IMF Executive Board Discusses Macroeconomic Developments and Prospects in Low-Income Countries—2022

IMF News, December 8, 2022

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Canonical URL: IMF Executive Board Discusses Macroeconomic Developments and Prospects in Low-Income Countries—2022

Discussion date: December 1, 2022.
Press release date: December 8, 2022.
The IMF staff paper covers recent macroeconomic developments and prospects in low-income countries (LICs) and includes in-depth discussion of the role of capacity development on debt management in mitigating debt vulnerabilities.
Definition used in the paper: LICs are those 69 countries eligible for the Poverty Reduction and Growth Trust facilities.

Compound shocks from the pandemic and Russia’s war in Ukraine have disproportionally affected LICs.
Growth: Strong rebound in 2021 lost momentum in 2022.
Inflation: Accelerating rapidly in 2022.
Fiscal balances: Fiscal deficits widened in 2022, further exacerbating debt vulnerabilities.
External and financial risks: Rise in financial stability risks and food insecurity reported.

Debt indicators: Not yet at pre-HIPC Initiative levels, but vulnerabilities are elevated.
Creditor landscape: Shift toward Non-Paris Club and private creditors increases challenges for timely and orderly debt restructuring.
Policy approach:
- Sound policy framework, fiscal consolidation, and decisive action to revitalize growth are fundamental for sustainable debt.
- Debt restructuring, when necessary, would also help tackle debt vulnerabilities.
- It is crucial to make debt restructurings under the G20 Common Framework more effective and timelier.
Multipronged Approach: The Multipronged Approach to Address Debt Vulnerabilities is referenced as a framework for supporting members on sound debt management and transparency.

Role of CD: CD will play an important role in enabling LICs to mitigate debt vulnerabilities and sustainably cover financing needs.
Fund positioning: The Fund is well positioned to respond to LICs' current and evolving requests for CD that account for a more complicated borrowing landscape with increased costs and risks.
Requirements for improvement:
- Steadfast commitment from authorities and CD providers.
- Attention to enabling conditions, such as public debt management institutional arrangements and legal frameworks.
- Building effective and robust public debt management practices requires time and improvements in technical skills, institutional, legal, and governance arrangements, and adequate resources including staffing.
Modalities: Regional debt management advisors increase responsiveness and tailoring, and facilitate coordination with other CD providers.

Updated estimate of additional financing needs for LICs to address the legacy of COVID, rebuild external buffers and accelerate income convergence: $440 billion over the period 2022-26.
International support noted:
- Scaling-up by international community and multilateral institutions, including the Fund, via policy advice, financing, and CD.
- Fund responses include the Special Drawing Rights (SDR) allocation, adaptation of lending facilities, the Resilience and Sustainability Trust, and the establishment of the food shock window (FSW) under emergency financing instruments.
Resourcing the Fund:
- Importance of keeping the Fund adequately resourced and closing shortfalls in pledges under the ongoing Poverty Reduction and Growth Trust (PRGT) fundraising.
- A few Directors called for consideration of the use of internal resources for the PRGT.
- Directors emphasized increasing ODA flows and maintaining an open and rules-based multilateral trade and financial system, and avoiding geopolitical fragmentation.

Setbacks: LICs have lost several years of progress toward the Sustainable Development Goals (SDGs), with setbacks in poverty and education indicators.
Climate risk: LICs face rising threats from climate change.
Policy priorities:
- Near-term: Use all instruments concertedly to fight inflation, protect the vulnerable, preserve growth, contain debt vulnerabilities, and manage financial sector risks while maintaining credible fiscal and monetary policy frameworks.
- Long-term: Continue to address poverty, inequality, climate change, and digitalization; pursue growth-enhancing structural reforms to strengthen governance, institutions, and the business climate.
- Decisive structural reforms needed to accelerate LICs' return to income convergence.

Directors broadly agreed with staff assessment and the identified policy priorities.
Concerns highlighted:
- Worsening trends in growth, inflation, and fiscal and external balances in many cases.
- Rising debt vulnerabilities, financial stability risks, and food insecurity.
Policy recommendations emphasized by Directors:
- Reduce debt over the medium term via revenue mobilization, careful prioritization toward social and investment spending, credible policy frameworks, and growth-enhancing structural reforms.
- Improve effectiveness and speed of debt restructurings under the Common Framework.
- Support members on sound debt management and transparency, in close collaboration with the World Bank.
- Develop more granular advice for LICs on making policy adjustments orderly and smoothly for both near- and long-term challenges, including inequality, climate change and digitalization.
Operational points:
- Commendation for the Fund’s CD efforts across all areas of public debt management and the contribution of regional debt management advisors.
- Recognition that building public debt management capacity takes time and resources.
- Suggestion by a number of Directors that future reports on Macroeconomic Developments and Prospects in LICs be released ahead of Spring and/or Annual meetings to maximize visibility and policy impact.

IMF Executive Board Discusses Macroeconomic Developments and Prospects in Low-Income Countries—2022, Press Release No. 22/416