved away from market-determined exchange rates toward regimes more driven by authorities’ measures. - Greater inconsistencies emerged between de jure and de facto exchange arrangements. - Exchange rate remains the main nominal anchor in about 50 percent of LICs. - FX market development and central bank role - Steady progress in developing FX markets. - Central banks are playing a lesser role in allocating foreign exchange; greater reliance on FX auctions to facilitate price discovery. - Capital account openness and capital controls - Balance of payments’ financial accounts remain less open than EMDEs and AEs. - Average restrictiveness is lower on capital inflows than outflows; large dispersion among LICs. - LICs have eased capital controls at a significantly slower pace than EMDEs and adjust controls less frequently. - Many LICs continue to maintain exchange restrictions and multiple currency practices (MCPs) subject to IMF jurisdiction, often to allocate scarce foreign exchange. *Source: ppea2025008 - EXECUTIVE SUMMARY, International Monetary Fund.* ### Growth divergence, structural correlates, and human development - Growth divergence (2022-24) - Among 70 LICs: 11 countries achieved average annual growth rates of 6.0 percent or more; 10 countries recorded growth rates of 3.0 percent or less. - LICs accounted for 11 of the world’s 20 fastest growing economies in 2024; 7 of those from Sub-Saharan Africa. - Sudan and South Sudan three-year average GDP growth declines: 9 percent and 16 percent, respectively; sharpest 2024 declines: -23.4 for Sudan and -26.4 for South Sudan. - Subgroup averages (2022-24): - More advanced LICs (38 countries): annual growth averaged 5.4 percent. - Poorest LICs (32 countries): annual growth averaged 3.1 percent. - Frontier Markets (FM): averaged 5.3 percent. - FCS: 2.4 percent annual growth. - Fuel exporters: 0.8 percent average growth. - Income convergence - Median per capita income for LICs ~6.5 percent of the AE median for over two decades. - More advanced LICs: median income per capita rose from ~9 percent of AE median in 2000 to 11 percent in 2024. - Poorest LICs: median income per capita ~4 percent of AE median; rapid population growth 2000-2024: 2.8 percent per year versus 1.7 percent for more advanced LICs. - SDG progress and human development - Among 135 assessable SDGs, only 17 percent are on track to be met by 2030; 83 percent show limited progress or reversal. - For 2024, more than half of LICs exhibit moderate to severe deviations from desired SDG trajectory; nearly 30 percent show only marginal progress. ### Inflation, food insecurity, and domestic finance - Inflation and food insecurity - Median CPI inflation in LICs: 4.6 percent in 2024 (peak 8.0 percent in 2022). - About 25 percent of LICs experienced double-digit inflation in 2024 (mostly poorest and most fragile). - Food insecurity: in 2024 about 209 million people in 41 countries worldwide classified as acutely food insecure (FSIN and Global Network Against Food Crises 2024). - Domestic financial sectors and sovereign–bank nexus - Median credit to private sector projected: 24 percent of GDP in 2024 (up from 22 percent in 2023). - Fifteen LICs with least developed credit markets: private credit-to-GDP ratios range between 2 and 15 percent. - Some Asian LICs (Cambodia, Nepal, Bhutan) report credit penetration comparable to AEs, though structural challenges persist. - Liquid bank assets as share of total assets declined sharply in 2024 in many LICs. - Banking sector exposure to central government growing significantly in some LICs. ### External sector, capital flows, and reserves - Current account and external balances - Median current account deficit for 2024: 4.4 percent of GDP (average 6.1 percent of GDP); nearly unchanged from 2023 (4.5 / 6.1 percent). - Remittances: total flows almost tripled between 2010 and 2023 to US$117 billion. - Tourism-dependent LICs: median CA deficit 7.4 percent of GDP in 2024; fuel exporters: median CA deficit 1.7 percent of GDP. - External sector assessments (2024): 23 out of 39 LICs assessed in IMF Article IV reports had external sector positions weaker, moderately weaker, or substantially weaker than fundamentals suggested. - Twin deficits decomposition (2024 average CA deficit 6.1 percent of GDP) - Public sector deficit: 3.8 percent of GDP (large gap between public investment and public savings). - Private sector deficit: 2.3 percent of GDP. - Staff finding: on average across LICs, a one percentage point improvement in fiscal balances translates into a reduction in CA deficits of half a percentage point; correlation for fuel exporters: 0.90. - Capital flows and market access (2024) - Jan–Jul 2024 Eurobond issuances: Benin, Cote d’Ivoire, Senegal, Kenya, Cameroon, and Uzbekistan raised US$7.7 billion; sovereign spreads declined significantly. - FDI: gross FDI inflows ~2 percent of LICs’ GDP in 2023 (historical 2010s average: 3.1 percent of GDP). - Other Investment (OI): surged to average 3.1 percent of GDP during 2021-23, up from 2.5 percent in preceding decade; OI subsequently fell sharply. - FX reserves: median FX reserves 3.2 months of imports in 2024 (3.7 months in 2023); 30 LICs had reserve cover <3 months at end-2024 (unchanged from 2023); more advanced LICs: reserves 4.5 months of imports. ### Fiscal developments and DRM - Fiscal balances (2024) - Median overall (primary) fiscal deficit: -3.1 (-1.6) percent of GDP in 2024 (from -3.6 (-1.8) percent in 2023). - 33 out of 70 LICs strengthened their fiscal positions in 2024. - Only 18 countries reduced deficits by more than one percent of GDP. - Fiscal consolidation approach - For median country, adjustment relied on tax revenue increases and modest expenditure compression in broadly equal measure. - Consolidation gradual in many countries; most pronounced among poorest LICs due to scarce financing. - Domestic Revenue Mobilization (DRM) and spending - LICs’ median fiscal (tax) revenue increased by about 0.9 (0.4) points of GDP in 2024 to reach 21.3 (13.9) percent of GDP. - Median tax take: more advanced LICs 15.4 percent of GDP; poorest LICs 10.8 percent of GDP. - Median expenditure: declined modestly to 24.0 percent of GDP in 2024 from 24.4 percent in 2023. - Median capital expenditure: 6.2 percent of GDP in 2024 (6.1 percent in 2023). - Median spending on social benefits: 3.8 percent of GDP in 2024 (3.3 percent in 2023); LICs’ median social benefits ~one-quarter of that of AEs. - Many LICs still struggle with distortionary energy subsidies; some progress in Fund-supported programs. ### Public debt and debt service pressures - Debt levels (2024) - Median debt-to-GDP ratio declined to 52.8 percent in 2024 from 54.7 percent in 2023. - Reliance on domestic public debt remains significantly higher than in the 2010s. - Debt vulnerabilities and service - Number of LICs at high risk or in debt distress fell since 2021 and nearly returned to pre-pandemic levels, but remains high compared to a decade ago; most cases among poorest and fragile LICs. - Interest payments on total public debt have increased by over two and a half times compared to a decade ago, with acceleration since 2021. - Median LIC external debt service rose from 6 percent of revenue (excluding grants) in 2014 to 15 percent in 2024. - 23 percent of LICs used more than 40 percent of fiscal revenue to cover domestic debt service; LIC median: 14.7 percent. - Fund and Bank staff working on implementing the “three-pillar approach.” ### Outlook and financing needs (conditional on policies/reforms) - Growth and inflation projections - GDP-weighted average growth (2025-29): 5.7 percent; median growth: 4.5 percent. - 13 LICs forecast to grow at an annual 6 percent or more; these 13 account for 60 percent of LICs’ overall growth forecast. - Recovery in Sudan projection hinges on assumption conflict ends by end-2025 and reconstruction commences shortly thereafter. - Median inflation expected to fall to 4.2 percent in 2025 and stabilize around that level; diversified and frontier LICs closer to 5 percent; FCS and fuel exporters to about 3 percent by 2029. - Current account and reserves - Median current account deficit projected: stabilize at 4.3 percent of GDP in 2025 and decline to 3.9 percent by 2029. - Median reserve coverage projected to increase to 4.0 months of imports by end of medium term (compared with 3.6 months in 2025). - On current projections, 16 LICs would still have reserves <3 months of imports by 2028. - Fuel exporters unable to increase reserves to cover 2 months of imports by 2028. - Reserve projection available until 2028 due to WEO data horizon through 2029. - Fiscal outlook and financing needs - Median primary deficit expected: fall to 0.9 percent of GDP in 2025 from 1.6 percent in 2024; end-2029 at 0.7 percent of GDP. - Median debt-to-GDP ratio projected to fall to 48.4 percent by 2029 from 50.8 percent in 2025. - External financing needs over 2025-29 estimated at US$658 billion (reflects current account deficits and projected debt amortization; excludes reserve replenishment or more ambitious development efforts). - Fourth Financing for Development (FfD4) conference planned for June 30-July 3, 2025. ### Policy implications and recommendations (macroeconomic policy stance) - Fiscal - Further fiscal consolidation in 2025 needed to support gradual reduction of public debt; pace depends on fiscal sustainability, financing availability, and cyclical positions. - In countries with large negative output gaps, consolidation will affect growth and employment; frontier markets and SDS with nearly closed output gaps could tighten faster. - Fiscal plans should rebalance toward DRM and higher-quality public spending to tackle inefficiencies, especially in infrastructure. - Multi-pronged approach to financing: official and private sources. - Monetary and exchange rate policy - Monetary policy should be data dependent and country specific: where inflation significantly above target, maintain tighter policy; where activity cools and inflation on track, less restrictive stance justified. - Ensure consistency in the macroeconomic policy mix; where no clear monetary anchor, the exchange rate may de facto serve as anchor, explaining shifts away from flexible regimes. - Structural reforms - Prioritize spending efficiency, DRM, public investment management, governance, and measures to boost TFP and labor force participation. ### Risks - Downside risk factors - Global intensification of trade tensions, adverse global growth, tighter international financial conditions, or exchange rate shifts could reduce trade and capital flows and weigh on investment and growth. - Disruptions to disinflation (commodity price spikes) could impede central bank easing and stress fiscal and financial stability. - Announced or likely reductions in international aid (including from the US and several European countries). - Regional and domestic risks: negative climate events, conflicts, political instability, backlash against unpopular measures, weak reform implementation. - Aggregate growth forecast (5.7 percent weighted) depends on strong performance of a few large countries; adverse developments in those countries would materially affect outlook. ### Designing fiscal adjustment mindful of growth and distributional impacts - Aggregate demand (AD) structure and drivers (past decade) - Private consumption: average 73 percent of LIC AD; explained ~69 percent of growth on average (strongest in more advanced LICs and FMs). - Public consumption: 13 percent of AD over 2015-24; contribution to GDP growth fell from 9 percent before the pandemic to 6 percent after 2020. - Investment: for median LIC, investment accounted for 25 percent of output; public investment share of total investment: 28 percent (v. 20 percent in EMs); contribution of public investment to growth: 7 percent (v. 12 percent in EMs). - Net exports: reduced growth by 10 percent for median LIC over past decade; largest negative impact FCS 20 percent and fuel exporters 30 percent; diversified and frontier LICs negative but smaller (5 and 6 percent). - Fiscal multipliers and policy implications (empirical caveats noted) - Tax revenue: for full LIC group, an increase in tax revenue has a negative impact on growth (results outside standard statistical significance thresholds); effects positive but outside significance band for poorest and more advanced LICs. - Public consumption: no statistically significant growth impact for entire LIC group; in poorest LICs, increasing current spending by 1 percentage point of GDP boosts output by 0.14 percent in the year of the shock and by almost three times that level three years after. - Public investment: increasing public investment by 1 percentage point of GDP boosts output by 0.2 percent in year of shock and 0.3 percent in year after; FCS show cumulative 54 basis points three years after; more advanced and frontier LICs cumulative 74 basis points three years after; poorest LICs multiplier ~one third of strength of more advanced LICs, significant only for first year. ### Mobilizing external financing and developing domestic financial markets — flow-specific effects - Remittances - Each U.S. dollar received translates into an average increase of 36 cents in consumption and 24 cents in investment. - Remittances exhibit countercyclical properties in many LICs. - FDI - Strongest impact on investment; impact on consumption small and statistically insignificant. - Long-term and risk-sharing characteristics make FDI attractive when managed prudently. - Improving corruption control and fiscal discipline correlated with higher FDI: staff estimates improving these to EM median levels could raise LICs’ FDI by average 0.5 percent of GDP. - Other Investment (OI) - Small positive, statistically significant effects on consumption and investment; critical during crises. - Portfolio Investment (PI) - Positive but statistically insignificant impacts on investment and consumption for most LICs; relevance low except for some FMs. - Domestic/policy determinants - Effective corruption control and fiscal discipline important to attract FDI. - Portfolio inflows more sensitive to global financial market volatility; underdeveloped domestic bond and equity markets hinder portfolio attraction. - OI inflows react countercyclically to domestic GDP growth and fiscal balances. ### Raising productivity — urgency and decomposition findings - TFP decline and implications - TFP contribution to growth has declined significantly and became negative since the pandemic for median LIC. - Without measures to support factors of production and TFP, potential growth will remain far below levels needed to improve living standards for fast-growing populations. - Decomposition (sample of 50 LICs, 2001-23) - TFP: steep decline primary cause of recent GDP growth slowdown; median country TFP 5-year rolling average fell from ~1 percent in early 2000s to 0.8 percent after the GFC; post-pandemic entered negative territory. Poorest LICs, FCS, and fuel exporters experienced steepest declines. - Labor: contribution broadly stable within 1.5-2.0 percent of GDP despite strong population growth; weaker-than-expected contributions signal challenges in transforming population growth into adequately skilled labor force. - Capital: capital contributed 2.1 percent of growth for median LIC and remained relatively stable; constraints include financing limitations, frequent shocks, fast depreciation, asset destruction, and PFM weaknesses affecting public investment quantity and quality. - Policy priorities to boost TFP and labor inclusiveness - Boost TFP through improved governance, compulsory education expansion, increased gross capital formation and innovation, protection of intellectual property, regulatory and quality standards. - Improve health to address malnutrition, waterborne diseases and malaria that negatively affect TFP. - Staff impulse response analysis indicates improvements in governance, compulsory education, and gross capital formation and innovation are particularly important to strengthen TFP. - Facilitate broad labor force participation via education, vocational training, formalization support, and expanded social spending coverage targeted to vulnerable groups. ### Exchange arrangements, FX market structure, and controls (detailed findings) - De facto arrangements and trends (2009–23) - LICs’ floating/free-floating regimes fell from ~30 percent (19 countries) in 2009 to ~9 percent (6 countries) in 2023. - Many LICs shifted from floating to soft pegs or other managed arrangements in response to shocks (GFC, commodity price shocks, COVID-19). - De jure vs de facto mismatches - As of end-April 2023: only 8 percent of LICs that classify their exchange rate arrangement as “floating” have a de facto floating exchange rate (EMDE comparable share ~40 percent). - None of LICs that report free-floating in practice do so; contrasting shares for EMDEs and AEs noted in source. - Monetary policy frameworks - Exchange rate anchor remains most common framework but declined from ~62 percent to ~48 percent in LICs (2010–2023). - Inflation targeting in LICs: 7 percent in 2023 (EMDEs: 34 percent). - Most LICs are transitioning toward interest-rate-based frameworks reported as de jure “Other monetary framework” but many continue de facto soft pegs. - FX market features and developments - FX auctions rose to 16 LICs in 2023 from 9 in 2011. - Standing FX facilities: 33 of 69 LICs report them. - Allocation mechanisms: reported by 12 of 69 LICs in 2023 (declined significantly since 2010). - Interbank markets: 55 LICs report some type of interbank market; OTC operations reported by 51 of 69 LICs in 2023. - Capital controls and repatriation/surrender requirements (as of end-June 2023) - Gradual decline in overall restrictiveness since the early 2000s; FARI values across LICs range from 0 to 0.8. - LICs more open to inflows than outflows; 54 of 66 LICs had lower FARI for inflows than outflows in 2022 (versus 41 in 1999). - Repatriation requirements: proceeds from export of goods repatriation required in 44 LICs; export of services in 37 LICs; proceeds from capital investments in 33 LICs. - Surrender requirements: export of goods 46 percent of LICs; export of services 45 percent; investment 33 percent. - Article VIII acceptance and MCPs (end-2022) - Fifty-nine LICs accepted Article VIII obligations as of end-2022. - LICs still under Article XIV (transitional): Afghanistan, Bhutan, Burundi, Eritrea, Ethiopia, Liberia, Maldives, São Tomé and Príncipe, Somalia, South Sudan. - Number of LICs with restrictive exchange measures increased from 19 in 2009 to 23 in 2022. - IMF MCP policy changes effective July 1, 2022 (identification and treatment changes) and effective February 1, 2024 (elimination of pre-existing MCPs under new policy rules). ### Empirical annex highlights — multipliers and financial inflows - Fiscal multipliers estimation (Annex III) - Core model: ADL with country and time fixed effects; fiscal shocks normalized by lagged GDP. - Sample coverage for multiplier estimation: 38 AEs, 84 EMs, and 68 LICs (2015–2024 data availability); LIC group in exercise: 32 poorest LICs and 26 more advanced LICs; LIC sample includes 29 FCS, 17 FMs, and 19 SDS. - Main empirical findings: - Tax revenue: coefficient negative in most cases; statistical significance below 90 percent for full LIC sample. - Public consumption: no visible growth impact on average; positive and significant in poorest LICs. - Public investment: positive and significant impact in year of shock and year after; larger multipliers for more advanced LICs. - Financial inflows determinants and real effects (Annex IV) - Pull–push regressions for gross FDI and Other Investment (2000–23) on 56 LICs (regression sample): - Logged VIX coefficients: 0.41, 0.42, 0.51, 0.41 (std. errors (0.31), (0.32), (0.81), (0.81)). - Real US interest rate coefficients: -0.39, -0.40*, -0.89***, -0.91*** (std. errors (0.24), (0.31), (0.22), (0.22)). - Control of corruption coefficients: 1.43*, 1.29, 1.05*, -2.04 (std. errors (0.87), (1.35), (0.57), (1.24)). - Fiscal deficit/GDP coefficients: -0.12*, -0.12*, 0.18***, 0.14*** (std. errors (0.06), (0.06), (0.04), (0.05)). - Interpretation: better governance associated with higher FDI; larger fiscal deficits deter FDI but are positively associated with Other Investment (countercyclical IFI/donor financing); Real US interest rate strongly negative for Other Investment. - Portfolio inflows (logit model, 2000–22, 54 LICs): - Logged VIX: -0.391 (0.326) - Real US interest rate: -0.224** (0.0872) - Lagged Financial Development Index: 33.70*** (5.223) - Interpretation: lower real US interest rate and higher financial development increase probability of positive portfolio inflows. - Real-economy impacts (panel regressions, 44 LICs, 2000–23): - Remittances: consumption coefficient 0.36** (0.14); investment coefficient 0.24* (0.12). - FDI: consumption 0.14 (0.13); investment 0.52*** (0.08). - Portfolio inflows: consumption 0.01 (0.24); investment 0.37 (0.26). - Other inflows: consumption 0.10*** (0.03); investment 0.07*** (0.02). - Interpretation: remittances raise consumption and investment; FDI strongly raises investment; other inflows are important for consumption and investment stabilizing role. ### Classification, counts, and methodological notes (Annex I highlights) - LIC definition: IMF members eligible to borrow under the PRGT; universe currently 70 LICs. - Segmentation dimensions used: 1. Income level: poorest LICs defined as GNI per capita at or below IDA cutoff US$1,335 in FY25; more advanced LICs above cutoff. Haiti, Nepal, and Guinea included among poorest LICs for consistency with PRGT review. 2. Institutional groups: FCS, SDS (population <1.5 million), Frontier Markets (FM), and Others. 3. Export structure: Fuel exporters, Non-fuel commodity exporters, Diversified, Tourism dependent, Other services. - Aggregate methods: - Medians: typical experience; not GDP-weighted. - Simple arithmetic averages: equal importance to each country. - Weighted averages for aggregate real GDP growth: weights based on GDP at PPP. - PRGT counts and classification aggregates - All PRGT Countries: 70. - Export-structure counts: Fuel: 5; Non-fuel: 25; Diversified & Manufacturing: 23; Frontier: 17; Tourism: 9; Other Services: 8. - Institutional-structure counts: FCS: 31; SDS: 19; Others: 16. - Annex I Table 3 income-group counts using IDA cutoff US$1,335: <=100 (29 countries); >100=<150 (11); >150<=300 (18); >300 (12). - Note: 69 out of 70 PRGT-eligible IMF members are also IDA-eligible per table note. *International Monetary Fund — MACROECONOMIC DEVELOPMENTS AND PROSPECTS FOR LOW-INCOME COUNTRIES 2025 (pp. excerpts from ppea2025008).* ### EXECUTIVE SUMMARY ### ppea2025008 - EXECUTIVE SUMMARY ### Recent Developments and Outlook in LICs - Universe and aggregate performance - The 70 low-income countries (LICs) in the IMF’s membership experienced steady but modest growth in 2024. - LICs’ GDP-weighted average growth turned out at 4.4 percent, unchanged from 2023, and one point below the average growth experienced over the 2010s. - The aggregate statistics mask important divergence across countries: 11 of the 20 fastest growing countries in the world in 2024 were LICs, while many of the poorest LICs—often fragile and conflict-affected states (FCS)—recorded very low growth. - For the subsample of the 38 more advanced LICs, income convergence vis-à-vis advanced economy peers progressed during the 2010s and again since 2022, while the poorest 32 LICs saw virtually no improvement over the past 15 years. - Inflation, external vulnerabilities, and shocks - Disinflation took hold across LICs. - Significant external vulnerabilities persisted for many LICs, including exposure to extreme climate events, high dependence on agriculture, and limited adaptation capacity. - LICs experienced more scarring from the Covid-19 pandemic than higher-income peers. - Conflicts and political instability weighed on several countries; 21 LICs had parliamentary or presidential elections in 2024, with fiscal deficits in election countries exceeding October 2023 WEO forecasts by a median of 0.2 points of GDP. - Policy and reform efforts to date - Gradual fiscal consolidation proceeded in about half of the LICs, supporting further stabilization of public debt levels. - The fiscal adjustment relied on both tax revenue increases and modest expenditure compression. - A funding squeeze continues to constrain priority spending in support of sustainable development and growth in many countries. - Monetary policy supported disinflation; growth-enhancing structural reforms proceeded, albeit often slowly. - Medium-term outlook and key conditional projections - Staff expects LICs’ GDP-weighted growth over 2025-29 to reach an average 5.7 percent (4.5 percent for the median country). - Projections are underpinned by strong forecasts for 13 countries, including some LICs exiting conflicts and fragility as well as Frontier Markets, which would grow at an annual 6 percent or more. - The outlook is subject to significant downside risks: the evolution of global growth, international financial conditions, exchange rate movements, availability of adequate external financing including aid flows, the need for strong policy and steadfast reform implementation (including decisive fiscal adjustment in 2025), and the absence of major negative shocks. ### Reinvigorating Inclusive Growth in LICs - Two priorities for policymakers - Implement necessary fiscal consolidation with as little negative impact on growth and vulnerable households as possible, while supporting consumption and investment through the mobilization of growth-enhancing external financial inflows and the development of domestic financial markets. - Improve productivity to enhance LICs’ growth potential, with special attention to total factor productivity (TFP), which has contributed negatively to growth since the COVID-19 pandemic. - Policy and reform agenda priorities (acknowledging need for country-specific fine-tuning) - Enhance spending efficiency and prioritization, and mobilize domestic revenue where needed. - Improve economic institutions, including through technology, to support external capital inflows and domestic financial market development. - Boost TFP through measures to improve governance, education, and health, while supporting capital formation and innovation. - Facilitate broad labor force participation. - Analytical findings informing priorities - Aggregate demand and productivity analyses indicate that without policy measures to support all factors of production—and especially TFP—LICs will not generate the levels of growth needed to durably improve standards of living for fast-growing populations. ### Exchange Rate and Foreign Exchange (FX) Market Operations in LICs - Exchange rate arrangements and nominal anchors - There has been a clear trend among LICs to move away from market-determined exchange rates toward regimes where the exchange rate is to a greater extent driven by authorities’ measures. - Greater inconsistencies have emerged between de jure exchange arrangements reported by authorities and de facto exchange arrangements in practice. - There has been a move towards less clarity regarding the economy’s nominal anchor in LICs; the exchange rate remains the main nominal anchor in about 50 percent of LICs. - FX market development and central bank role - There has been steady progress in developing FX markets in LICs. - Overall, central banks are playing a lesser role in allocating foreign exchange, including through greater reliance on FX auctions to facilitate price discovery. - Capital account openness and capital controls - The balance of payments’ financial accounts of LICs remain less open than those of Emerging Market and Developing Economies (EMDEs) and advanced economies. - The average restrictiveness is lower on capital inflows than outflows, but there is a large dispersion in restrictiveness among LICs. - LICs have been easing capital controls at a significantly slower pace than EMDEs and tend to adjust their controls less frequently than EMDEs. - Many LICs continue to maintain exchange restrictions and multiple currency practices (MCPs) subject to IMF jurisdiction, often as a means to allocate and prioritize scarce foreign exchange resources. *Source: ppea2025008 - EXECUTIVE SUMMARY, International Monetary Fund.* ### 2. The aggregate statistics mask significant divergence in growth outturns across ### 2. The aggregate statistics mask significant divergence in growth outturns across ### Growth divergence across LICs (2022-24) - Among the 70 LICs, 11 countries achieved average annual growth rates of 6.0 percent or more, while 10 countries recorded growth rates of 3.0 percent or less. - LICs accounted for 11 of the world’s 20 fastest growing economies in 2024, 7 of which from Sub-Saharan Africa. - Sudan and South Sudan: over the last three years, their GDP growth fell by an average 9 percent and 16 percent, respectively, reflecting the impact of civil war and fragility. - The sharpest decline in growth was recorded in 2024: -23.4 for Sudan and -26.4 for South Sudan. - Subgroup performance (2022-24 averages): - More advanced LICs (38 countries): annual growth averaged 5.4 percent. - Poorest LICs (32 countries): annual growth averaged 3.1 percent. - Frontier Markets (FM): averaged 5.3 percent over 2022-24. - FCS (fragile and conflict-affected states): achieved 2.4 percent annual growth over 2022-24. - Fuel exporters: average growth of 0.8 percent. ### Structural and institutional correlates of growth divergence - Diversified export structures and access to international capital markets have typically been associated with stronger growth. - LICs with diversified export structures and Frontier Markets averaged 5.4 percent and 5.3 percent over 2022-24, respectively. - Fragility, conflicts, and undiversified export structures correlated with below-average growth rates. - Definitions and notes from source: - The poorest LICs include 29 countries with a GNI per capita below the FY25 IDA cut-off (US$1,335) as well as Nepal, Guinea and Haiti included for consistency with Tier 1 countries. - Diversified economies include countries whose exports are dominated by manufactured goods or more than one category of exported products. ### Income convergence: gains for some, decoupling risk for others - Median per capita income for LICs has hovered at 6.5 percent of the AE median for over two decades. - More advanced LICs: - Median income per capita rose from about 9 percent of the AE median in 2000 to 11 percent in 2024. - Interquartile range improvements observed; some fast-growing LICs are on track to achieve EM status if trends continue. - Poorest LICs: - Median income per capita has hovered around 4 percent of the AE median. - The poorest LICs today were also the poorest at the turn of the century. - Rapid population growth contributed to difficulties: 2.8 percent per year during 2000-2024 compared to 1.7 percent for more advanced LICs. ### Human development and SDG progress - Among 135 assessable Sustainable Development Goals (SDG), only 17 percent are on track to be met by 2030; 83 percent show limited progress or reversal. - Progress remains especially challenging for FCS and the poorest LICs. - For 2024, more than half of the LICs exhibit moderate to severe deviations from the desired SDG trajectory and nearly 30 percent only show marginal progress. ### Inflation, food insecurity, and price pressures - LICs’ median CPI inflation declined to 4.6 percent in 2024 from a peak of 8.0 percent in 2022. - About 25 percent of LICs, most among the poorest and most fragile, experienced double-digit inflation in 2024. - Food insecurity: - In 2024, about 209 million people in 41 countries worldwide were classified as acutely food insecure (FSIN and Global Network Against Food Crises 2024). - Drivers of disinflation: falling world inflation, stabilizing goods prices (including energy and food staples), and monetary tightening in about a third of countries. ### Domestic financial sectors and sovereign-bank nexus - Median credit to the private sector projected to reach 24 percent of GDP in 2024, up from 22 percent of GDP in 2023. - LICs’ median private credit of 24 percent of GDP remains well below EMs and AEs. - For 15 LICs with the least developed credit markets, private credit-to-GDP ratios range between 2 and 15 percent. - Some Asian LICs (Cambodia, Nepal, Bhutan) report credit penetration comparable to AEs, though overall depth remains lower and structural challenges persist (e.g., Nepal). - Liquidity pressures: liquid bank assets as a share of total assets declined sharply in 2024 in many LICs. - Banking sector exposure to central government has been growing significantly in some LICs (Figure 7 shows banking sector claims on central government as percent of banking sector assets; monthly averages Jan-Jun 2024 used). ### External vulnerabilities and current account dynamics - Median (average) current account (CA) deficit for 2024 was 4.4 (6.1) percent of GDP, nearly unchanged from 2023’s 4.5 (6.1) percent of GDP. - Large negative public sector savings-investment balances and, in some cases, sizeable exchange rate depreciations offset favorable trends in external prices and demand. - Remittances: total flows almost tripled between 2010 and 2023 to US$117 billion. - Tourism-dependent LICs had median CA deficit of 7.4 percent of GDP in 2024; fuel exporters reported the lowest median CA deficit of 1.7 percent of GDP. - External sector assessments: in 2024, 23 out of 39 LICs assessed in IMF Article IV reports had external sector positions weaker, moderately weaker, or substantially weaker than fundamentals suggested. ### Twin deficits (Box 1) - LICs’ average CA deficit of 6.1 percent of GDP in 2024 decomposed into: - Public sector deficit of 3.8 percent of GDP (large gap between public investment and public savings). - Private sector deficit of 2.3 percent of GDP. - Fuel exporters show a particularly strong fiscal–external nexus. - Staff analysis: on average across all LICs, a one percentage point improvement in fiscal balances translates into a reduction in CA deficits of half a percentage point; correlation increases to almost one for fuel exporters (correlation coefficient of 0.90). ### Capital flows, market access, and FX reserves - Market access in 2024: - Between January and July 2024, Benin, Cote d’Ivoire, Senegal, Kenya, Cameroon, and Uzbekistan raised US$7.7 billion with new Eurobond issuances; sovereign spreads declined significantly. - Uncertainty remains whether these events herald broader re-access to international capital markets for LICs. - Portfolio inflows largely absent due to underdeveloped financial markets. - FDI: - Gross FDI inflows grew slightly in nominal terms but remained unchanged in real terms, at about 2 percent of LICs’ GDP. - Historically, gross FDI inflows to LICs averaged an annual 3.1 percent of GDP during the 2010s. - Since the pandemic, around three quarters of LICs have experienced a decline in FDI flows as a share of GDP; the remaining quarter recorded increases mainly in natural resource exploration sectors. - Other Investment (OI) inflows: - OI surged to an average 3.1 percent of GDP during 2021-23 (COVID period), up from 2.5 percent of GDP in the preceding decade; OI has subsequently fallen sharply. - FX reserves: - Median FX reserves dropped to 3.2 months of imports in 2024 from 3.7 months in 2023. - 30 LICs had reserve cover of less than 3 months of imports at end-2024 (unchanged from 2023). - More advanced LICs: international reserves stood at 4.5 months of imports. ### Policy and reform efforts: fiscal consolidation, DRM, and spending patterns - Fiscal balances: - Median overall (primary) fiscal deficit decreased to -3.1 (-1.6) percent of GDP in 2024 from -3.6 (-1.8) percent in 2023. - 33 countries out of 70 LICs strengthened their fiscal positions in 2024. - Only 18 countries reduced their deficits by more than one percent of GDP. - Fiscal consolidation approach: - For the median country, adjustment relied on tax revenue increases and modest expenditure compression in broadly equal measure. - Consolidation was gradual in many countries; adjustment most pronounced among the poorest LICs due to scarce financing. - Domestic Revenue Mobilization (DRM): - LICs’ median fiscal (tax) revenue increased by about 0.9 (0.4) points of GDP in 2024 to reach 21.3 (13.9) percent of GDP. - Median tax take: more advanced LICs 15.4 percent of GDP; poorest LICs 10.8 percent of GDP. - Tax revenues remained below pre-pandemic levels in more than a third of LICs, notably in SDS and FCS. - Recent popular discontent against certain tax policy measures in some countries highlights the need for careful design of measures, attention to distributional impacts, and effective communication and consultation to build consensus. - Expenditure patterns: - Median expenditure declined modestly to 24.0 percent of GDP in 2024 from 24.4 percent of GDP in 2023. - Median capital expenditure almost unchanged at 6.2 percent of GDP (6.1 percent in 2023). - Poorest LICs: median current and capital expenditures represented 14 percent and 5.7 percent of GDP respectively. - Higher-income LICs: median current and capital expenditures were 22 percent and 6.5 percent of GDP respectively. - Median spending on social benefits rose to a record high of 3.8 percent of GDP in 2024, up from 3.3 percent of GDP in 2023; LICs’ median social benefits level remained about one-quarter of that of AEs. - Quality of adjustment: many LICs continued to struggle with reducing distortionary energy subsidies; some progress made in countries with Fund-supported programs. *Italic: Source – MACROECONOMIC DEVELOPMENTS AND PROSPECTS FOR LOW-INCOME COUNTRIES 2025, INTERNATIONAL MONETARY FUND.* ### 14. Public debt levels saw another year of moderate decrease. The median debt-to -GDP ### 14. Public debt levels saw another year of moderate decrease. The median debt-to -GDP ### Debt levels and composition - The median debt-to -GDP ratio for LICs declined to 52.8 percent in 2024 from 54.7 percent in 2023, supported by fiscal consolidation efforts and steady GDP growth. - Reliance on domestic public debt (proxied as total public debt less external public debt) in LICs remains at levels significantly higher than in the 2010s. - The shift toward higher domestic debt accelerated in the wake of the Covid-19 pandemic due to unanticipated funding needs and limited access to international markets. - Note: Domestic debt is calculated as the difference between total (general government) debt and external public debt. ### Debt vulnerabilities and debt service pressures - The number of LICs at high risk or already in debt distress has fallen since 2021 and has almost returned to pre-pandemic levels, though it remains high compared to a decade ago; most countries currently at high risk or already in debt distress are among the poorest and most fragile LICs. - Interest payments on total public debt (external and domestic) in LICs have increased by over two and a half times compared to a decade ago, with a significant acceleration since 2021. - LICs’ external debt service (interest and principal) obligations rose from 6 percent of revenue (excluding grants) in 2014 to 15 percent of revenue (excluding grants) in 2024 for the median LIC. - 23 percent of LICs used more than 40 percent of their fiscal revenue to cover domestic debt service, compared with a LIC median of 14.7 percent. - Fund and Bank staff are working on implementing the conceptual framework provided by the “three-pillar approach” presented last Fall. ### Monetary and exchange rate policy challenges - Many LICs achieved progress with disinflation, but weaknesses in policy frameworks often affected the effectiveness of monetary and exchange rate policies. - Monetary tightening occurred through policy interest rate increases and/or quantitative measures, but the effectiveness was mixed; in many countries key interest rates remained in negative territory at the end of 2024 when adjusted for inflation. - De facto exchange rate regimes have become less market-based, with a shift away from flexible exchange rates; most LICs now implement hard and soft pegs and only 6 LICs operate floating exchange rates. - Only 7 percent of LICs are currently operating under an inflation targeting framework; most LICs are in transition from monetary aggregate or exchange rate targeting to an interest-based monetary policy framework. ### Structural reform progress - Many LICs progressed with ambitious structural reform agendas, often at a gradual pace. - Fiscal sector reforms focused on measures to increase revenues, improve efficiency and effectiveness of public spending, enhance transparency, and adopt accountability mechanisms. - Reforms also targeted SOE inefficiencies, corruption and governance challenges, the business climate, central banking structures and operations, and oversight and regulation of the financial sector. - Recent country experiences with Fund-supported programs suggest a positive relationship between home-grown structural reforms and growth outturns, though sometimes with significant lags. - Examples: Benin developed a Medium-Term Revenue Strategy (MTRS), improved public management of procurement and investment, and enhanced transparency; Cote d’Ivoire adopted measures to improve tax administration and MTRS as well as management of public debt; Guinea-Bissau and the Comoros experienced delays in adopting fiscal reforms due to fragility and low capacity. ### Outlook and macroeconomic projections (conditional on policies and reforms) - LICs’ GDP-weighted average growth over 2025-29 is projected to accelerate to 5.7 percent, while median growth is projected to increase to 4.5 percent. - 13 LICs are forecast to grow at an annual 6 percent or more; these 13 countries account for 60 percent of LICs’ overall growth forecast. - The projected recovery in Sudan hinges on the assumption that the conflict would end by end-2025 and re-engagement and reconstruction would commence shortly thereafter. - Median inflation is expected to fall to 4.2 percent in 2025 and then stabilize around that level; inflation is likely to remain closer to 5 percent in diversified and frontier LICs and fall to some 3 percent by 2029 in FCS and fuel exporters. - LICs’ median current account deficit is projected to stabilize at 4.3 percent of GDP in 2025 and decline to 3.9 percent of GDP by 2029. - Median reserve coverage would increase slightly to 4.0 months of imports by the end of the medium term, compared with 3.6 months in 2025. - On current projections, a total of 16 LICs would still have reserves of less than 3 months of imports by 2028. - Fuel exporters would be unable to increase reserves even to cover 2 months of imports by 2028. - WEO data projection is available through 2029; therefore the reserve projection is available until 2028. ### Fiscal outlook and financing needs - The median primary deficit is expected to fall to 0.9 percent of GDP in 2025 from 1.6 percent of GDP in 2024, before ending the decade at 0.7 percent of GDP in 2029. - The median debt-to -GDP ratio would fall to 48.4 percent by 2029 from 50.8 percent in 2025, supported by stable GDP growth and fiscal consolidation. - An exercise using updated WEO data to estimate LICs’ external financing needs over 2025-29 yields the amount of US$658 billion; this figure reflects current account deficits and projected debt amortization and does not account for additional needs such as reserve replenishment or more ambitious development efforts. - The Fourth Financing for Development (FfD4) conference planned for June 30-July 3, 2025, will present an opportunity for LICs and development partners to discuss financing. ### Policy implications and recommendations - Further fiscal consolidation in 2025 is needed to support gradual reduction of public debt, with the pace of adjustment depending on fiscal sustainability, availability of financing, and cyclical positions. - In countries with large negative output gaps, fiscal consolidation will affect growth and employment; by contrast, frontier markets and SDS with nearly closed output gaps could tighten fiscal stances more quickly. - Fiscal plans signal some rebalancing towards domestic resource mobilization (DRM) and a focus on higher-quality public spending to tackle inefficiencies, especially in infrastructure. - Ensuring sufficient levels of financing calls for a multi-pronged approach involving official and private sources. - Monetary policy should be data dependent and less uniform across countries: for countries with inflation significantly above target, maintain tighter monetary policy until underlying inflation sustainably returns to target; where activity is cooling and inflation is on track to return to target, a less restrictive stance is justified. - Ensuring consistency in the macroeconomic policy mix—including the interplay between monetary and exchange rate policies—is important; where a clear monetary anchor is absent, the exchange rate may de facto serve as the anchor, explaining shifts away from flexible regimes. _International Monetary Fund — Macroeconomic Developments and Prospects for Low-Income Countries 2025 (chapter content)._ ### 31. Risks are tilted to the downside amid elevated uncertainty. On a global level, an ### 31. Risks are tilted to the downside amid elevated uncertainty. On a global level, an ### Downside risks and channels - Global intensification of trade tensions, adverse trends in global growth, international financial conditions, or/and exchange rates could impact LICs’ trade and capital flows, and weigh on investment and growth, especially in countries with large financing needs. - Further disruptions to the disinflation process, potentially triggered by new spikes in commodity prices amid persistent geopolitical tensions, could prevent central banks from easing monetary policy, posing significant challenges to fiscal policy and financial stability. - Announced or likely reductions in international aid flows, including from the US and several European countries, add to challenges. - Regional and domestic exposures: negative climate events, conflicts, political instability, backlash against unpopular measures, and weaker-than-expected reform implementation. - Dependence of the relatively benign 5.7 percent (weighted) average growth forecast on the strong performance of a number of relatively large countries implies that materialization of significant risks in those countries could have a significant impact on the overall LIC growth outlook. *The IMF provides capacity development support to help its members strengthen monetary and exchange rate frameworks, enhance domestic financial markets, and improve the effectiveness of monetary policy tools.* ### Designing fiscal adjustment mindful of growth and distributional impacts — Aggregate demand (AD) structure and drivers - Private consumption: - Represented an average 73 percent of LIC’s AD over the past decade. - Explained some 69 percent of growth on average, with the role strongest in more advanced LICs and FMs. - Public consumption: - Accounted for 13 percent of aggregate demand over 2015-24. - Contribution to GDP growth fell from 9 percent before the pandemic to 6 percent after 2020. - Growth in more advanced LICs typically benefitted from public consumption almost twice as much as growth in the poorest LICs. - Investment: - For the median LIC, investment accounted for 25 percent of output over the past decade. - Share of public investment in total investment: 28 percent v. 20 percent in EMs. - Contribution of public investment to growth: 7 percent v. 12 percent in EMs. - Net exports: - Over the past decade, net exports reduced growth by 10 percent for the median LIC. - Largest negative impact: FCS 20 percent and fuel exporters 30 percent. - Diversified and frontier LICs: net exports negative but smaller (5 and 6 percent, respectively), compared to 7 percent in EMs. ### Minimizing the growth impact of fiscal adjustment — Fiscal multipliers and policy implications - General caveat: Output effects depend on cyclical position and structural characteristics; estimated multipliers should be interpreted with caveats. - (Tax) revenue: - For the full group of LICs, an increase in tax revenue has a negative impact on growth (results outside standard thresholds of statistical significance). - For poorest LICs and more advanced LICs the effects are positive but outside the significance band. - Public consumption: - No statistically significant growth impact for the entire group of LICs. - Poorest LICs: increasing current spending by 1 percentage point of GDP boosts output by a statistically significant 0.14 percent in the year of the shock and by almost three times that level three years after. - More advanced LICs: coefficient becomes negative and significant two and three years after the shock. - Public investment: - Increasing public investment in LICs by 1 percentage point of GDP boosts output by 0.2 percent in the year of the shock and 0.3 percent in the year after (increasing only marginally and losing statistical significance thereafter). - FCS: statistically significant growth impact — a cumulative 54 basis points three years after the shock. - More advanced LICs and frontier LICs: cumulative increase of 74 basis points three years after the shock. - Poorest LICs: multiplier only one third of the strength of the more advanced LICs, showing statistical significance only for the first year. ### Mobilizing external financing and developing domestic financial markets — Effects by flow type - Remittances: - Each U.S. dollar received translates into an average increase of 36 cents in consumption and 24 cents in investment. - Remittances exhibit countercyclical properties in many LICs. - FDI: - Impact on investment is the strongest of all flow types; impact on consumption much smaller and statistically insignificant. - Long-term nature and risk-sharing characteristics make FDI attractive for development when managed prudently. - Other Investment (OI) (including official bilateral creditors and international financial institutions, including the 2021 SDR allocation): - Small positive, statistically significant effects on consumption and investment. - Critical during economic crises when other inflows become less available. - Portfolio Investment (PI): - Positive but statistically insignificant impact on both investment and consumption (low relevance for most LICs, except some FMs). - Domestic and policy determinants: - Effective corruption control and fiscal discipline are important to attract FDI. - Staff’s panel regression finds a positive correlation between effective corruption control and FDI inflows, and a negative association of FDI with fiscal deficits. - Efforts to improve corruption control and fiscal deficits to levels on par with those in the median EM are estimated to raise LICs’ FDI by an average 0.5 percent of GDP. - Portfolio inflows are more sensitive to global financial market volatility and the underdevelopment of domestic bond and equity markets hinders attraction of international portfolio investors. - OI inflows react in a countercyclical pattern to domestic GDP growth and fiscal balances. ### Raising productivity — summary and urgency - TFP decline and implications: - Total factor productivity (TFP) contribution to growth has been declining significantly for the median LIC and has become negative since the pandemic. - Without policy measures to support factors of production and TFP, potential growth in LICs will remain far below levels needed to improve living standards for fast-growing populations. - Decomposition findings (sample of 50 LICs, 2001-23): - TFP: - Steep decline in TFP contribution was primary cause of recent GDP growth slowdown in LICs. - LICs’ TFP contribution to growth, measured as a 5-year rolling average for the median country, fell from about 1 percent in the early 2000s to 0.8 percent following the GFC. - Post-pandemic, TFP contribution entered negative territory. - Poorest LICs, FCS, and fuel exporters experienced the steepest declines. - Labor: - Contribution of labor to growth broadly stable within 1.5-2.0 percent of GDP over the sample period despite strong population growth. - Weaker-than-expected contributions signal challenges in transforming population growth into an adequately skilled labor force. - Capital: - Capital contributed 2.1 percent of growth for the median LIC and remained relatively stable. - Domestic and external financing constraints, exposure to frequent shocks, fast depreciation, and physical destruction of assets limit the ability to boost this contribution. - PFM weaknesses affect both quantity and quality of public investment. - Heterogeneity: fuel-exporting LICs saw a major increase in investment over the past 15 years, while FCS struggled to increase capital stock and face large infrastructure gaps. *Source: IMF staff, MACROECONOMIC DEVELOPMENTS AND PROSPECTS FOR LOW-INCOME COUNTRIES 2025, INTERNATIONAL MONETARY FUND.* ### Box 2. Decomposition of Growth Along the Production Function in LICs ### Box 2. Decomposition of Growth Along the Production Function in LICs ### Output decomposition and contributions to growth - Output identity: Output = TFP * f(K,L). - Sample note: Data on labor, employment, GDP or capital output ratio is missing for some island economies and conflict-affected countries LICs, limiting the sample size to 50 LICs. - In 2023, the contribution of the capital stock to growth in the median LIC was 2.1 percentage points, and thus higher than the 1.5 percentage point for EMs and the 0.7 percentage points for AEs. - Presentation format used in source: Annual GDP Growth (5-year moving average, percentage points: median within 25th-75th percentiles band); TFP Contribution to Median LIC Growth (5-year moving average, percentage points, median and linear trend); Capital Contribution to LIC Growth (5-year moving average, percentage points: median within 25th-75th percentiles band); Labor Contribution to LIC Growth (5-year moving average, percentage points: median within 25th-75th percentiles band). ### Structural impediments to improving LIC production functions - Weaknesses in economic institutions: - Cited literature: Acemoglu, Johnson, Robinson, 2004; Edwards, Johnson, and Weil 2016; Ivanyna and Salerno 2021. - Despite efforts, large gaps remain between LICs and higher income peers (World Bank 2025). - Informality: - Informality accounts for more than a third of total output in approximately half of the LICs. - The informal sector is typically much less productive than the formal sector and is less efficient in accumulating physical and human capital. - Underdeveloped financial sectors: - Financial systems in LICs are often under-developed, leaving many households and firms (mostly small-scaled businesses) with self-financing as the only option (Khan and Senhadji 2000). - Narrow export base and few trade partners: - Median imports and exports for LICs nearly doubled as a percentage of GDP since 1990, but trade openness still lags higher-income peers. - Weaknesses in AI preparedness: - Weak skills and education, technological infrastructure, and legal frameworks negatively impact AI preparedness in LICs. ### Key empirical and governance indicators referenced - Aggregate Governance Indicator, 2022 (aggregate computed as a simple average across all six Worldwide Governance Indicator estimates). - Estimate of Informal Output Share, 2020. - Financial Development, 2021. - Government CAPEX-Total Expenditure Ratio, 2023. - Tax Revenue-GDP Ratio, 2023. - Import+Export-GDP Ratio, 2022. - Figure references in source: Figure 16 (Structural Characteristics of LIC Economies). ### Policy and reform agenda to support inclusive growth - Overarching guidance: - Country-specific conditions require careful finetuning and sequencing. - Emphasize spending efficiency and DRM while prioritizing social spending and public investment during fiscal adjustment. - Enhance economic institutions and technology to attract external capital and develop domestic financial markets. - Boost TFP by improving governance, education, health, capital formation, and innovation. - Increase social spending coverage and promote broad labor force participation. - Act quickly because structural measures typically take time to develop their impact. - Fiscal design priorities (medium term): - Enhance spending efficiency and mobilize domestic revenue where needed while prioritizing social spending and public investment when implementing fiscal adjustment. - Shift spending to priority areas such as health, education and targeted support for vulnerable households and away from untargeted energy subsidies. - Prioritize growth-enhancing investment and factor climate risks into PFM and public investment management (PIM) processes; embed in medium-term fiscal frameworks and support by efficient investment processes (Eltokhy et al. 2024). - Domestic revenue mobilization (DRM) measures could aim at broadening the VAT base and reducing informality, improving personal income taxes and property taxes, rationalizing corporate income tax incentives and modernizing the fiscal regime for extractive industries, and leveraging excise taxes. - Implement revenue administration measures and progress with digitalization to improve tax compliance. - PFM reforms to strengthen budget processes and enhance transparency and efficiency. - In FCS, adopt a gradual approach to improving fiscal institutions aligned with local absorption and implementation capacity. - External financing, institutions, and financial markets: - Overall official inflows to LICs are unlikely to increase significantly over the medium term, reinforcing the need to mobilize other external financing, including FDI. - Maintain macroeconomic stability and enhance transparency, accountability, and legal frameworks to protect property rights. - Technical innovation (e.g., Fintech) can lower the cost of remittances and portfolio inflows; the average cost of money transfers to LICs is 6.3 cents on each dollar (World Bank 2024c). - Develop deeper domestic financial markets to reduce informality, support higher private consumption and investment, and improve monetary policy transmission. ### Boosting TFP and enhancing labor force inclusiveness - TFP priorities: - Boost TFP through improved governance (e.g., protect intellectual property, ensure regulatory and quality standards), expansion of compulsory education, increased gross capital formation and innovation. - Staff impulse response analysis (Figure 17) indicates improvements in governance, compulsory education, and gross capital formation and innovation are particularly important to strengthen TFP in LICs. - Staff analysis highlights strong complementarity between FDI and AI preparedness (as a proxy for preparedness for advanced technology more broadly) in fostering TFP growth (see Box 3). - Improving health matters because malnutrition, waterborne diseases and malaria negatively affect TFP (Cole & Neumayer 2006). - Industrial policy can help address market failures if measures are well-targeted, time-bound, cost-effective, transparent, and preserve macroeconomic stability (IMF 2024i). - Labor force participation and inclusiveness: - Facilitate broad labor force participation by enhancing the quality and accessibility of education and vocational training to match skills to employer needs. - Help firms transition into formality and support productivity growth in the informal sector. - Increase coverage and efficiency of social spending, including targeted efforts for vulnerable groups such as youth, women, and the disabled, to improve their access to the labor market and expand potential growth (Annex V). ### Empirical caution and methodological notes - Impulse Response Functions (IRF) in Figure 17: - IRFs show responses to one-unit increases in variables of interest, controlling for lagged GDP per capita, economic openness, two TFP lags, and country- and time-specific fixed effects, using the Local Projection method (Jordà, 2005). - Y axis measures percentage points; X axis measures years. A coefficient of -0.5 (+0.5) corresponds to a 0.5 percentage points decrease (increase) in TFP's contribution to real GDP growth. - TFP data includes 90-110 countries, half of which are LICs. - Results are correlational rather than causal; endogeneity and reverse causality may still be present. ### Box 3 (summary): Low-income Countries and Artificial Intelligence (AI) - IMF’s Artificial Intelligence Preparedness Index (AIPI) reveals significant disparities in AI readiness between LICs and higher-income peers. - Among LICs, those with above-median FDI and AIPI have had more sustained TFP contributions to growth during and after the Covid-19 pandemic than others. - LICs with above-median FDI but below-median AIPI (mainly commodity exporters) recorded lower TFP contributions to growth. - Implication: FDI can contribute to higher growth when backed by knowledge and a skilled labor force. - LIC categorization in Box 3: based on average FDI/GDP (2019-2023) and 2023 AIPI into four groups (overall low resources; higher funding but low tech; higher tech but low funding; overall higher resources). *Sources: WEO, Penn World Table, IMF staff Calculations; additional sources cited within the text.* ### 44. In contrast, de facto exchange rate arrangements in advanced economies are mostly ### ppea2025008 - 44. In contrast, de facto exchange rate arrangements in advanced economies are mostly ### De facto exchange rate arrangements across country groups - Advanced economies (AEs) and EMDEs have a larger share of market determined exchange rate regime compared to LICs. - EMDEs are characterized by a markedly smaller share of countries with soft pegs and a significantly larger share of floating regimes compared to LICs. - Definitions and sample sizes used: - EMDEs refers to Emerging and Developing Economies as classified in the WEO minus the 69 LICs, so there is no overlap between EMDEs and LICs. - AEs = advanced economies (39 countries); EMDEs = emerging market and developing economies (86 countries); LICs = low income countries (69 countries); Frontier (17 countries); FCS = fragile and conflict-affected situations (30 countries); SDS (19 countries) and Other (16 countries). ### Trends in LICs’ exchange rate regimes (2009–23) - Clear trend over the last 15 years among LICs to move away from market determined exchange rates to more tightly controlled exchange rate arrangements. - Floating and free-floating regimes among LICs: - Dropped from about 30 percent (19 countries) in 2009 to about 9 percent (6 countries) in 2023. - Notable regime transitions and drivers: - 2010–11: six countries moved away from floating to soft pegs or other managed (Burundi, Cambodia, Congo DR, Guinea, Haiti, Sudan). The global financial crisis (GFC) played a role. - 2017: Four countries moved from floating to stabilized or other managed (Kenya, Tanzania, Malawi, Sierra Leone); external shocks (volatile markets, commodity price shocks, Ebola, weather events) influenced changes. - 2021: Three countries switched from floating to crawl-like arrangement (Ghana; Mozambique; Zambia). COVID-19 effects (lowered growth and increased fiscal deficits) cited as a main reason. - As of April 2023: - Number of soft peg regimes in LICs is above the historic average. - Number of floating regimes is below the historic average. ### De jure versus de facto mismatches - Increased inconsistencies between de jure (reported) and de facto (observed) exchange rate arrangements in LICs as a consequence of the shift toward managed arrangements. - As of end April 2023: - Only 8 percent of the LICs that classify their country’s exchange rate arrangement as “floating” have de facto a floating exchange rate. - Comparable share in EMDEs is about 40 percent. - None of the LICs that report having a free-floating regime do so in practice. - By contrast, 19 percent of EMDEs and 82 percent of advanced economies that report having a free-floating regime do so in practice. - Note: Somalia has a de facto free-floating arrangement but its de jure exchange rate arrangement is undetermined because of the absence of administrative measures controlling the foreign exchange market; Somalia is excluded from the de jure vs de facto comparison. ### Monetary policy frameworks in LICs - Framework classification: de jure monetary policy frameworks include Exchange rate anchor; Monetary aggregate target; Inflation-targeting framework; Other monetary framework. - Trends (2011–23): - Exchange rate anchor remains the most common framework but its share in LICs declined from about 62 percent to about 48 percent from 2010 to 2023. - Countries that ceased to list exchange rate as main nominal anchor include: Lao P.D.R., Malawi, Sudan (all 2011); Ethiopia, Vanuatu (both 2013); Samoa, Tonga (both 2015); Zimbabwe (2018); Liberia (2020). South Sudan adopted a conventional peg in 2012 and abandoned it in 2015. - One half of LICs that ceased to have the exchange rate as main nominal anchor are now reported as having “Other monetary framework.” - In 2023, the currency used most as an anchor was the Euro (15), followed by the US dollar (13). - Inflation targeting: - Share of LICs operating under inflation targeting framework in 2023 is 7 percent. - Share in EMDEs is 34 percent. - Kenya and Uzbekistan adopted inflation targeting in 2020; they joined Ghana, Moldova, and Uganda among LICs implementing inflation targeting for many years (three of these are frontier economies). - Many LICs have moved toward interest rate–based frameworks reported as de jure “Other monetary policy framework” while continuing to monitor other indicators; most continue to have de facto soft peg or other managed exchange rate regimes, indicating incomplete adoption of market-determined exchange rates required for full-fledged inflation targeting. - Implication: - When large discrepancies exist between de jure and de facto exchange rate arrangements, monetary policy frameworks tend to be opaque and less effective. ### Foreign exchange (FX) market features and developments - Importance: Well-functioning FX markets support cross-border payments, trade, and investment; market development depends on regulatory framework and central bank role in intermediating FX flows. - General development since 2010: - FX markets in LICs have developed and increased depth; sharp decline in use of central bank allocation mechanisms and greater reliance on interbank market forces. - Foreign exchange standing facilities: - 33 of 69 LICs reported standing FX facilities. - Standing facilities are used mostly in LICs with currency boards, conventional pegs, crawling pegs, and other managed arrangements. - Changes since 2010: Six LICs stopped using them (Burundi [2011], Guinea [2015], Malawi [2013], Rwanda [2015], São Tomé and Príncipe [2018], Yemen [2020]); Cambodia introduced one in 2015. - Foreign exchange allocation systems: - Used to provide FX for strategic imports or priority projects when reserves are scarce. - Less than 20 percent of LICs (12 of 69) currently report use of allocation mechanisms; the number has declined significantly since 2010 (almost twice as high then). - Major discontinuations: - 2018: 8 LICs comprising the BCEAO (WAEMU) discontinued allocation mechanisms. - 2013: 4 LICs of the BEAC (CEMAC) discontinued. - Other abandonments: Myanmar (2012), Malawi (2012), Ghana (2020); South Sudan introduced in 2012 and dropped in 2015. - Adoptions since 2010: Sudan (2012), Nepal (2013), Papua New Guinea (2019), Mozambique (2020). Note: Yemen reported use only in 2020. - Foreign exchange auctions: - Number of LICs reporting FX auctions increased to 16 in 2023 from 9 in 2011. - Countries that stopped auctions since 2011: Burundi (2012), Mozambique (2012), Liberia (2019), Kenya (2020). - Countries that started auctions since 2011: Myanmar (2011), Uganda (2011), Moldova (2012), Guinea (2013), The Gambia (2014), South Sudan (2015), Tajikistan (2015), Zimbabwe (2019), Yemen (2021). Honduras discontinued in 2020 but reinstated in 2023; Sudan temporarily conducted auctions in 2021–22. - Fixing sessions: - Allow central bank to gather market bids to gauge market clearing exchange rate; characteristic of early-stage FX market development. - Only 3 LICs have used fixing sessions since 2010; in 2023 only Mozambique reported its use. - Mauritania stopped fixing sessions in 2022 and relies only on auctions; Uzbekistan reported use during 2017–19. - FX market segments—development indicators (2011 vs 2023) include growth in interbank market and spot exchange market usage, increased presence of over-the-counter and forward exchange market segments, reduced reliance on standing facilities and allocation mechanisms. *Source: IMF, AREAER database and IMF staff calculations (as presented in "MACROECONOMIC DEVELOPMENTS AND PROSPECTS FOR LOW-INCOME COUNTRIES 2025").* ### 52. Since 2010 there has been a gradual increase in the number of LICs that report the ### 52. Since 2010 there has been a gradual increase in the number of LICs that report the existence of an interbank market ### Interbank markets: types and coverage - AREAER reports on three main types of interbank markets: over the counter markets (OTC), brokerage arrangements, and market-making arrangements. - Fifty-five of the LICs report some type of an interbank market. - Over-the-counter operations - 51 of 69 or about 74 percent of LICs report the existence of an OTC market in 2023. - Comparable ratio for EMDEs is about 78 percent. - 43 LICs exclusively operate an OTC interbank market and do not have brokerage or market-making arrangements. - Number of LICs reporting an active OTC interbank market grew from 32 in 2010 to 51 by 2020; a net increase of 19. - Of that net increase, 20 LICs implemented an OTC FX market and one LIC discontinued its use. - Since 2010 the following 20 LICs reported the existence of an OTC FX interbank market: Afghanistan, Myanmar, Tanzania, Uzbekistan, Comoros, Kenya, Democratic Republic of the Congo, Malawi, Tajikistan, The Gambia, Maldives, Djibouti, Mauritania, Uganda, Zimbabwe, Grenada, St. Lucia, St. Vincent and the Grenadines, Liberia, and Mozambique. - São Tomé and Príncipe, which initially reported an existence of an OTC stopped doing so in 2014. - As of end June 2023, 18 LICs reported that they do not engage in over-the-counter operations; over half of these are LICs with fragile and conflict-affected situations, while a few are frontier economies. - Brokerage arrangements - Only two LICs (Kenya and Papua New Guinea) report the existence of brokers in the foreign exchange market. - This number has remained constant since 2010. - Market-making agreements - Twelve LICs (or about 17 percent) report the existence of market-making agreements in the foreign exchange market in 2023. - Comparable share for EMDEs in 2023 is about 41 percent. ### Other foreign exchange market features - Forward market - Number of LICs with a forward market increased from 34 countries in 2009 to 40 in 2023. - Share of LICs with forward markets is about 60 percent, compared to 75 percent for EMDEs. - Within LICs, the depth and scope of forward markets vary; in some LICs forward contracts are limited to select underlying transactions (examples: WAEMU countries, Comoros, Madagascar, Nepal, Papua New Guinea, Sierra Leone [only if below a threshold value], Tanzania). - In some jurisdictions forward contracts above a threshold require central bank approval (BEAC/CEMAC); in others central bank approval is required for such transactions (Mozambique [for certain financial derivatives], Solomon Islands). - Forward market is still insignificant or at a very early stage in Moldova, Mauritania, Malawi, Rwanda. - To encourage forward market development, some central banks have undertaken swaps with authorized dealers (Ghana). - A few countries report no specific limitations on banks conducting forward market operations (Cabo Verde, Kenya, Uganda). - Taxes and subsidies on foreign exchange transactions - Number of LICs levying a tax on foreign exchange transactions remained fairly stable during 2009-23, increasing from 18 to 20. - Share of LICs with such taxes is about 29 percent versus about 14 percent for EMDEs. - FX taxes in LICs range from 0.02 percent to 2.5 percent of the value of transaction. - In most cases the tax is applied to both purchases and sales of foreign exchange and could be at different rates. - Only one LIC in 2023 reported subsidizing foreign exchange transactions compared to three EMDEs. - Bangladesh subsidized inward remittances at 2.5 percent; previously Sudan provided an exchange subsidy to incentivize exports and Yemen utilized nonmarket exchange rates for food imports. ### Capital controls — level of restrictiveness - General - Capital flows bring benefits and risks; free capital movements are generally more beneficial and less risky in countries with higher financial and institutional development. - AREAER measures capital-account restrictiveness using the Financial Account Restrictiveness Index (FARI). - Trends and dispersion - Financial accounts in LICs are the least open relative to EMDEs and advanced economies, but the gap relative to EMDEs is narrowing. - Since the early 2000s there has been a gradual decline in overall restrictiveness in LICs per the FARI. - Among LICs the degree of restrictiveness is heterogeneous: for 2022 FARI values range from aggregate FARI equal to zero (Cabo Verde and Zambia) to levels of 0.8 indicating highly restrictive or closed financial accounts. - Figure evidence indicates a tendency toward less restrictiveness from 1999 to 2022. - Inflow vs outflow openness - LICs are relatively more open to capital inflows than to capital outflows and have reached the same level of inflow openness as EMDEs. - The distribution of inflow controls shows a clear shift indicating liberalization since 1999, while the shift in outflow controls is less prominent. - Fifty four of 66 LICs have a lower FARI for inflows than outflows in 2022 compared to 41 in 1999. ### Scope of controls and repatriation/surrender requirements - Investment restrictions - Most LICs report some form of controls on portfolio and direct investments, both inflows and outflows. - Just over half of LICs report some controls on nonresidents’ investment in shares of domestic companies. - A slightly smaller number report controls on nonresidents’ investment in local bond and/or money markets compared to equity markets. - About 70 percent of LICs report some controls on residents’ portfolio investments abroad. - About 64 percent report some form of restrictions on inward FDI; one third of those indicate controls on liquidation of invested capital. - Slightly over 50 percent report restrictions on nonresidents’ investment into real estate and on residents’ real estate investment abroad. - Repatriation and surrender requirements (as of end June 2023) - Most LICs report some form of repatriation and/or surrender requirement for cross-border transactions; shares notably higher than in EMDEs. - Proceeds from export of goods: 44 LICs report repatriation requirements. - Proceeds from export of services: 37 LICs report repatriation requirements. - Proceeds from capital investments: 33 LICs report repatriation requirements. - Corresponding shares for LICs vs EMDEs: 64 percent vs 45 percent (export goods); 54 percent vs 37 percent (export services); 48 percent vs 30 percent (capital investments). - Surrender requirements (shares LICs vs EMDEs): export of goods 46 percent vs 30 percent; export of services 45 percent vs 28 percent; investment 33 percent vs 26 percent. - Foreign exchange proceeds have to be surrendered to the banking system, to the central bank or to both. - As of end June 2023, 23 LICs report some form of surrender requirement to the central bank; about 60 percent of those countries have a conventional peg arrangement (12 belonging to one of the currency unions). The remainder are split across crawl-like, stabilized, other managed, with one classified as floating arrangement. - Nonresident and resident foreign currency accounts - Virtually almost all LICs (97 percent) permit nonresidents to hold bank accounts in foreign exchange in the country, comparable to EMDEs. - About 80 percent of those LICs do not require nonresidents to get approval to open such accounts. - Residents of 90 percent of LICs are permitted to have bank accounts in foreign exchange abroad, with just over half permitting this without approval from authorities; share is somewhat lower than in EMDEs. ### Changes to controls affecting capital flows - Frequency and magnitude of regulatory changes - Since 1999 LICs have changed regulations affecting capital flows much less frequently than EMDEs. - LICs with 5 or less changes are the largest group; several EMDEs reported over 100 changes. - The FARI shows gradual decline in restrictiveness, while the AREAER Change Index (ACI) captures the count of regulatory actions (easing or tightening). - The cumulative number of easing actions taken by EMDEs was about 3,000, compared to about 500 in LICs. - The frequency of policy actions concerning capital flows taken by EMDEs is almost 5 times higher than LICs. - The much lower number of measures taken by LICs may reflect a lower capacity to calibrate and enforce changes to capital controls. - Easing actions dominate over tightening ones in aggregate ACI measures. ### Exchange restrictions and multiple currency practices - IMF context - Since 1944 the Fund has promoted international monetary cooperation including elimination of restrictive exchange measures on payments and transfers for current international transactions. - Article VIII, Sections 2(a) and 3 of the IMF’s Articles of Agreement establish obligations that members must observe with respect to exchange restrictions and multiple currency practices. - Under Article VIII Sections 2(a) and 3 members may not impose restrictions on the making of payments and transfers for current international transactions and are prohibited from engaging in discriminatory arrangements or multiple currency practices without prior IMF approval. - Members may avail themselves of transitional arrangements under Article XIV when joining the Fund to maintain restrictions that were in effect at the time of membership, but are subject to Article VIII obligations for any new exchange measures implemented after joining. *Italic: IMF staff summary of ppea2025008 - 52. Since 2010 there has been a gradual increase in the number of LICs that report the* ### 61. The share of LICs that have accepted Article VIII at end 2022 is about 85 percent, ### 61. The share of LICs that have accepted Article VIII at end 2022 is about 85 percent ### Article VIII acceptance and Article XIV transitional arrangements - Fifty-nine LICs have accepted Article VIII obligations as of end 2022. - Four LICs accepted Article VIII since 2010: Lao PDR [2010], Mozambique [2011], Tuvalu [2016], and Myanmar [2020]. - LICs that had yet to accept the obligations under Article VIII, Sections 2 and 3, and thus availed themselves of the transitional arrangements under Article XIV as of end 2022: Afghanistan, Bhutan, Burundi, Eritrea, Ethiopia, Liberia, Maldives, São Tomé and Príncipe, Somalia, and South Sudan. - The discussion does not specify whether restrictive exchange measures are maintained under Article VIII or Article XIV. ### Restrictive exchange measures in LICs and EMDEs (2009–22) - The number of LICs maintaining restrictive exchange measures (exchange restrictions and/or multiple currency practices (MCPs)) increased from 19 countries in 2009 to 23 in 2022. - Over the same period the number of EMDEs with restrictive exchange measures dropped from 25 to 23 countries. - The number of LICs with MCPs increased from 11 in 2009 to 12 in 2022. - The number of LICs with exchange restrictions increased from 15 in 2009 to 19 in 2022. - Over the same period, the number of EMDEs with MCPs increased by one to 14 and those with exchange restrictions remained at 19. - The number of restrictive exchange measures in LICs increased steadily since 2010 but dipped in 2022, largely because of a fall in the number of exchange restrictions. - Restrictive exchange measures peaked in 2018 in EMDEs and started a downward trend but increased sharply in 2022, in part because of a rise in the number of exchange restrictions. - Many countries maintain both an exchange restriction and/or MCP and in many cases have more than one type of exchange restriction and/or MCP, resulting in a much larger count of restrictive exchange measures compared to number of countries with restrictions. - The average number of MCPs maintained by LICs are between 1 and 2 per country. - The average number of exchange restrictions maintained by LICs is slightly over 2 per country. - For the most part LICs maintained on average a higher number of exchange restrictions compared to EMDEs, and vice versa for MCPs. - The broad trend has been for these averages to increase gradually over time for both groups. ### IMF MCP policy change and measurement scope - The IMF adopted a new MCP policy on July 1, 2022. Main changes noted: - (1) an MCP will arise due to an official action that segments foreign exchange markets or increases or subsidizes the cost of certain foreign exchange transactions (for example, exchange taxes), - (2) MCPs will be identified on the basis of a new country-specific market-based rule, - (3) the new policy ensures better alignment of the MCP policy with other relevant IMF policies. - The new policy became effective on February 1, 2024, after a transitional period (July 1, 2022, until February 1, 2024) to allow members to adjust their policies. - Since July 1, 2022, under the new policy, no MCPs are to be found where (1) official action takes the form of (a) an one-day lagged official exchange rate computed and used as specified in the new policy, (b) broken cross-rates, or (c) a foreign exchange auction consistent with specified criteria under the new policy; and (2) an MCP results from exchange rate spreads arising in an illegal parallel market. - Effective July 1, 2022, existing MCPs based on the types of official action that are no longer covered under the MCP policy were considered eliminated. - All remaining pre-existing MCPs were considered eliminated effective February 1, 2024, when the new policy came into effect. - The number of restrictive exchange measures discussed is based on those reported in IMF staff reports issued as of December 31, 2022; changes reported after December 31, 2022 are not reflected. ### Types of MCPs in LICs (2009–22) - The most common form of MCPs in LICs is the use of mandated exchange rates for specific transactions. - An MCP may arise when authorities use a mandated or official rate for certain transactions because the official rate is calculated based on previous day’s transactions, thus creating the potential deviation of two percent or more between official and market exchange rates on the day of the transaction. - Since 2009, 20 LICs have had such an MCP. - LICs maintaining mandated-rate MCPs in 2022: Burundi, Eritrea, Ghana, Guinea, Honduras, Kyrgyz Republic, Maldives, Papua New Guinea, Sierra Leone, Sudan, Tajikistan, and Zimbabwe. - Multiple price foreign exchange auctions as an MCP: - More common among EMDEs than LICs. - In 2022 only one LIC (Zimbabwe) had an MCP owing to multiple price FX auctions compared to three EMDEs. - Since 2009 four other LICs were identified to have had an MCP related to multiple price FX auctions: Honduras (2016), Myanmar (2013), Sierra Leone (2009), and Uganda (2015). - MCPs arising from the spread between official and parallel market rates in LICs: - Only slightly less frequent than in EMDEs. - In 2022 only two LICs (Eritrea and Sudan) had such an MCP, but since 2009 other LICs (Maldives, São Tomé and Príncipe, South Sudan, Malawi, Myanmar) have had this type of MCP. - MCPs related to taxes on foreign exchange transactions have been rare in LICs since 2009. - In 2022 only Eritrea had such an MCP, and Somalia had one during 2009-16. - Subsidies and guarantees as MCPs have been uncommon in LICs since 2009. - South Sudan had an MCP due to an exchange rate guarantee arrangement during 2014-16. ### Types of exchange restrictions in LICs (2009–22) - General limitation on access to foreign exchange was the most common type of exchange restriction identified in LICs and these have increased since 2009. - These typically include prioritization and rationing of foreign exchange, or limiting amounts at foreign exchange auctions. - Excess demand for FX may be satisfied through access to the parallel market. - In 2022, 14 LICs maintained general exchange restrictions, largely due to prioritization, rationing and not allocating enough foreign exchange to meet demand for current transactions. - Examples of countries and counts of such restrictions: - South Sudan was found to have three such exchange restrictions. - Bhutan was identified with two exchange restrictions. - Maldives was identified with one exchange restriction. - Exchange restrictions related to payments for invisibles: - The number of such exchange restrictions has remained steady, attributed to a few LICs maintaining them for a number of years; some have more than one such exchange restriction. - Examples of LICs that maintained such exchange restrictions in 2022: - Bhutan (3; including requiring FDI companies to pay for their operational expenses), - Ethiopia (1; a tax certification requirement for repatriation of dividend and other investment income), - São Tomé and Príncipe (1; requirement that taxes and other obligations to the government have to be paid/fulfilled as a condition for transfer of net income from investment), - South Sudan (1; an exchange restriction arises from imposing absolute ceilings on the availability of foreign exchange for certain invisible transactions). - Other exchange restrictions less prevalent but observed: - Restrictions on availability of foreign exchange for importers who have not provided evidence of past imports unrelated to the underlying transaction (Bhutan, Ghana). - Requirement for a clearance certificate (Ethiopia). - Imposition by the government of a cash margin requirement for most imports (Sudan). - Generally, EMDEs had fewer instances of such exchange restrictions during this period. ### Concluding observations - There has been a clear trend among LICs to move away from market determined exchange rates toward regimes where the exchange rate is to a greater extent driven by authorities’ measures, resulting in greater inconsistencies between de jure and de facto exchange arrangements. - There has been a move towards less clarity regarding the economy’s nominal anchor in LICs; the exchange rate remains as the main nominal anchor in about 50 percent of LICs. - There has been steady progress in developing foreign exchange markets in LICs, with central banks playing a lesser role in allocating foreign exchange and greater reliance on FX auctions to facilitate price discovery. - The balance of payments’ financial account of LICs remains less open than those of EMDEs and advanced economies; the restrictiveness is lower on capital inflows than outflows, with large dispersion among LICs. - LICs have been easing capital controls at a significantly slower pace than EMDEs and tend to adjust their controls less frequently than EMDEs, perhaps due to less capacity to calibrate and enforce such changes. - Many LICs continue to maintain exchange restrictions and MCPs subject to IMF jurisdiction, including as means to allocate and prioritize scarce foreign exchange resources. *Source: Excerpt from IMF chapter on exchange arrangements and restrictive measures in LICs as of end 2022.* ### References ### References ### Academic and Working Papers - Acemoglu, D., Johnson, S., & Robinson, J. 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Selected Issues Paper.” IMF Country Report 21/201. - IMF (2021b). “Sudan: Request for a 39-Month Arrangement Under the Extended Credit Facility.” IMF Country Report 21/142. - IMF (2022a). “Zambia: Request for an Arrangement Under the Extended Credit Facility.” July 2022. - IMF (2022b). “Review of the Fund's Policy on Multiple Currency Practices–Proposals for Reform.” IMF Country Report 22/292. - IMF (2022c). “Bhutan: 2022 Article IV Consultation.” IMF Country Report 22/146. - IMF (2022d). “Democratic Republic of São Tomé and Príncipe: Staff Report for 2022 Article IV Consultation; Fourth Review Under the Extended Credit Facility Arrangement.” IMF Country Report 22/95. - IMF (2022e). “Republic of South Sudan: 2022 Article IV Consultation And Second Review Under The Staff-Monitored Program.” IMF Country Report 22/266. - IMF (2023a). “World economic outlook”, October 2023. - IMF (2023b). “Regional economic outlook – Sub-Saharan Africa: Light on the Horizon?” October 2023. - IMF (2023c). “Regional economic outlook – Middle East and Central Asia: Safeguarding Macroeconomic Stability amid Continued Uncertainty.” May 2023. - IMF (2024a). “Review of the poverty reduction and growth trust facilities and financing—Reform proposals.” Washington, DC, October. - IMF (2024b). “Regional economic outlook: Sub-Saharan Africa—Reforms amid great expectations.” Washington, DC, October. - IMF (2024c). “Kenya: Seventh and Eighth Reviews Under the Extended Fund Facility and Extended Credit Facility Arrangements.” Washington, DC, November. - IMF (2024d). “World economic outlook, October 2024”. Washington, DC, October. - IMF (2024e). “Global financial stability report, October 2024”. Washington, DC, October. - IMF (2024f). “Macroeconomic Developments and Prospects for Low-Income Countries—2024”. Washington, DC, April. - IMF (2024g). “Annual Report on Exchange Arrangements and Exchange Restrictions 2023”. Washington, DC, December. - IMF (2024h). “Stepping Up DRM: A New Joint Initiative from the IMF and WB” Washington, DC, June. - IMF (2024i). “Industrial Policy Coverage in IMF Surveillance—Broad Considerations, March 2024.” Washington, DC. - IMF (2024j). “G-20 Note on Alternative Options for Revenue Mobilization, June 2024.” Washington, DC, June. - IMF (2024k). “World economic outlook—Steady but Slow: Resilience Amid Divergence, April 2024.” Washington, DC. - IMF (2025a). “World economic outlook update—Global Growth Divergence and uncertain”, January 2025. Washington, DC, January. - IMF (2025b). “Debt vulnerabilities and financing challenges in emerging markets and developing economies—An overview of key data, February 2025”. Washington, DC, February. - IMF (2025c, forthcoming). “Applying the integrated policy framework to low-income countries: Shocks, frictions, and policy considerations.” ### World Bank and Other International Publications - FSIN and Global Network Against Food Crises. (2023). “Global Report on Food Crisis 2023 Mid-Year Update.” Rome. - Ohnsorge, F., & Yu, S. (2022). “The long shadow of informality: Challenges and policies”. World Bank Publications. - World Bank. (2024a). “Tax expenditure manual, June 2024”. - World Bank. (2024b). “Global Economic Prospects, January 2024”. doi:10.1596/978-1-4648-2017-5. - World Bank. (2024c). “Remittance Prices Worldwide. Making Markets More Transparent”, June 2024. - World Bank. (2025). “Global economic prospects, January 2025”. doi: 10.1596/978-1-4648-2147-9. ### Annex I. LIC Classification and Aggregation Methodology — Key Points and Numeric Values - Definition of LICs: - LICs are defined as all IMF members that are eligible for borrowing under the Poverty Reduction and Growth Trust (PRGT). - The list, updated regularly following a PRGT-eligibility review approved by the IMF Board, currently includes 70 LICs. - Three segmentation dimensions used throughout the report: 1. By income level: - LICs are categorized into two mutually exclusive groups based on their GNI per capita: - (1) at or below the IDA cutoff threshold (US$ 1,335 in FY25, =100 percent), referred to as poorest LICs throughout the report; and - (2) countries above the IDA cutoff threshold, referred to as more advanced LICs. - For analytical consistency with the 2024 Review of PRGT Finances and Facilities, Haiti, Nepal, and Guinea are included in the first group despite having GNI per capita above the IDA cutoff threshold. - This grouping differs from the WB definition of poorest LICs, which is composed of those countries with more than half of their populations below the extreme poverty line (Mawejie 2024). 2. By institutional characteristics: - Four institutional groups: (1) fragile and conflict-affected states (FCS); (2) small and developing states (SDS) with populations lower than 1.5 million; (3) frontier markets (FM) with access to international financial markets; and (4) all other LICs. - Overlaps exist (e.g., some LICs classified as both FCS and FM, or FCS and SDS). 3. By export structure (five mutually exclusive groups, following the WEO Country Group classification): - Fuel exporters: net fuel exports make up 30 percent or more of total exports. - Non-fuel commodity exporters: resource-intensive countries (other than fuel exporters) whose nonrenewable natural resources represent at least 25 percent of total exports. - Diversified countries: non-resource-intensive countries (not classified as fuel or non-fuel commodity exporters), identified in the original WEO classification as having Diversified and Manufacturing export sectors; included if dominant exports are manufactured goods or if they have more than one category of exported products. - Tourism dependent countries: export earnings are small, but revenue from travel and passenger transport services make up 10 percent or more of total export revenue. - Other services countries: main source of exports are services (including income, transfers) in the original WEO Country Groupings. - Historical and classification notes: - Since 2008, 83 countries have been classified as PRGT-Eligible (LICs) over time; 65 of the initial PRGT-eligible members remain on the list to this day. Only 6 countries entered the list since it was established, while 13 graduated to EM status. - See the IMF (2024a), approved by the Board on October 15, 2024, Annex IX. - The classification of Haiti, Nepal, and Guinea reflects the comprehensive assessment framework established in the 2024 PRGT Review for determining access to concessional financing. - The LIC-SDS country group excludes 7 advanced economies (Andorra, Cyprus, Estonia, Iceland, Luxembourg, Malta, and San Marino) and 3 high-income fuel-exporting countries (Bahrain, Brunei Darussalam, and Equatorial Guinea) as per the 2024 SDS Guidance Note. _International Monetary Fund — ppea2025008 References (content unit)._ ### Annex I. Table 2. Complete Classification Lists ### Annex I. Table 2. Complete Classification Lists ### PRGT membership and classification counts - All PRGT Countries: 70 - Export-structure groups: - Fuel: 5 - Non-fuel: 25 - Diversified & Manufacturing: 23 - Frontier: 17 - Tourism: 9 - Other Services: 8 - Institutional-structure groups: - FCS: 31 - Others: 16 - SDS: 19 - Note: 5 countries with * were not eligible for financing under the PRGT since its start in 2008. The remaining 65 countries have been PRGT-eligible members since 2008. Countries in italics blue are currently under a Fund-supported program. ### Selected country-classification details (as presented) - Examples of countries listed under major groupings (as shown in table): - Fuel: Bangladesh, Chad, Congo, Republic of, Timor-Leste, Yemen, South Sudan - Non-fuel: Benin, Burkina Faso, Burundi, Cote d'Ivoire, Djibouti, Eritrea, Ethiopia, Ghana, Guinea, Kenya, Liberia, Malawi, Mali, Mauritania, Mozambique, Nepal, Papua New Guinea, Sierra Leone, Solomon Islands, Somalia, South Sudan, Sudan, Syria, Timor-Leste, Tuvalu, Yemen, Zambia, Zimbabwe - Diversified & Manufacturing: Benin, Bhutan, Cambodia, Cameroon, Cote d'Ivoire, Ethiopia, Ghana, Honduras, Kenya, Lao P.D.R., Lesotho, Madagascar, Micronesia, Myanmar, Nicaragua, Papua New Guinea, Rwanda, Senegal, Tajikistan, Tanzania, Togo, Uzbekistan, Zambia - Frontier: Benin, Bangladesh, Bhutan, Cambodia, Cameroon, Congo, Democratic Republic of Congo, Eritrea, Ethiopia, Ghana, Honduras, Kenya, Madagascar, Micronesia, Myanmar, Mozambique, Nepal, Nicaragua, Niger, Papua New Guinea, Rwanda, Senegal, Sierra Leone, Solomon Islands, Somalia, South Sudan, Sudan, Syria, Tajikistan, Timor-Leste, Tonga, Tuvalu, Uganda, Uzbekistan, Vanuatu, Yemen, Zambia, Zimbabwe - Tourism: Cabo Verde, Dominica, Grenada, Maldives, Marshall Islands, Micronesia, Samoa, Sao Tome, Solomon Islands, St. Lucia, St. Vincent and the Grenadines, Timor-Leste, Tonga, Tuvalu, Vanuatu (table entries show overlap across categories) (Note: the source lists full country membership across the classification lists; the above bullets present representative examples following the source structure.) *Italicized note from table: 5 countries with * were not eligible for financing under the PRGT since its start in 2008. The remaining 65 countries have been PRGT-eligible members since 2008. Countries in italics blue are currently under a Fund-supported program.* --- ### Annex I. Table 3. Classification by Income ### Income-group counts and thresholds - IDA cutoff used: US$1,335 (US$1,335=100 percent) - Poorest LICs (GNI per capita at or below IDA cutoff of US$ 1,335): <=100 (29 countries) - More advanced LICs subdivided into: - >100=<150 (11 countries) - >150<=300 (18 countries) - >300 (12 countries) ### Selected country placement (as presented) - <=100 (29): Afghanistan, Burkina Faso, Burundi, Central African Republic, Chad, Democratic Republic of Congo, Eritrea, Ethiopia, Gambia, The, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mozambique, Myanmar, Niger, Rwanda, Sierra Leone, Somalia, South Sudan, Sudan, Syria, Tanzania, Togo, Uganda, Yemen, Zambia - >300 (12): Cabo Verde, Dominica, Grenada, Maldives, Marshall Islands, Micronesia, Moldova, Samoa, St. Lucia, St. Vincent and the Grenadines, Tonga, Tuvalu ### Special classification note - Haiti, Nepal, and Guinea are classified as poorest LICs, even though their GNI per capita is above the IDA cutoff, for consistency with 2024 Review of PRGT Finances and Facilities approved by the Board in October 2024. --- ### Annex I. Table 4. Evolution of PRGT List ### Entrants and graduates (selected timeline points listed) - Entrants/Graduates examples shown for years: 2010, 2013, 2015, 2017, 2020, 2024. - Notable entry/graduate footnote: Zimbabwe was not included in the PRGT-eligible list of countries until 2017 due to its overdue financial obligations (arrears) to the Fund, which prevented an assessment against the PRGT eligibility criteria, as the country was not eligible to any form of financing until full clearance of the arrears. ### Cross-universe comparisons (explicit counts) - This report’s LIC universe compared with IDA eligibility: - 69 out of the 70 PRGT-eligible IMF members are also eligible for IDA-financing. - The remaining nine countries eligible for IDA financing but excluded from PRGT eligibility are: Belize, Eswatini, Fiji, Guyana, Kosovo, Nigeria, Pakistan, Sri Lanka, and Suriname. - Moldova is PRGT-eligible but graduated from IDA eligibility in 2020. - This report’s LIC universe compared with the World Bank GEP coverage: - Of the 70 PRGT countries, 25 overlap with the World Bank's list of 26 Low-Income Countries (LICs) from the January 2025 Global Economic Prospects Report. --- ### Methodological Note: Aggregation Methodologies (as used in the report) - Medians: - Definition: the middle value when all values are ordered. - Use: reflects the "typical" experience, robust to outliers; does not weight countries by economic size (GDP). - Simple Arithmetic Average: - Definition: sum of observations divided by number of countries. - Use: gives equal importance to each country. - Weighted averages: - Use: reflect relative economic size or systemic importance. - For aggregate real GDP growth rates: weights based on GDP measured at purchasing power parity (PPP). --- ### Annex III. Estimating Fiscal Multipliers in LICs ### Methodology (model specification and interpretation) - Core specification: autoregressive distributed lag (ADL) model for real GDP growth: - y_{i,t} = ln(Y_{i,t}/Y_{i,t-1}); country fixed effects α_i; time fixed effects β_t. - Fiscal shocks: - S^C_{i,t} = (G^C_{i,t,t} - G^C_{i,t,t-1}) / Y_{i,t-1,t-1}^{n} - S^K_{i,t} = (G^K_{i,t,t} - G^K_{i,t,t-1}) / Y_{i,t-1,t-1}^{n} - G^C: nominal public consumption expenditure; G^K: public investment. - Multipliers: 흁_h^C and 흁_h^K (h=0,1,2,3) are fiscal spending multipliers at different lags (percent increase in output in response to unit increase in normalized fiscal variables). - Controls x_{i,t} include lagged public consumption and investment shares, lagged tax revenue share, lagged real GDP growth, lagged inflation, and recession dummy R_{i,t} (equals 1 during negative output gap episodes, 0 otherwise). - Tax revenue multiplier model: - Similar ADL but using S^T_{i,t} = (G^T_{i,t,t} - G^T_{i,t,t-1}) / Y_{i,t-1,t-1}^{n} - Tax revenue multipliers inferred from coefficients on lagged tax shocks to avoid contemporaneous endogeneity; one-year multiplier = μ_1^T; two-year cumulative = μ_1^T + μ_2^T; three-year cumulative = Σ_{h=1}^3 μ_h^T. ### Data and sample - Primary data sources: January 2025 WEO database for most indicators; shocks calculated using October vintages of the 2014-2024 WEO databases. - Shock calculation: difference between Year t October WEO release of G^C and G^K and their forecasts in October WEO from one year earlier, divided by year t-1 October WEO release of Y_{i,t-1}^{n}. Fiscal variables expressed in percent of GDP. - Sample coverage for multiplier estimation: - 38 AEs, 84 EMs, and 68 LICs with available data during 2015 and 2024. - LIC group composition in this exercise: 32 countries included in the poorest LICs and 26 more advanced LICs. - LIC sample comprises 29 FCS, 17 FMs, and 19 SDS (see Annex I for definitions). ### Empirical findings (summary of key results) - General: - Most coefficients show expected signs and magnitudes. - Coefficient on tax revenue is negative in most cases, but statistical significance falls below 90 percent for the full LIC sample. - Public consumption expenditure: - On average for LICs, an increase in public consumption expenditure has no visible growth impact. - Heterogeneity: consumption expenditure has positive impact in the poorest LICs. - Public investment: - An increase in public investment has positive and significant impact in the year of the shock and the year after. - Heterogeneity: investment multipliers are larger for the more advanced LICs. - Multipliers inference: - Current-year multipliers: μ_0^C and μ_0^K. - One-year cumulative: μ_0^C + μ_1^C and μ_0^K + μ_1^K. - Two-year cumulative: Σ_{h=0}^2 μ_h^C and Σ_{h=0}^2 μ_h^K. - Three-year cumulative: Σ_{h=0}^3 μ_h^C and Σ_{h=0}^3 μ_h^K. --- ### Annex IV. Empirical Analysis of Financial Inflows ### Methodology (pull-push panel regression) - Core regression for gross inflows: - K_{i,t} = β_1 × PUS_t + β_2 × PL_i,t-1 + γ_i + ε_{i,t} - K_{i,t}: gross FDI or other investment inflows to country i at year t (gross flows defined as net incurrence of liabilities in FDI/other investment categories of BPM6). - PUS_t (global push factors): VIX index (CBOE) and real US interest rate (FRED). - PL_i,t-1 (country pull factors, lagged by one year): lagged real GDP growth, capital account openness/restrictiveness, perception of good governance (Control of corruption), fiscal balance (policy prudence). - Country fixed effects γ_i included in some specifications to account for time-invariant country characteristics; push factors vary over time but not across countries. ### Data - Sample period: 2000-23. - Gross FDI/other investment inflow data for 70 LIC countries available from STA BOP database or WEO desk submissions; regressions use STA BOP data for consistency. - Portfolio inflows not analyzed due to low relevance for LICs. - Regression sample for reported results includes 56 out of 70 LICs due to data limitations. ### Empirical findings (regression results from Annex IV. Table 2) - Table reports four specifications: columns correspond to dependent variable = FDI inflows (col 1: no country FE; col 2: with country FE) and Other investment inflows (col 3: no country FE; col 4: with country FE). - Global push factors: - Logged VIX index coefficients: 0.41, 0.42, 0.51, 0.41 (standard errors (0.31), (0.32), (0.81), (0.81)) - Real US interest rate coefficients: -0.39, -0.40*, -0.89***, -0.91*** (standard errors (0.24), (0.31), (0.22), (0.22)) - Domestic pull factors (lagged): - Real growth rate coefficients: 0.07, 0.07, 0.01, -0.02 (standard errors (0.05), (0.05), (0.05), (0.04)) - Capital inflow restrictiveness coefficients: -0.02, -0.00, 0.02, 0.01 (standard errors (0.01), (0.02), (0.01), (0.03)) - Control of corruption coefficients: 1.43*, 1.29, 1.05*, -2.04 (standard errors (0.87), (1.35), (0.57), (1.24)) - Fiscal deficit/GDP coefficients: -0.12*, -0.12*, 0.18***, 0.14*** (standard errors (0.06), (0.06), (0.04), (0.05)) - Specification details: - Country FE: No, YES, No, YES (for columns 1–4 respectively) - Sample period: 2000-23 - Number of LICs in regression sample: 56 - Interpretation of key coefficients and signs: - Perception of good governance: positive coefficients across regressions; statistical significance falls below 90 percent when country fixed effects are incorporated. - Fiscal deficit/GDP: negative coefficients in FDI regressions (columns 1–2), indicating less prudent macroeconomic policies can deter FDI; positive and statistically significant coefficients in Other Investment regressions (columns 3–4), likely reflecting countercyclical IFI and donor financing captured in other investment flows. - Real US interest rate: negative and statistically significant for Other investment inflows (columns 3–4) at the 1 percent level (***), indicating tighter global financial conditions reduce other investment inflows to LICs. - VIX: coefficient typically negative in EMs in literature, but here logged VIX coefficients are positive and statistically insignificant for LICs; footnote suggests this likely reflects weaker integration of LICs’ financial markets compared to EMs. --- *Source: ppea2025008 - Annex I. Table 2. Complete Classification Lists (IMF PDF content provided).* ### 2. Determinants of Portfolio Inflows to LICs ### 2. Determinants of Portfolio Inflows to LICs ### Overview - Nearly 80 percent of the observations on portfolio inflows to LICs are recorded as zero. - The limited positive inflows primarily reflect sporadic issuance of sovereign bonds; negative inflows largely indicate repayments associated with those bonds. - By comparison, less than 10 percent of the observations of FDI inflows are zero. ### Methodology and Data - With portfolio inflow data heavily skewed at zero, a logit model on portfolio inflows is employed instead of the typical pull and push factor model. - Empirical specification: Pr(y_{i,t} ≠ 0 | X_{it}) = P(X_{it} β + v_i), where y_{i,t} are portfolio inflows and X_{it} is a vector of determinants. - Determinants included: logged VIX index, real US interest rate, and a lagged domestic Financial Development Index (from IMF Financial Development Index). - Regression sample: 54 LICs for the period from 2000 to 2022 (sample ends in 2022 because the financial development index is available up to 2021; lagging it allows one additional year of observation). ### Empirical Findings — Determinants of Portfolio Inflows (Logit Model) - All coefficients in the regression show the expected signs, consistent with theoretical predictions. - Statistically significant results reported in Annex IV. Table 3 (standard errors in parentheses): - Logged VIX index: -0.391 (0.326) - Real US interest rate: -0.224** (0.0872) - Lagged Financial Development Index: 33.70*** (5.223) - Country fixed effects: No - Number of Countries: 54 - Note: *** p<0.01, ** p<0.05, * p<0.1. - Interpretation: - A lower real US interest rate is associated with an increased probability of positive portfolio inflows to LICs—an effect primarily driven by encouragement of sovereign bond issuances. - Higher levels of financial development markedly increase the likelihood of positive portfolio inflows. ### Relationship between Financial Inflows and Consumption and Investment — Methodology - Panel regression on a sample of 44 LICs covering 2000–2023: y_{i,t} = β × x_{i,t} + α_t + γ_i + ε_{i,t}, where y_{i,t} is consumption- or investment-to-GDP ratio and x_{i,t} is one of the financial inflows (lagged). - Year fixed effects (α_t) and country fixed effects (γ_i) included. - Data sources: Consumption and investment from WEO database; remittance data from Migration Data portal; other inflow data from WEO. ### Empirical Findings — Financial Inflows and Consumption/Investment (Annex IV. Table 4) - Coefficient β estimates with robust standard errors in parentheses (*** p<0.01, ** p<0.05, * p<0.1): - Consumption / Investment - Remittance inflows: 0.36** (0.14) / 0.24* (0.12) - FDI inflows: 0.14 (0.13) / 0.52*** (0.08) - Portfolio inflows: 0.01 (0.24) / 0.37 (0.26) - Other inflows: 0.10*** (0.03) / 0.07*** (0.02) - Key quantitative interpretations: - A one dollar increase in remittances is associated with a 36-cent average increase in consumption and a 24-cent average increase in investment in LICs. - FDI inflows have a statistically significant positive impact on investment (0.52***), but an insignificant impact on consumption (0.14). - Other investment inflows show small positive impacts on both consumption (0.10***) and investment (0.07***), consistent with a more countercyclical, demand-stabilizing role. - Portfolio inflows have a positive but statistically insignificant association with both consumption (0.01) and investment (0.37) in most LICs, reflecting their limited role. ### Policy Implications and Relevance - Developing domestic financial markets and raising financial development are key to increasing the probability of positive portfolio inflows, as indicated by the large and highly significant coefficient on the Financial Development Index (33.70***). - Global financial conditions—particularly the real US interest rate—affect LIC portfolio inflows; a lower real US interest rate raises the likelihood of positive inflows by encouraging sovereign bond issuance. - Given the pronounced role of remittances in supporting consumption and investment, policies that facilitate remittance flows and financial inclusion for recipient households can have sizable real-economy benefits. - Policies to attract FDI should emphasize investment-facilitating reforms given FDI’s strong positive association with investment. - The limited and often sporadic nature of portfolio inflows in LICs underscores the importance of diversifying financing sources, strengthening domestic financial development, and maintaining favorable macroeconomic and institutional conditions to attract more stable external financing. *Prepared by Strategy, Policy, and Review Department — excerpt from "2. Determinants of Portfolio Inflows to LICs" in the provided content.* --- _Source: https://www.imf.org/-/media/files/publications/pp/2025/english/ppea2025008.pdf_