The IMF Executive Board Discusses “The Evolution of Public Debt Vulnerabilities in Lower Income Economies”
IMF News, February 5, 2020
Source details
- Canonical URL
- The IMF Executive Board Discusses “The Evolution of Public Debt Vulnerabilities in Lower Income Economies”
Other formats
Bibliographic details
- Published: February 5, 2020
Overview and context
- Press Release No. 20/33; February 5, 2020.
- On January 22, 2020, the Executive Board of the IMF discussed a joint IMF‑World Bank staff paper assessing the evolution of debt developments and emerging debt issues in lower‑income economies (LIEs) since 2017.
- Media relations contact: PRESS OFFICER: Maria Candia Romano; Phone: +1 202 623-7100; Email: MEDIA@IMF.org.
Macroeconomic environment and financing flows
- The macroeconomic environment for LIEs has become somewhat more supportive of late; economic growth is estimated to have firmed in LIEs in 2019 despite weakening global growth.
- Continued accommodative monetary policies in advanced economies have facilitated a continued flow of financing to LIEs.
- The availability of external financing, including from new creditors, has provided opportunities for borrower countries to accelerate development.
Public debt levels, dynamics, and risks
- Public debt levels are already high in LIEs.
- The pace of debt accumulation in LIEs has slowed somewhat since 2017, helped by gradual recovery in oil‑exporting LIEs, but debt‑to‑GDP ratios have continued to rise in many non‑oil exporting LIEs.
- Research shows that increases in public debt ratios can have important negative implications for developing countries’ growth prospects.
- Half of the countries covered in the report are now assessed to be at high risk of or already in debt distress.
- Rising interest burdens are constraining fiscal space and limiting the scope for countercyclical fiscal policy.
- The interest‑to‑revenue ratio has risen above the pre‑HIPC Completion point level in half of the countries that benefited from HIPC debt relief.
- The rising debt service burden is associated with increased vulnerability to domestic and external shocks, particularly for countries that have relied on funding on commercial or near‑commercial terms.
Composition of financing and market access
- Traditional development partners (multilateral, plurilateral and traditional bilateral creditors) continue to provide a sizeable contribution to LIE financing in the form of loans and grants.
- This has been increasingly supplemented by commercial financing (e.g., Eurobonds) and borrowing from non‑Paris Club creditors, most notably China.
- LIEs’ access to international capital markets has remained concentrated, with 10 of the 76 countries accounting for about 85 percent of Eurobond issuances during 2017–19.
Outlook, realism, and key downside risks
- The projected debt trajectory has remained broadly unchanged after a period of repeated upward revisions, but DSA realism tools are still flagging risks ahead.
- The projected decline in public debt is in many cases predicated on ambitious fiscal consolidation and growth outcomes above historical averages over the next five years.
- Key additional risks to the debt outlook stem from weaker‑than‑expected global growth, increased uncertainty and rising protectionism and trade tensions that lower commodity prices and exports.
Debt management, transparency, and contingent liabilities
- Evaluations by World Bank staff point to improvements on most dimensions of debt management, including in terms of developing and publishing debt management strategies and debt reports.
- However, most LIEs have yet to meet minimum debt management standards and considerably more needs to be done to respond to the increasing complexity and volatility of debt flows, particularly in frontier economies that have tapped international debt markets.
- Bank‑Fund debt sustainability assessments have seen expansion in the institutional coverage of public debt, but recent country cases suggest that contingent liability risks may still be underestimated, underscoring the importance of further efforts to strengthen reporting.
- Directors underscored the importance of enhancing coverage of all public and publicly‑guaranteed debt in public debt statistics to allow full assessment of debt vulnerabilities and contingent liabilities.
- Directors expressed concern at the limited amount of publicly available data on external debt of state‑owned enterprises in LIEs and called for greater efforts to address the information gap on collateralized debt.
Debt resolution and creditor coordination
- The increased importance of non‑traditional lenders and instruments has complicated debt resolution.
- Recent restructurings have been protracted, pointing to the need for efforts to improve creditor coordination across a diverse range of creditors.
- Directors noted that the process of completing debt resolutions has been drawn out in several recent cases and that ad hoc bilateral restructuring arrangements outside a comprehensive macroeconomic program framework raise questions about their effectiveness in maintaining debt sustainability.
- Directors broadly concurred that a review of developments concerning sovereign debt resolution practices is needed.
Executive Board assessment and policy recommendations
- Directors welcomed the opportunity to discuss the evolution of public debt vulnerabilities in LIEs and noted that accommodative global financial conditions and expanded funding from non‑Paris Club creditors have allowed LIEs to mobilize larger volumes of external financing to finance development spending.
- Directors welcomed the recent stabilization in debt levels but expressed concern at the continued high levels of public debt in many LIEs, which could reduce fiscal space and feed through to lower investment and growth.
- Directors urged greater caution in forecasting growth outcomes and welcomed the realism tools used by staff.
- Policy recommendations and priority actions emphasized by Directors:
- Adhere to medium‑term fiscal frameworks and closely monitor the evolution of debt levels.
- Undertake structural reforms to support inclusive and sustainable medium‑term growth and build resilience to shocks and natural disasters.
- Be ready to make adjustments to safeguard debt sustainability if growth disappoints and/or the economy is hit by shocks.
- Use opportunities in the current financing environment to undertake debt buybacks to ease near‑term refinancing risks and voluntarily reprofile external debt service payments.
- Develop local currency debt markets to help reduce exchange rate risk.
- Strengthen debt management strategies (including through climate‑resilient borrowing) and enhance debt transparency, with support from the international community and the joint IMF/World Bank multi‑pronged approach.
- Enhance coverage of all public and publicly‑guaranteed debt in public debt statistics and improve disclosure on state‑owned enterprise external debt and collateralized debt.
- Strengthen coordination among official creditors to facilitate timely and effective debt resolution.
- Borrowing countries should adhere to sustainable fiscal policies, raise domestic revenue, increase spending efficiency, improve public investment management, strengthen debt management and transparency, and tap concessional financing where available.
- Official creditors should pay appropriate attention to maintaining debt sustainability in borrower countries.
- Use the sustainable financing practices identified in the IMF and World Bank G20 note on Operational Guidelines for Sustainable Financing—Diagnostic Tool to guide improvements in lending practices.
- Stepped‑up international community efforts and creative ways to mobilize long‑term concessional financing to support the SDGs.
Press Release No. 20/33, February 5, 2020, International Monetary Fund.
