August 2016 Volume 5 (2)

Navigating a Challenging Global Economic Setting

After an extensive period of strong growth in low-income developing countries (LIDCs), a sharp drop in global commodity prices and tighter external borrowing conditions have contributed to a significant slowdown in many of them. An IMF policy paper assesses the rising risks in LIDCs against these developments, compounded in some cases by domestic policy vulnerabilities. IMF Deputy Managing Director, Min Zhu launched the paper at the Carnegie Institute, and stressed in an Op-Ed the priority for LIDCs to maintain resilience and stay on course for sustainable growth. Staff presented the paper at the ODI, GIZ, and European Commission, and highlighted the IMF's commitments under the 2030 Development Agenda in core areas such as boosting domestic fiscal revenues, supporting institutions and capacity for scaling up infrastructure investment where needed, and promoting economic inclusion.

The latest Regional Economic Outlook zooms in on the experience in sub-Saharan Africa and explores the nature of growth slowdown in the region. A box in the April 2016 WEO examines the role of external factors affecting LIDC growth, and shows that oil exporters have been hit hardest. The April Fiscal Monitor documents the revenue loss in these countries as a result of the recent global trade slowdown.

Advancing Sustainable Economic Development

An inaugural LIDC conference during the IMF Spring 2016 Meetings on Sustainable Economic Development in a Challenging Global Environment focused on the challenges that LIDCs face to achieve their long-term development goals against a weaker external environment. The discussions underscored the importance of economic diversification, tackling inequalities and closing infrastructure gaps while maintaining sustainable debt levels.

In the keynote speech, Larry Summers noted that resilient growth in LIDCs must be maintained through rainy day buffers, public investment and structural reforms. Lant Pritchett agreed that sustained growth is key to development, but argued that such resilience is still lacking in LIDCs. Former Nigerian Minister of Finance Ngozi Okonjo-Iweala, the Governor of the Bank of Tanzania Beno Ndulu, and the director of the IMF's African Department Antoinette Sayeh identified economic diversification, domestic revenue mobilization, tackling corruption, and strong political will as key policy building blocks that allow countries to save in good times and build buffers for bad times. Paul Collier suggested that affordable external financing should be made available for LIDCs burdened by an overstated perceived risk.

Macro-critical Dimensions of Income Inequality

The IMF has continued to deepen its policy work on income inequality and the distributional consequences of macroeconomic policies and reform in LIDCs. Efforts at operationalizing this work—by integrating the analytical findings with staff's policy dialogue with member countries during Article IV discussions—have also continued. Recent completed reports include Bolivia, Republic of Congo, Ethiopia, Kyrgyz Republic, and Malawi. For example, the analysis on Malawi revealed that while reforming an ill-targeted farm input subsidy program would yield revenues and improve efficiency, it could nevertheless raise poverty and income inequality unless compensatory policies were used to improve agricultural productivity, support migration, possibly with short-term measures such as cash transfers.

Understanding Macro-financial Linkages

An IMF study provides guidance to developing countries seeking to modernize monetary policy frameworks. It recommends attaching priority to the price stability objective, committing to an explicit inflation objective to anchor inflation and build central bank credibility, and adopting a short-term interest rate tool to enhance the transmission of monetary policy. The study also provides lessons from a number of country experiences.

A guidance note sheds light on reserve adequacy assessments for different kind of economies, including credit-constrained and lower-income countries.

To further deepen its macro-financial analysis in IMF member countries, these issues are featured prominently in a selected set of pilot countries in the Article IV consultations. For example, the Samoa Staff Report assesses the role of public financial institutions in the economy, and how financial and prudential reforms can support reducing systemic risk. The Uganda Staff Report provides an integrated picture of financial and real cycle developments, and examines developments and outlook for credit, monetary policy transmission, and financial deepening. Staff reports for other LIDCs—Malawi, Kyrgyz Republic, Bangladesh, Mauritania, Cote D'Ivoire, Sao Tome and Principe—also discuss macro-financial linkages.

The 2015 LIDC report, a blog by staff, and the April 2016 WEO examine the experience of LIDCs with capital inflows—documenting the sharp increase in the share of debt-creating inflow since the 2000s—and cast a cautionary note on LIDCs' exposure to risks associated with fickle financial flows.

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