Washington, DC : On December 1, 2022, the Executive Board of the International Monetary Fund (IMF) discussed the IMF staff paper on recent macroeconomic developments and prospects in low-income countries (LICs). The report also includes in-depth discussion of the role that capacity development on debt management plays in mitigating debt vulnerabilities. The paper defines LICs as those 69 countries eligible for the Poverty Reduction and Growth Trust facilities. [1]
The compound shocks from the pandemic and Russia’s war in Ukraine have disproportionally affected LICs. They now face the challenge of resuming income convergence against the backdrop of a weak and uncertain global economic environment.
The strong rebound of growth in 2021 lost momentum in 2022, while inflation is accelerating rapidly. Fiscal deficits widened, thus further exacerbating debt vulnerabilities. Debt sustainability indicators have not yet reached the levels observed on the eve of the Heavily Indebted Poor Countries (HIPC) Initiative, but the shift in creditor landscape toward Non-Paris Club and private creditors brings new challenges for a swift and orderly debt restructuring where and when necessary. While sound policy framework, fiscal consolidation, and decisive action to revitalize growth remain the fundamental solution to sustainable debt, debt restructuring, when necessary, would also help tackle debt vulnerabilities. It will therefore be crucial to make debt restructurings under the G20 Common Framework more effective and timelier.
Capacity development on public debt management (CD) will also play important role in enabling LICs to mitigate debt vulnerabilities and sustainably cover their financing needs. The Fund is well positioned to respond to LICs current and evolving requests for CD that takes account of a more complicated borrowing landscape that has increased costs and risks. Future debt management improvements in LICs will require steadfast commitment on the part of both the authorities and CD providers, including paying more attention to the supportive enabling conditions, such as public debt management institutional arrangements and legal frameworks.
Looking at longer-term challenges, LICs have lost several years of progress towards achieving the Sustainable Development Goals (SDGs). Setbacks have been observed in major indicators, including poverty and education, while LICs are under rising threat from climate change. With greater challenges under more constrained resource envelope, removing structural barriers to sustained and inclusive growth has become ever more important.
The international community and multilateral institutions, including the Fund, have stepped up support to LICs by providing policy advice, financing, and capacity development. However, the financing needs for LIC remains large. Updated estimate on the additional financing needs for LICs to address the legacy of COVID, rebuild external buffers and accelerate income convergence amounts to about $440 billion over the period 2022-26.
On their side, policymakers should confront challenges in both near and long term. They should wield all instruments available concertedly to achieve as best as possible the multiple competing near-term objectives: fighting inflation, protecting the vulnerable, preserving growth, containing debt vulnerabilities and managing financial sector risks. Countries should be mindful of maintaining credible fiscal and monetary policy frameworks. In the meantime, they also should not lose sight of longer-term issues, for instance poverty, inequality, climate change and digitalization. Decisive actions on structural reforms that unleash the growth potential will accelerate LICs’ return to the course of income convergence.
Executive Board Assessment [2]
Executive Directors welcomed the opportunity to discuss recent macroeconomic developments and prospects in LICs. They broadly agreed with the staff’s assessment and the identified policy priorities. Recognizing the worsening trends in growth, inflation, and in many cases fiscal and external balances. Directors expressed concerns over rising debt vulnerabilities, financial stability risks, and food insecurity. They commended the swift actions taken by the Fund, including the establishment of the food shock window (FSW) under the emergency financing instruments.
Directors concurred with staff that although debt indicators still appear to be lower than the pre-HIPC era, debt vulnerabilities are elevated. They observed that reducing debt over the medium term will require a combination of revenue mobilization, careful prioritization toward social and investment spending, and credible policy frameworks, as well as growth-enhancing structural reforms, including to strengthen governance, institutions, and the business climate. Noting that the evolving creditors landscape brings significant challenges to fast and orderly debt restructurings where needed, Directors emphasized the importance of more effective and accelerated processes for debt restructurings under the Common Framework. Directors also called on the Fund, in close collaboration with the World Bank, to support members on sound debt management and transparency, for which the Multipronged Approach to Address Debt Vulnerabilities provides a reference framework.
Directors were concerned about the effects of multiple macroeconomic shocks on progress toward income convergence with advanced economies and achieving the Sustainable Development Goals (SDGs). They stressed that it is important for countries to use all policy instruments available concertedly to address the impact of these shocks in the near-term, while continuing to pursue long-term goals. Directors called on staff to develop more granular advice for LICs on making policy adjustments orderly and smoothly for addressing both near- and long-term challenges, including in areas with increased Fund engagement such as inequality, climate change and digitalization.
Directors were encouraged by the scaling-up of support by the international community. They welcomed the updated estimate of LICs financing needs, while acknowledging the uncertainty surrounding it. Directors commended the Fund for its fast response through the Special Drawing Rights (SDR) allocation and the adaptation of its lending facilities to the shocks, including the Resilience and Sustainability Trust and the FSW. They agreed that it is important to keep the Fund adequately resourced, including by closing the shortfalls in pledges under the ongoing Poverty Reduction and Growth Trust (PRGT) fundraising, while a few Directors also called for the use of internal resources to be considered for the PRGT. More broadly, Directors concurred that increasing the flows of ODA to help meet the financing needs of LICs should remain a prominent objective for the international community. They also emphasized the importance of maintaining an open and rules-based multilateral trade and financial system and avoiding geopolitical fragmentation.
Directors also welcomed the opportunity to discuss the role that public debt management capacity development (CD) plays in enabling LICs to mitigate debt vulnerabilities, particularly after the fundamental changes in the borrowing landscape and sovereign debt structure of LICs during the last two decades.
Directors commended the Fund’s efforts, alongside those of other CD providers, to improve public debt management practices in LICs through a variety of CD modalities covering all areas of public debt management. They noted that regional debt management advisors contribute to CD traction by increasing the responsiveness to emerging needs and tailoring, while also facilitating coordination with other CD providers. At the same time, Directors acknowledged that building effective and robust public management practices in LICs takes time. It requires improvements in both technical skills and institutional, legal, and governance arrangements, while being also conditional on the availability of adequate resources, including staffing.
A number of Directors called for future reports on Macroeconomic Developments and Prospects in LICs to be released ahead of Spring and/or Annual meetings to maximize their visibility and potential to impact strategic, policy and resourcing discussions.
[1] The list can be found in Annex I of the report.
[2] 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 summing up can be found here: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .