Debt Build-up in Frontier Low-Income Developing Countries (LIDCs) since 2012: Global or Country-specific Factors and Way Forward?

IMF Working Papers, February 22, 2019

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Documented a 20-percentage point increase in the external and government debt-to-GDP ratios since 2012.
Observed a composition shift toward higher non-concessional debt.
Recorded a rise in interest rate payments.
Panel regressions over 1998–2016 show both global and country-specific factors are correlated with debt-to-GDP ratios.
For the period 2012–16, global factors dominate the correlation with debt-to-GDP ratios.
A small open-economy model indicates that the projected tightening in global financial conditions would reduce debt-to-GDP ratios by less than the increase associated with the expected rise in investment.

Empirical approach: panel regressions covering 1998–2016, with focused analysis on 2012–16 to distinguish global versus country-specific drivers.
Modeling approach: small open-economy model used to quantify the net effect of projected global financial tightening and expected investment-driven debt increases.

The dominance of global factors in 2012–16 implies policy responses should account for global financial conditions when addressing LIDCs’ debt vulnerabilities.
The model-based result—that tighter global conditions lower debt-to-GDP by less than investment-driven increases raise it—underscores a potential need to manage investment composition and financing terms to avoid unsustainable debt trajectories.
The shift toward non-concessional debt and higher interest payments suggests a need to:
- Monitor debt composition closely.
- Consider strategies to reorient financing toward concessional sources where feasible.
- Strengthen debt-management capacity to mitigate rollover and interest-rate risks.