IMF Executive Board Discusses “Macroeconomic Developments and Prospects in Low-Income Developing Countries—2019”

IMF News, December 12, 2019

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Canonical URL: IMF Executive Board Discusses “Macroeconomic Developments and Prospects in Low-Income Developing Countries—2019”

Press Release No. 19/452; discussion on November 13, 2019; press release dated December 12, 2019.
LIDCs defined as a group of 59 IMF member countries, primarily by income per capita level below a certain threshold (set at $2,700 in 2016).
Population and output footprint:
- Contain one fifth of the world’s population—1.5 billion people.
- Account for only 4 percent of global output.

Growth performance:
- LIDCs are expected to record average annual growth of some 5 percent in 2018–19.
- Growth is expected to pick up marginally in 2020 and beyond, but risks to the global economy threaten this outlook.
Sectoral patterns:
- Commodity-dependent economies continue to fare less well than countries reliant on other export sectors, a pattern since the drop of commodity prices from mid-2014.
- Experiences vary markedly within these groups; countries in fragile situations typically record weaker-than-average performance.
Drivers of longer-term growth:
- Investment levels are important contributors to growth.
- Dragging factors include inefficient use of resources, weak business climates, and low levels of human capital.
- Poor performance of total factor productivity growth has acted as a significant drag in many countries.
- Importance of improving public investment management capacity, governance frameworks, business climate, and building human capital.

Debt dynamics:
- Public debt accumulation in LIDCs has slowed significantly since 2017, after rising markedly in the preceding four years.
- Debt levels continue to drift upward in about half of the countries.
- More than two-fifths of countries assessed are at high risk of, or already in, debt distress.
- Emphasis on strengthening debt management capacity and improving data quality and transparency.
Taxation and domestic revenue:
- Median tax-GDP ratio in LIDCs is about 13 percent of GDP, broadly unchanged from the levels recorded in 2013.
- One-quarter of the countries have succeeded in increasing this ratio by at least 2 percentage points over this period.
- Mobilizing domestic revenue by broadening the tax base and strengthening tax administration is essential.
- Directors called for more analysis to identify factors contributing to success or failure in boosting tax revenues.

VAT potential and implementation challenges:
- VAT can be a very effective instrument for boosting tax revenues.
- Many LIDCs have faced significant challenges in building institutional capacity to:
- Execute the provision of VAT credits in a timely manner.
- Manage VAT registration in a cost-effective manner.
- As these challenges are addressed, VAT can be expected to deliver higher revenues in an efficient and cost-effective manner.
Distributional considerations:
- Distributional impact of the VAT should be viewed as part of the wider mix of fiscal policy, including tax and expenditure.
- Concerns about regressivity are relevant, but governments have other instruments to address distributional objectives.
- Digitalization is opening new possibilities for well-designed benefit programs.
Policy guidance:
- Directors called on the Fund and other providers of technical assistance to help build relevant institutional capacity in LIDCs.
- Need for renewed efforts to tackle VAT implementation challenges, notably handling VAT credits and managing VAT registration.

Recent stresses and vulnerabilities:
- Recent bank failures have highlighted weaknesses in financial sector safety nets contributing to instability.
- Financial sector stress remains significant in many LIDCs, with elevated levels of nonperforming loans.
- Loss of correspondent banking relationships (CBRs) continues to be a challenge in many countries.
Identified institutional gaps:
- Absence or weakness of effective bank resolution regimes.
- Lack of well-designed emergency liquidity assistance frameworks.
- Need for financially sound deposit insurance systems.
Policy recommendations:
- Upgrade safety nets, including by targeted adaptation of international standards to local conditions.
- Develop a robust bank resolution regime, a soundly-designed emergency liquidity assistance framework, and an appropriately funded deposit insurance scheme.
- Proactive oversight by regulatory authorities, sustained efforts to strengthen regulation and supervision frameworks, and support from the international community and the Fund.
- Fund engagement to better understand drivers, impact, and solutions related to withdrawal of CBRs.
- Reform measures should be prioritized and tailored to country-specific circumstances and implementation capacity.

Overall endorsement:
- Executive Directors broadly endorsed the assessment of macroeconomic developments in LIDCs and the policy priorities in the staff report.
- They welcomed the examination of VAT implementation and tailoring of financial safety nets to country circumstances.
Key Director observations and requests:
- Noted solid growth in 2018-19 amid slowing global growth, with large variation across countries and notable underperformance in fragile or conflict-affected countries.
- Welcomed the broadly favorable medium-term outlook but recognized sizeable downside risks, external and domestic.
- Emphasized importance of public investment management, governance, business climate, and human capital quality.
- Encouraged more analysis of poverty dynamics and the evolution of per capita incomes to understand growth inclusivity.
- Expressed concern that the median tax-GDP ratio had not changed significantly since 2013 and requested more analysis on determinants of revenue mobilization success.
- Supported Fund assistance and international cooperation on financial sector reforms and safety-net strengthening.
- Looked forward to regular reports on macroeconomic developments and policy issues in LIDCs, encouraged stronger thematic focus, and better alignment of Board discussion timing with Spring and Annual Meetings.

IMF Communications Department, Press Release No. 19/452 (December 12, 2019).