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

IMF News, April 2, 2024

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

Discussion date: March 29, 2024.
Publication/press date: April 2, 2024.
Definition used for LICs: "those 69 countries eligible for the Poverty Reduction and Growth Trust facilities."
Press Release No.: 24/95.
Media contact: PRESS OFFICER: Randa Elnagar; Phone: +1 202 623-7100; Email: MEDIA@IMF.org.
The paper includes in-depth analysis of strategies for strengthening social safety nets (SSN) in LICs.[1]

LICs' prospects are "finally slowly improving" supported by:
- economic growth acceleration,
- decreasing inflation,
- easing financial conditions.
Adverse forces and scarring:
- Economic scarring from the COVID-19 pandemic, Russia’s war in Ukraine and ensuing geopolitical tensions, and tightening financial conditions following strong inflationary pressures have disproportionately hit LICs.
- Liquidity conditions remain tight and the burden of high debt service payments "limits the space for development spending."
Risks:
- Significant uncertainties and adverse risks remain in "a more shock-prone world."
- Downside risks remain amid persistent scarring, liquidity challenges, elevated vulnerabilities to shocks, and relatively low macroeconomic buffers.
- Some Directors highlighted the impact of geoeconomic fragmentation on LICs.

Poorest countries: hit hardest by the pandemic with the strongest scarring in output loss.
Fragile and conflict affected states (FCS): recovery hindered by weak institutions and inherent fragilities.
Commodity/export concentration: LICs with exports concentrated in a few products have weaker and more volatile performance.
- Fuel exporters missed the chance to capitalize on the oil windfall and will need to consolidate in a less favorable environment.
Resilient groups:
- Diversified exporters and frontier markets have shown more resilience to shocks.
- Many Small Developing States (often tourism-dependent) have recovered comparatively better but face high debt levels and need to allocate part of their revenues to critical climate change adaptation investments.

Macroeconomic stabilization:
- Prudent fiscal and monetary policies to maintain macroeconomic stability.
Revenue and spending:
- Accelerate domestic revenue mobilization.
- Prioritize public spending to create additional space for critical development and social spending.
- Strengthen public financial management, governance, and transparency to promote accountability and build political support for reforms.
Structural reforms and resilience:
- Well sequenced and growth enhancing structural reforms.
- Deepen domestic financial markets.
- Stronger public financial and debt management.
- Build climate resilience.
Social safety nets (SSN):
- Efficient allocation and expansion of SSNs are "crucial" for alleviating poverty and building buffers against external shocks.
- Call for re-direction of SSN spending "from the better-off to the poorest segments."
- Tailored SSN design to improve poverty impact of expanding coverage and benefits.
- Enhance adaptability of SSNs to respond swiftly to shocks by improving identification, verification, and delivery mechanisms and "making use of digitalization to the extent possible."
- Noted impact example: "Simply redirecting half of the portion of SSN spending going to the richest households toward the poorest would be enough to nearly double the coverage of the most vulnerable."

External support needed in multiple forms: financing, policy advice, and technical assistance.
Financing priorities:
- Grants and highly concessional financing "will be crucial" for poorer and fragile LICs.
- Catalyzing private financing is important, particularly in frontier markets.
Cautionary points:
- Some Directors recommended a cautious approach to further buildup in senior debt held by LICs, which could impact the catalytic effect of Fund financing.
Debt restructuring:
- Debt restructuring processes, including under the Common Framework, need further improvement through closer creditor coordination to deliver timely debt relief.
- Directors welcomed the work of the Global Sovereign Debt Roundtable.
IMF engagement:
- "The Fund is continuing to play its part: lending more than tripled since the pandemic, the bulk of it on concessional terms, and continuing to adapt its support to respond to changing LIC needs."
- Directors look forward to the upcoming review of the PRGT Facilities and Financing and the review of the Bank-Fund debt sustainability framework for low income countries (LIC DSF).

Directors broadly agreed with the staff’s assessment and identified policy priorities, including strengthening SSNs.
Consensus points emphasized by Directors:
- Need for more growth, more inclusion, and more resilience to accelerate convergence and progress toward the Sustainable Development Goals.
- Importance of tailoring the policy mix to country circumstances given heterogeneity across LICs.
- Need to reverse adverse trends in poverty reduction, food security, and women’s labor force participation.
- Continued Fund engagement through targeted policy advice, capacity building, and financing.
- Continued close cooperation between the Fund, the World Bank, other development partners, and stakeholders, leveraging the Fund’s comparative advantage.

This summary reflects the content of the IMF Executive Board discussion as presented on the referenced page.