How Financing Can Boost Low-Income Countries’ Resilience to Shocks

IMF Blog, June 14, 2023

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Low-income countries face rapid inflation, food insecurity, costly borrowing, and mounting debt, heightened by shocks from the pandemic and Russia’s war in Ukraine.
The IMF has revised down growth projections for low-income countries; per capita income growth is falling further behind rates needed to catch up with advanced economies, threatening reversal of decades-long convergence in living standards.
The IMF estimates that low-income countries need an additional $440 billion of financing through 2026 from all available sources to boost economic growth and restore a path to income convergence with advanced economies.
IMF concessional financing offered at low or zero interest rates is highlighted as playing a key role in cushioning the impact of ongoing shocks and future crises.

The economic gains from $272 billion in pandemic support for 94 countries were strongest in the poorest and more vulnerable recipients of IMF concessional financing.
High-frequency indicators used to assess recovery:
- Google Mobility Reports (smartphone location data).
- Nighttime satellite imagery (Earth Observation Group).
- A composite of conventional economic indicators: gross domestic product, industrial production, and tourist visits.
Methodological notes:
- Analysis excludes high-income countries and very fragile countries to address selection bias.
- Controls include key variables representing country-level demand for and availability of financing, income levels, pandemic severity, lockdown intensity, and other multilateral financing.

An illustrative 10 percent increase in IMF financing was associated with a 0.2 percentage point increase in economic activity, on average over the course of the pandemic.
The study implies that increasing access to IMF financing by half would be associated with an increase in economic activity by around 1 percentage point in IMF-funded countries relative to unfunded ones.
More than $272 billion in support was provided to 94 of the IMF’s 190 member countries since the start of the pandemic, including $34 billion in emergency financing.
Effects are larger in low-income countries with interest-free borrowing from the Poverty Reduction and Growth Trust (PRGT).

PRGT concessional financing can have greater positive effects on low-income countries, partly because these countries have more constrained policy space and limited access to international credit compared to advanced and emerging market countries.
Maintaining the PRGT adequately financed is underscored as important so it can continue to provide strong support to low-income countries for years to come.

This blog reflects research contributions by Sumin Chun, PhD candidate in economics at Duke University.

Source: How Financing Can Boost Low-Income Countries’ Resilience to Shocks, Karmen Naidoo and Nelson Sobrinho, June 14, 2023.