Washington, DC: On March 29, 2024,the
Executive Board of the International Monetary Fund (IMF) discussed the IMF
staff paper on macroeconomic developments and prospects in low-income
countries (LICs) [link], which includes in-depth analysis of strategies for
strengthening social safety nets (SSN) in LICs. The paper defines LICs as
those 69 countries eligible for
the Poverty Reduction and Growth Trust
facilities.
[1]
The economic scarring of the COVID-19 pandemic, Russia’s war in Ukraine and
ensuing geopolitical tensions, and the tightening of financial conditions
following strong inflationary pressures have hit LICs the hardest in recent
years.
LICs' prospects are finally slowly improving, helped by a better global
outlook, as economic growth accelerates, inflation decreases, and financial
conditions ease. However, significant uncertainties and adverse risks
remain in the context of a more shock-prone world. Liquidity conditions
remain tight and the burden of high debt service payments limits the space
for development spending.
However, there is significant heterogeneity amongst LICs. The poorest
countries have been hit hardest by the pandemic and have experienced the
strongest scarring in terms of output loss. Fragile and conflict affected
states (FCS) have seen their recovery hindered by weak institutions and
inherent fragilities. The many LICs whose exports have been concentrated in
a few products, have had weaker and more volatile performance. Fuel
exporters, in particular, have missed the chance to capitalize on the oil
windfall and will now have to consolidate in a less favorable environment.
On the contrary, diversified exporters and frontier markets have shown more
resilience to shocks. Finally, many Small Developing States who are often
tourism-dependent, have recovered comparatively better but need to reduce
high debt levels and allocate part of their revenues to critical climate
change adaptation investments.
The report points to the fact that decisive efforts are needed to
accelerate income convergence with more advanced economies and make progress
towards the Sustainable Development Goals. This involves boosting growth,
overcoming setbacks in poverty reduction triggered by the COVID-19 pandemic,
reversing negative trends in food security and women’s employment, and
enhancing resilience to future shocks.
Addressing these challenges requires decisive domestic actions paired with
strong external support. On the domestic front, prudent fiscal and monetary
policies would be key to maintain macroeconomic stability. The authorities
should also focus on accelerating domestic revenue mobilization and
prioritizing public spending to create additional space for critical
development and social spending. In this context, efficient allocation and
expansion of social safety net plays a crucial role in alleviating poverty
and building buffers against external shocks. This calls for a re-direction
of SSN spending from the better-off to the poorest segments. Strengthening
public financial management, governance and transparency would promote
accountability and help build political support buy-in for reforms,
including ambitious structural reforms that support inclusive growth.
At the same time, all partners should step up external support, including
not just financing but also policy advice and technical assistance. In
particular, grants and highly concessional financing will be crucial to
support development efforts of poorer countries, while efforts to catalyze
private financing should be enhanced, in particular in frontier markets.
Improved creditor cooperation would be important to ensure timely debt
treatment where needed. 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.
Executive Board Assessment[2]
Executive Directors welcomed the timely opportunity to discuss recent
macroeconomic developments and prospects in low income countries (LICs).
They broadly agreed with the staff’s assessment and the identified policy
priorities, including strengthening social safety nets (SSN).
Directors welcomed that after several challenging years marked by the
pandemic, Russia’s war in Ukraine, and the tightening of international
financial conditions, the macroeconomic outlook for LICs is gradually
improving as growth picks up, inflation subsides, and international
financial conditions ease. However, risks for LICs are tilted to the
downside amid persistent scarring, liquidity challenges (with high debt
service putting pressure on the space available for development spending),
elevated vulnerabilities to shocks, and relatively low macroeconomic
buffers. Some Directors also highlighted the impact of geoeconomic
fragmentation on LICs.
Directors acknowledged the significant heterogeneity in macroeconomic
outcomes across LICs, with the poorest and fragile and conflict affected
states (FCS) facing the toughest challenges. On the other side of the
spectrum, frontier markets, and in general LICs with more diversified
economies and higher per capita incomes, have typically fared better. In
this context, Directors emphasized that carefully tailoring the policy mix
to country circumstances is vital.
Directors agreed that more growth, more inclusion, and more resilience are
essential to accelerate the path of LICs’ convergence with more advanced
economies and support progress toward the Sustainable Development Goals.
This entails, among others, reversing adverse trends in areas such as
poverty reduction, food security, and women’s labor force participation.
Directors emphasized the importance of decisive domestic action in LICs,
including further policy tightening where needed; accelerated domestic
revenue mobilization and more efficient fiscal spending to create space for
urgent development outlays and for protecting the most vulnerable;
deepening domestic financial markets; stronger public financial and debt
management; progress on governance and transparency; well sequenced and
growth enhancing structural reforms; and building climate resilience.
Directors concurred that efficient allocation and expansion of SSNs are
vital for substantial poverty reduction in LICs. Both economic growth and
increased SSN spending are necessary. They noted that in many LICs, a focus
should be placed on better targeting benefits to the poorest segments.
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. Directors underscored the importance of tailored
SSN design to improve the poverty impact of expanding coverage and
benefits. Enhancing the adaptability of SSNs to respond swiftly to various
shocks is crucial, including by improving the ability to identify
vulnerable households, verify their needs, and deliver benefits following
shocks, making use of digitalization to the extent possible.
Directors noted staff’s estimates of LICs’ sizable financing needs, while
recognizing that such estimates are subject to uncertainty. They agreed
that decisive domestic reforms need to be complemented with strong external
support by all partners, including through technical assistance and
adequate financing. Directors emphasized the criticality of grants and
highly concessional financing for the poorest and most fragile LICs.
Meanwhile, catalyzing significant financing from the private sector would
be crucial, in particular in frontier markets, to accompany their
transition to middle income status. In this context, a number of Directors
recommended a cautious approach to a further buildup in senior debt held by
LICs, which could impact the catalytic effect of Fund financing. Directors
noted that while progress has been made, debt restructuring processes,
including under the Common Framework, should be further improved through
closer creditor coordination to deliver timely debt relief where needed.
They welcomed the work of the Global Sovereign Debt Roundtable to support
this effort.
Directors commended the Fund’s strong engagement with LICs through targeted
policy advice, capacity building, and financing. They underscored the
important role played by the Fund in helping LICs maintain or restore a
stable macroeconomic environment and achieve their reform agenda. They
noted that the Fund’s support to LICs evolved flexibly to help them tackle
changing needs and repeated shocks since the pandemic. Directors looked
forward to the upcoming review of the PRGT Facilities and Financing, as
well as other upcoming policy reviews that will have a bearing on the
effectiveness of Fund support for LICs, including the review of the Bank
Fund debt sustainability framework for low income countries (LIC DSF).
Overall, Directors urged the Fund to continue to work closely with the
World Bank and with other development partners and stakeholders, and
leverage its comparative advantage to support LICs.
[1]
The list can be found in Annex I of the report.
[2]
At the conclusion of the discussion, the Managing Director, as
Chair 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 summing up can be found here:
http://www.IMF.org/external/np/sec/misc/qualifiers.htm
.