Managing Debt Vulnerabilities in Low-Income Countries
IMF News, September 13, 2018
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Bibliographic details
- Authors: Christine Lagarde
- Published: September 13, 2018
Context and purpose
- Opening Remarks by Christine Lagarde, IMF Managing Director, delivered at the Sovereign Debt Conference, Washington, DC, September 13, 2018.
- Principal objective: maintain the stability of the international financial system by strengthening the health of sovereign borrowers.
- Conference focus: using current global growth momentum to bolster the health of sovereign debtors and inform an upcoming book building on the conference.
Recent debt dynamics and vulnerabilities
- Global and historical context:
- Advanced economies: public debt at levels not seen since the Second World War.
- Emerging markets: public debt at levels last seen during the 1980s debt crisis.
- Low-income countries (LICs):
- This concerns 59 economies that make up 20 percent of the global population.
- Median debt level among LICs increased from 33 percent of GDP in 2013 to 47 percent.
- We estimate that 40 percent of low-income countries already face significant debt challenges.
- Drivers of the buildup:
- 2008 financial crisis and post-crisis policy responses (especially in advanced economies).
- Rapid spending growth in emerging markets and LICs, only partly used for public investment.
- Shocks: low export prices for commodity producers, natural disasters, conflicts, epidemics.
- Ample global liquidity facilitating easier borrowing.
- Shift in creditor base: increased reliance on non-traditional lenders (bond investors, foreign commercial banks, commodity traders, creditor countries outside the Paris Club), which generally implies higher interest rates and shorter maturities and complicates creditor coordination.
- Risks from high debt:
- Greater vulnerability to sudden tightening of global financial conditions and higher interest costs.
- For emerging market and frontier economies: potential for market corrections, sharp exchange rate movements, and weakening capital flows.
- High debt service crowds out spending on infrastructure, health, and education and creates uncertainty that deters investment and innovation.
Key measurement and transparency shortcomings
- Governance and reporting gaps can produce “debt surprises” driven by poor governance, off-balance sheet borrowing, and weak debt recording and reporting.
- Specific reporting gaps highlighted:
- One third of low-income countries do not report debt guarantees for state-owned enterprises.
- Fewer than one in ten report debt of public enterprises.
- IMF activity:
- Conducted assessments in 55 low-income countries last year.
- Rolling out a new enhanced debt sustainability framework for LICs that:
- Brings out the economic assumptions behind the analysis.
- Clarifies the obligations covered.
- Includes stress tests that highlight vulnerabilities particularly relevant for LICs (natural disasters and commodity price shocks).
Policy priorities and recommendations
- Overarching aim: build trust in sovereign debtors through sustainability, transparency, and collaboration.
- Priority 1 — Make borrowing more sustainable:
- Proceed prudently in taking on new debt.
- Focus more on attracting foreign direct investment.
- Boost tax revenues at home.
- Prioritize investment projects with credibly high rates of return.
- Increase lender responsibility to assess the impact of new loans on borrower debt positions before lending.
- Priority 2 — Strengthen rigor and transparency in borrowing and lending:
- Significantly strengthen institutions that record, monitor, and report debt in individual countries.
- Improve public disclosure of debt contracts by both borrowers and lenders to reduce risk and increase accountability.
- IMF to work closely with member countries to bolster debt recording and management capacity and governance frameworks.
- Use the enhanced debt sustainability framework to surface risks and assumptions.
- Priority 3 — Encourage stronger collaboration between borrowers and lenders:
- Improve disclosure practices jointly by borrowers and lenders.
- Develop new approaches to official creditor coordination to address substantial non-Paris Club debt and facilitate debt restructuring processes.
- Address obstacles that inhibit smooth debt restructurings so the IMF can play its traditional role in providing financial support and acting as a catalyst for additional flows, including from the World Bank and other major lenders.
- IMF engagement: providing advice and a platform for dialogue to support reform and coordination.
Conference outcomes and next steps
- Topics highlighted for further discussion and research:
- How fast public debt should be reduced.
- The best conventional and unconventional tools for debt reduction.
- How to encourage more effective debt restructuring processes, especially involving non-traditional creditors.
- Follow-on publication:
- An upcoming book, co-edited by Ken Rogoff, Ali Abbas, and Alex Pienkowski, will build on the conference.
Opening Remarks by Christine Lagarde, IMF Managing Director, Sovereign Debt Conference, Washington, DC, September 13, 2018.