The IMF Executive Board Discusses “The Evolution of Public Debt Vulnerabilities in Lower Income Economies”

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.

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 has been facilitating 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.

At the same time, 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 has shown 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 also associated with increased vulnerability to domestic and external shocks, particularly for countries that have relied on funding on commercial or near-commercial terms.

The composition of financing is continuing to evolve toward new, more expensive sources. 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.

The outlook has stabilized somewhat, but risks remain. 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.

Important gaps in debt management and transparency remain. 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.

Debt resolution frameworks show signs that they are not effective enough. The increased importance of non-traditional lenders and instruments has complicated debt resolution. As a result, recent restructurings have been protracted, pointing to the need for efforts to improve creditor coordination across a diverse range of creditors. This is particularly important in view of the large number of LIEs that are currently assessed to be at high risk of experiencing debt distress.

Executive Board Assessment [1]

Executive Directors welcomed the opportunity to discuss the evolution of public debt vulnerabilities in Lower Income Economies (LIEs). They noted that accommodative global financial conditions and expanded funding from non‑Paris Club creditors have allowed LIEs to mobilize larger volumes of external financing. This has provided the opportunity to help finance important development spending. At the same time, Directors highlighted the challenge for countries to strike a balance between boosting development spending and containing debt vulnerabilities.

Directors welcomed the recent stabilization in debt levels. However, they expressed concern at the continued high levels of public debt in many LIEs, which could reduce fiscal space and ultimately feed through to lower investment and growth. They noted that continued stability of debt levels hinges, in many countries, on a continued benign global environment and relative stability of commodity prices. They expressed concern that materialization of global risks (such as from weaker global growth and rising protectionism) could expose debt vulnerabilities particularly for countries that are already assessed to be at high risk. In this context, Directors urged greater caution in forecasting growth outcomes, and welcomed the realism tools used by staff in this regard. Directors also stressed the importance of assessing the impact of new borrowing, including whether or not it is aimed at productive public investment that could raise economic growth and reduce poverty, and highlighted the Fund’s role in providing appropriate advice.

Directors emphasized the importance for LIEs to adhere to their medium‑term fiscal frameworks, closely monitor the evolution of debt levels, and undertake structural reforms to support inclusive and sustainable medium‑term growth and build resilience to shocks and natural disasters. Countries should also be ready to make adjustments to safeguard debt sustainability in case growth disappoints and/or the economy is hit by shocks.

Directors noted that the increased reliance on debt provided on commercial or near‑commercial terms is raising debt service burdens and making LIEs more vulnerable to domestic and external shocks, including interest rate, exchange rate, and rollover risks. They encouraged countries to continue to take advantage of opportunities in the current financing environment to use debt buybacks to ease near‑term refinancing risks and voluntarily reprofile external debt service payments. They also encouraged countries to develop local currency debt markets to help reduce exchange rate risk.

Directors welcomed the ongoing efforts of LIEs to strengthen institutional capacity to manage and monitor debt, including with the support of the IMF and the World Bank, as well as operational measures that countries are undertaking to better manage debt risks. They stressed the importance of continued efforts to enhance debt management strategies (including through climate‑resilient borrowing) and strengthening debt transparency, including with the support of the international community and in the context of the joint IMF/World Bank multi‑pronged approach. They noted that the increasing complexity of debt instruments and volatility of capital flows, particularly for the frontier economies that have tapped international debt markets, should be matched by a strengthening of debt management practices.

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. They expressed concern at the limited amount of publicly available data on external debt of state‑owned enterprises in LIEs, which can be an important source of fiscal risks. They also called for greater efforts to address the information gap on collateralized debt.

Directors noted with concern that the process of completing debt resolutions has been drawn out in several recent cases. A number of Directors also noted that ad hoc bilateral restructuring arrangements outside a comprehensive macroeconomic program framework, while valuable, raise questions about their effectiveness in maintaining debt sustainability. They noted that effective coordination among official creditors is critical for timely and effective debt resolution and called for further efforts to facilitate such coordination. Directors broadly concurred that a review of developments concerning sovereign debt resolution practices is needed.

More broadly, noting the substantial financing needs to achieve the SDGs, Directors called for enhanced efforts by both debtors and creditors to engage in sustainable financing practices. Borrowing countries need to 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. The sustainable financing practices identified in the IMF and World Bank G20 note on Operational Guidelines for Sustainable Financing—Diagnostic Tool can help guide improvements in lending practices. Directors urged stepped‑up efforts by the international community in support of the SDGs and called for creative ways to mobilize long‑term concessional financing.

[1] An explanation of any qualifiers used in summings up can be found here: .

IMF Communications Department

PRESS OFFICER: Maria Candia Romano

Phone: +1 202 623-7100Email: