IMF Executive Board Discusses Macroeconomic Prospects and Challenges in LIDCs
IMF News, January 12, 2017
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- Published: January 12, 2017
Overview and context
- Publication: Press Release No. 17/07
- Date: January 12, 2017
- IMF Communications Department; Press Officer: Andrew Kanyegirire; Phone: +1 202 623-7100; Email: MEDIA@IMF.org
- Board discussion date: December 19, 2016 (staff paper on macroeconomic developments in LIDCs)
- Focus areas examined in the staff paper: economic and fiscal prospects and vulnerabilities in LIDCs, financial sector stress, and challenges relating to public investment in infrastructure.
Key findings on growth and external environment
- The sharp realignment of global commodity prices (beginning mid-2014) has been a major setback for commodity-exporting LIDCs and generally benefitted other LIDCs, producing increasingly divergent growth prospects.
- Commodity exporters:
- Experienced a marked slowdown of economic activity, with some suffering a sharp contraction.
- Prospects remain heavily influenced by ability to implement policies addressing high fiscal deficits, reduced foreign reserves, and elevated economic and financial stress.
- As many as three-fifths of commodity exporters are at risk of financial sector stress over the next one to two years.
- Diversified LIDCs:
- Overall strong growth in many, helped by lower oil import bills.
- Some have experienced weaker growth due to adverse external spillovers, weak domestic policies, stabilization programs, natural disasters, or remittance shocks.
- Fiscal and external imbalances have widened in many LIDCs, and debt levels are being pushed up in both commodity and diversified exporters, from already elevated levels in some cases.
- Vulnerabilities to deterioration in macroeconomic performance remain high, particularly in commodity exporters, but also in some diversified exporters.
Financial sector stress and supervisory weaknesses
- Financial sector stress has emerged in about one-fifth of LIDCs, resulting in bank failures and supervisory interventions.
- Structural weaknesses in banking supervision common to many LIDCs include:
- inadequate supervisory powers and independence,
- under-resourced and weak supervisory capacity,
- insufficient use of risk-based (rather than compliance-based) assessments,
- poor enforcement of regulations and decisions.
- Fiscal risks are amplified by volatile commodity-related revenue and donor grant disbursements, liabilities from state-owned enterprises, and a rising stock of Public-Private Partnerships (PPPs).
Public investment and infrastructure constraints
- Public investment, including in infrastructure, has broadly increased in LIDCs over the last 15 years.
- Despite increased investment, the quantity, quality and accessibility of infrastructure in LIDCs remains considerably lower than in other economies.
- Outside the telecom sector, infrastructure services in LIDCs are primarily provided by the public sector.
- Private participation is largely channeled through PPPs:
- PPPs are mostly concentrated in the energy sector.
- Volume of PPPs has declined recently after a sharp spike in the early 2010s.
- Financing patterns:
- Grants and concessional loans from development partners are an essential and stable source of infrastructure funding in LIDCs.
- International loans play an important complementary role in a few countries, but lending volume has fallen in the last two years.
- An IMF desk survey suggests that funding constraints are a common impediment to increased infrastructure investment.
Executive Board assessment — findings and priorities
- Directors welcomed the comprehensive assessment and the paper’s attention to diversity of country situations and the focus on financial sector issues and public infrastructure provision.
- Directors’ observations and concerns:
- Economic developments continue to be heavily influenced by the decline in commodity prices that began in mid-2014.
- Commodity-reliant countries suffered significant erosion of export earnings and budgetary revenues, slowing growth, widening fiscal imbalances, and erosion of foreign reserves.
- Diversified LIDCs generally recorded strong growth, though some faced negative shocks (remittances, conflict, natural disasters).
- Upward drift in fiscal deficits and public debt levels in many fast-growing economies is a concern.
- Financial sector stresses are increasing in a significant number of LIDCs, particularly commodity exporters.
- Directors emphasized the need for vigilance, decisive policy responses, close Fund monitoring, tailored advice, and collaborative work with multilateral institutions and donors.
- Directors supported an annual formal Board discussion of macroeconomic and financial conditions in LIDCs.
Policy recommendations and actions urged by Directors
- For commodity exporters and vulnerable LIDCs:
- Undertake further policy adjustments to restore sustainable fiscal and external positions.
- Fiscal consolidation is an imperative.
- Exchange rate adjustment where feasible, coupled with monetary tightening in some cases.
- Efforts to rebuild foreign exchange buffers.
- Boost budgetary revenues, including by broadening the tax base.
- Cut expenditure while protecting growth‑critical spending and shielding the most vulnerable groups.
- Diversify the economic base to improve resilience.
- Donors should boost support for countries undertaking difficult adjustments; the Fund should stand ready to provide appropriately‑calibrated support for strong adjustment programs.
- On financial sector oversight:
- Pro‑active oversight by regulatory authorities to contain stresses.
- Design and implement reforms to substantially strengthen financial sector regulation and supervision, supported by development partners and the Fund.
- Fund assessments and technical assistance will be important.
- On fiscal risk management and resilience:
- Prioritized efforts to strengthen risk management, taking into account countries’ capacity constraints.
- Bolster resilience through export product and market diversification and greater regional integration.
- On infrastructure and public investment:
- Finance required public investment while safeguarding debt sustainability through:
- boosting public saving via enhanced domestic revenue mobilization,
- containing non‑priority outlays,
- ensuring efficient use of funds by strengthening public investment management,
- developing local capital markets,
- tapping all available sources of concessional financing.
- Enhance the role of the private sector in infrastructure delivery where feasible by improving regulatory and macroeconomic environment and enhancing capacity to negotiate and implement PPPs to balance risk‑sharing.
- Multilateral development banks should boost private sector investment via technical support, active engagement of private sector arms, and effectively‑designed risk‑mitigation mechanisms.
- The Fund’s role: assess macroeconomic gains from infrastructure investment and provide advice and technical assistance on enhancing public investment efficiency and debt management, drawing on cross‑country experiences.
Institutional and procedural notes
- Directors called for further reflection on strengthening collaboration between the Fund and the Bank in their work on LIDCs.
- The paper will be an important input into forthcoming Board discussions on the LIC Debt Sustainability Framework and the Fund’s Facilities for Low Income Countries.
- Footnote on summing up: At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found at the link provided in the original document.
Source: IMF Executive Board Discusses Macroeconomic Prospects and Challenges in LIDCs (Press Release No. 17/07).