## Macroeconomic Developments and Prospects in Low-income Countries—2022

## Source details

**Canonical URL:** [Macroeconomic Developments and Prospects in Low-income Countries—2022](https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/mar2023.pdf)

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### Overview and policy priorities
- Russia’s war in Ukraine has slowed down LICs’ recovery from the pandemic, accelerated inflation, and increased fiscal stress and debt vulnerabilities (IMF, March 2023).
- The international community’s additional financing needs for LICs are estimated at $440bn (IMF, March 2023).
- Near-term priorities: fighting inflation, addressing debt vulnerabilities, supporting recovery, and protecting the vulnerable through a concerted use of all policy instruments (IMF, March 2023).
- Effective public debt management is emphasized as critical to mitigating debt vulnerabilities (IMF, March 2023).
- Medium- to long-term priorities: structural reforms to address poverty, inequality, climate change, and to promote digitalization to support development and income convergence (IMF, March 2023).
- The report was discussed by the IMF Executive Board on December 1, 2023; outreach was conducted with the U.K. FCDO, the OECD DAC, the AfDB, and at an event organized by the Banque de France and FERDI (IMF, March 2023).

### DIGNAD toolkit: development and applications
- Internal launch: The DIGNAD toolkit was launched internally on December 8th, 2022 at an IMF iLab event opened by the Fund’s Economic Counselor and Director of the Research Department Pierre-Olivier Gourinchas (IMF, March 2023).
- Model foundation: Extension of the Debt, Investment and Growth model of Buffie et al. (2012) to natural disasters, following Marto, Papageorgiou and Klyuev (2018); runs from an Excel interface (IMF, March 2023).
- Purpose: Captures challenges of closing infrastructure gaps in developing countries particularly vulnerable to natural disasters, many of which are small low-income countries (IMF, March 2023).
- Availability and outreach:
  - Toolkit and user manual are available to all IMF economists through the IMF intranet (IMF, March 2023).
  - Presentations made to the IMF Institute for Capacity Development’s climate group, the Resilience Sustainability Trust (RST) working group, and the Statistics Department’s climate group (IMF, March 2023).

### Country-level analyses and policy implications
- Niger — Macroeconomic gains from closing gender educational gaps:
  - Closing the gender gap in years of schooling in each income percentile would boost long-term GDP by 11 percent (Selected Issues Paper, Chapter two; IMF, March 2023).
  - Closing gaps would boost female labor participation, increase income earned by women, and improve fiscal outcomes (IMF, March 2023).
  - Findings support Niger’s PDES 2022-26 strategic goals (IMF, March 2023).

- Rwanda — Policy lessons from DIGNAD simulations:
  - Simulations (Box 2, IMF Country Report No 22/381) show that investing in more robust infrastructure initially raises public debt but reduces output losses, asset damages, and post-disaster fiscal rebuilding costs (IMF, March 2023).
  - Improving public investment efficiency raises resilience and the initial debt increase can be mitigated by securing private and more concessional financing (IMF, March 2023).

- Bangladesh — Macro-fiscal implications of climate change policies:
  - Simulations (Annex III.D, IMF Country Report No 23/066) indicate accelerating adaptation infrastructure investment can support a green recovery, mitigate disaster impacts, and reduce macroeconomic and fiscal risks (IMF, March 2023).
  - Improved public investment management and efficiency can lessen the growth-debt trade-off for adaptation investment (IMF, March 2023).

- Guinea — Using mining revenues to strengthen development:
  - Model-based assessment (Annex IV, IMF Country Report No. 2023/043) suggests reforming the mining code and exemptions could yield additional mining revenues of around 2 percent of GDP (IMF, March 2023).
  - If properly invested, those revenues could increase investment in infrastructure, education spending and social transfers, producing:
    - additional 1.1 percentage points of growth over 30 years;
    - poverty reduction of 17.8 percentage points;
    - improvements in several inequality indicators (IMF, March 2023).

### Research findings: remittances, public investment, and human capital
- Remittances during COVID-19:
  - Using a newly compiled monthly remittance dataset for 52 countries (including 25 LICs), the study finds remittances were strongly resilient during the pandemic (The Journal of Development Studies; Kpodar et al.; IMF, March 2023).
  - Key results:
    - Remittances responded positively to COVID-19 infection rates in migrant home countries, acting as an automatic stabilizer.
    - Stricter containment measures dampened remittances.
    - A shift from informal to formal channels due to travel restrictions contributed to a surge in formal remittances.
    - Size of fiscal stimulus in host countries is positively associated with remittance flows to migrants’ home countries (IMF, March 2023).

- Public investment and human capital with segmented labour markets:
  - A dynamic general equilibrium model with segmented labour markets and efficiency wages (Oxford Economic Papers; Buffie et al.; IMF, March 2023) finds:
    - For plausible calibrations, public investment in education is much more effective than infrastructure investment in promoting long-run development.
    - Because education investment affects labour productivity with a lag, policymakers face an intertemporal trade-off depending on social discount rates and distributional weights.
    - Ignoring labour market distortions understates general equilibrium returns to public investment and shifts optimal public investment further toward human capital (IMF, March 2023).

- Loss-of-learning and the post-COVID recovery in LICs:
  - A dynamic general equilibrium analysis (Journal of Macroeconomics; Buffie et al.; IMF, March 2023) shows:
    - Without significant and sustained external financing, persistent loss-of-learning effects on labour productivity will make the post-COVID recovery more attenuated and more expensive than many analyses suggest (IMF, March 2023).

### Inflation, energy prices, monetary policy, and political institutions
- Inflation response to retail energy prices:
  - Using a monthly database covering 110 countries (incl. 37 LICs) over 2000:M7 to 2016:M6, the study (Journal of International Money and Finance; Abdallah and Kpodar; IMF, March 2023) finds:
    - Consumer price levels respond positively to retail energy price shocks, with effects on average modest and transitory.
    - Heterogeneity: larger and more persistent responses in countries with less flexible labor markets, lower energy intensity, looser fiscal policy stances, and less credible monetary policy—characteristics common in many LICs.
    - Evidence of non-linearity and asymmetry: positive and larger energy price shocks lead to larger and more persistent consumer price level effects (IMF, March 2023).

- Monetary policy and fragility:
  - Applied Economics paper (Diallo, Gui-Diby, Imam; IMF, March 2023) finds:
    - Single-objective monetary policy (e.g., focusing only on inflation) is not always appropriate in fragile settings.
    - Balancing nominal objectives (price stability) with real objectives (reducing unemployment) can better address fragility.
    - The impact depends on the effectiveness of monetary policy transmission channels (IMF, March 2023).

- Political institutions and output collapses:
  - An IMF working paper (Imam and Temple; IMF, March 2023) using cross-country data for 155 countries (of which 25 LICs) models output growth and political institutions as a finite state Markov chain and finds:
    - Growth is more likely to be sustained under democracy than under autocracy.
    - Output collapses are more persistent under autocracy; stagnation under autocracy can lead to outright collapse.
    - Democratic countries appear more resilient, consistent with high institutional quality providing a safety net against worst outcomes (IMF, March 2023).

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_Source: https://www.imf.org/-/media/files/topics/lics/macro-research-for-development/newsletters/mar2023.pdf_