Mounting Debt Threatens Sustainable Development Goals

IMF Blog, April 27, 2018

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In 2015, 193 countries adopted the 17 Sustainable Development Goals (SDGs) as an overarching policy roadmap through 2030.
Less than three years after adoption, implementation of the SDGs is running into a major hurdle—rising public debt in some developing countries.
The UN and the IMF collaborated on a report on financing for development, issued with almost 60 other agencies, highlighting these challenges.

40 percent of low-income countries face high risk of debt distress or are unable to service their debt fully—this is up from 21 percent just five years ago (as noted by IMF Deputy Managing Director Tao Zhang).
Several developing countries are falling behind in terms of per capita income due to fragility and conflict; examples include Haiti, D.R. Congo, and Chad.
Recent growth in debt has enabled greater access to international financial markets and lending by new creditors such as China, unlocking infrastructure financing.
Risks arise when:
- debt is already high;
- resources are not spent well (including in the presence of corruption and governance weaknesses);
- a country is hit by natural disasters or economic shocks such as sudden reversals of capital flows.
New private credit often comes with higher interest rates and shorter maturities.
Coordination among creditors has become harder, complicating debt restructuring when needed.

Median tax revenue in low income developing countries is just 13.3 percent of GDP.
Causes of low tax revenue include narrow tax bases, over-reliance on extractive industries, weak tax administration, informality, and tax evasion.
Recommendations:
- First step: raise more revenue at home through tax policy and administration reforms.
- Enhance international collaboration on tax, including new international standards on exchange of tax information, ensuring developing countries benefit.
- Official development assistance (ODA) amounted to $146.6 billion in 2017.
- ODA is less than half the internationally-agreed target of 0.7 percent of gross national income.
- A growing share of ODA is deployed for emergencies such as in-country refugee costs and humanitarian aid, leaving less for long-term public investments in sustainable development.
- Donor countries need to step up assistance to poorest and most vulnerable countries, where ODA inflows have stagnated and remain concentrated.

Given large investment needs, attracting more private investment is critical.
The least developed countries struggle to attract private finance at scale, particularly outside extractive industries.
Only 7 per cent of private finance so far mobilized was directed toward projects in the least developed countries.
Recommendations:
- Build competitive business environments by improving institutional and regulatory frameworks.
- Develop project pipelines and investible projects, especially in infrastructure.
- Use risk-sharing instruments such as guarantees and public-private partnerships carefully to avoid adding to debt burdens, including contingent off-balance sheet liabilities.
- Manage blending activities to ensure they reach countries with the greatest need and do not unduly increase sovereign risk.

Debt sustainability assessments should take into consideration the growth effects of investment in productive capacity.
When risk of debt crisis is high, a quick response to lessen immediate financial stress can determine whether recovery is rapid or harm is long-lasting.
Policy options discussed:
- Greater use of state-contingent debt instruments, which reduce or delay a country’s debt obligations during crises; by reducing default risks and risk premiums, they can expand available fiscal space for investment.
- Debt-for-climate swaps, where concessional funders buy back outstanding debt, freeing up resources to fight climate change and helping regions hit hard by climate-related disasters.
Careful management is required to balance the benefits of new financing sources with risks of higher cost, shorter maturities, and creditor coordination problems.

The bottom line: we only have twelve years left in which to implement the SDGs.
The current upswing in the global economy opens a vital window of opportunity, but financing agendas must not be derailed by mounting public debt.
The UN and the IMF are united in supporting recommendations on public finance and debt, private investments, trade, and other priorities for SDG financing, and are committed to deepening support for the SDGs.

Source: Mounting Debt Threatens Sustainable Development Goals, Chris Lane and Elliott Harris, April 27, 2018.

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