IMF Executive Board Discusses “Macroeconomic Developments and Prospects in Low-Income Developing Countries—2018”
IMF News, March 22, 2018
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- Published: March 22, 2018
Growth and near-term prospects
- Growth improved broadly across LIDCs in 2017, helped by more favorable external conditions including a pick-up in global growth, partial recovery of commodity prices, and benign financing conditions.
- Output growth in commodity exporters continues to lag behind levels achieved in 2010-14—by an average of some 2 percentage points in non-fuel commodity exporters and even more in fuel exporters.
- In countries less reliant on commodity exports, growth remains robust, averaging 6 percent in 2017, but there is marked variation across countries, with smaller countries typically faring less well.
- Growth prospects for LIDCs are improving, supported by improved external conditions, while global inflation pressures remain contained.
- Risks to the outlook include a reversal of the recovery in commodity prices, an unexpectedly sharp tightening of global financial conditions, domestic policy slippage, internal conflict, weather shocks, and rising financial sector stress.
Fiscal positions, public investment, and financial sector stress
- There has been a broad-based weakening of fiscal positions in LIDCs in recent years, with fiscal deficits widening in some 70 percent of LIDCs between 2010-14 and 2017.
- In about one-third of these cases, higher public borrowing was fully matched by a scaling-up of investment, but in close to half the cases investment declined, notwithstanding higher public borrowing.
- Increased fiscal pressures contributed to rising stress in financial sectors in many LIDCs.
- Directors noted that rising interest outlays and a gradual decline in foreign grants and remittances had exacerbated fiscal and balance of payments pressures in many countries.
- Inflation levels remained too high in a significant subset of countries, and many countries needed to re-build depleted levels of foreign reserves.
Public debt developments, composition, and data gaps
- Debt burdens and vulnerabilities have risen significantly since 2013 in many LIDCs, reflecting a mix of factors including exogenous shocks and loose fiscal policies.
- While the majority of LIDCs remain at low or moderate risk of debt distress, the number of countries at high risk or in debt distress has increased from 13 in 2013 to 24 in January 2018.
- The composition of public debt in LIDCs continues to shift from traditional sources towards non-Paris Club bilateral lenders, commercial external debt, and domestic debt.
- Higher interest rates on commercially-priced debt has led to higher debt servicing costs and market risks, while the rising importance of non-traditional creditors poses new challenges for potential debt resolutions, including difficulties in ensuring the creditor coordination needed to produce comprehensive agreements acceptable to all major creditors.
- Data on LIDC debt suffer from substantial gaps, notably related to public guarantees and to debt of public sector entities outside the general government. This can result in significant underestimation of public sector liabilities and undermine the value of debt sustainability analyses (DSAs).
- Data gaps have contributed to unfavorable debt surprises in several countries, as public liabilities not captured in the debt data are converted into liabilities of the central government.
Executive Board assessment — findings
- Directors broadly agreed with the assessment of macroeconomic developments in LIDCs and the identified policy priorities.
- Directors welcomed the pickup in growth but underscored the large diversity of experiences among countries and noted with serious concern the broad-based increase in public debt burdens, gaps in public debt data, and the increasing number of countries classified at high risk of debt distress.
- Directors were encouraged by continued strong growth performance in most diversified exporters and partial recovery in most commodity exporters, but noted overall sluggish per capita growth and falling public investment levels.
- Directors underscored the weaker economic performance of several fragile states and called on the Fund to pay close attention to tackling the underlying causes of fragility, including weak government institutions, sharp social divisions, and poor security conditions.
- Directors observed that fiscal balances had deteriorated in the majority of LIDCs over the past several years and expressed concern that increases in deficits had not been matched by corresponding increases in public investment in most cases.
- Directors noted the record of debt developments under Fund-supported programs, with debt rising faster than programmed in a considerable number of cases, and called for further analysis of factors at play and implications for program design.
Executive Board recommendations and requested actions
- Urgent need for fiscal prudence and improved debt management in many LIDCs, along with greater data transparency on the part of borrowers and creditors.
- Countries facing elevated debt burdens should move promptly to contain further debt accumulation and rely more on the generation of domestic fiscal space to meet development financing needs.
- Countries at low or moderate risk of debt distress have more room to scale up public investment through borrowing, but should take great care to use new loans selectively to support projects with high rates of return.
- Mobilize domestic revenue to create fiscal space; enhance the efficiency of public investment spending; maintain strong oversight of financial systems.
- Improve financial sector regulation and supervision and promptly tackle fiscal imbalances to address rising financial sector stress.
- Develop more granular advice on ways to promote economic diversification and strengthen resilience to shock in LIDCs and small states.
Multilateral coordination, debt resolution, and data transparency
- Directors called for concerted efforts from the multilateral community, including the IMF, to accelerate the development of debt management capacity in LIDCs and to enhance cooperation on debt issues.
- Both debtors and creditors should subscribe to global principles for sustainable lending, such as the G20 operational guidelines for sustainable financing.
- Support for creating an improved framework for debt restructuring where debt burdens have become unsustainable, including mechanisms for ensuring effective collaboration and information sharing across official creditors.
- Directors stressed the importance of improving data coverage on debt and increased transparency on debt exposures, helped by technical assistance from the Fund and development partners.
- Need to ensure full coverage of public and publicly-guaranteed debt in public debt figures to allow full assessment of debt vulnerabilities and contingent liabilities and to maintain confidence in the integrity of DSAs.
- Directors welcomed staff’s ongoing work to better contain debt accumulation and to support efforts to strengthen the architecture for tackling debt resolution issues. These actions include:
- Incentivizing and assisting borrower countries to compile comprehensive data on public debt and guarantees;
- Roll-out of the revised Debt Sustainability Framework for Low-Income Countries, with its enhanced analytical tools;
- Systematic outreach to non-Paris Club official creditors;
- Careful examination of debt developments under Fund-supported programs in the context of the upcoming Review of Conditionality and the Review of the Fund’s Debt Limits Policy.
- Most Directors called for a strengthened Fund strategy to address rising debt vulnerabilities in LIDCs and called on management and staff to present an action plan on how to address the increased risks.
Press Release No. 18/100 — IMF Communications Department, March 22, 2018