Managing debt vulnerabilities in low-income and developing countries

In some of the world’s poorest countries, public debt is reaching dangerous levels, a new IMF report shows. The report analyzes the progress and macroeconomic prospects of low-income countries, which represent a fifth of the world’s population, but only 4% of world output.

The report focuses not only on the increase in public debt but also on the change in the composition of creditors. Due to this change, the report also stresses the importance of official creditors collaborating with each other to find ways to ensure efficient coordination in the event of future debt restructuring.

The factors that determine debt accumulation vary from country to country 

The factors that determine debt accumulation vary from country to country 

Among them are the shocks – the sharp drop in raw material prices in 2014 that affected the budgetary incomes of the exporters of these products, natural disasters such as the Ebola epidemic, civil conflicts – as well as the high level of spending. public not intended to finance productive public investments.

The abundance of global liquidity had an important impact by facilitating the obtaining of loans and allowing the increase of debt in low-income countries. In our study, debtors, lenders and the international community are urged to take action.

Public debt is growing

In most low-income countries, the budget deficit has been increasing in the current decade: 70% of low-income countries had a higher public deficit in 2017 than during 2010-14. In the case of countries that export raw materials, the fall in income contributed to the increase in the deficit, but in other countries, the most important factor was the increase in spending. For the average country, public debt levels increased from 33% of GDP in 2013 to 47% of GDP registered last year.

The current build-up of public debt comes after a period of low debt levels and robust growth following measures taken by the international community to forgive most of the debt of heavily indebted poor countries through the Country Initiative. Poor Heavily Indebted (HIPC) and the Multilateral Debt Relief Initiative, which provided countries with more resources to spend on investment and education.

A higher level of public deficit and debt is not necessarily a negative factor

A higher level of public deficit and debt is not necessarily a negative factor

Loans applied for to pay for infrastructure investments can foster long-term growth, which in turn generates income to pay for the increased debt.

In fact, in almost a third of the low-income countries where the deficit increased, such as Bangladesh, Kenya, Madagascar, Moldova, and Nicaragua, investment grew at least as much. But in most cases, the growth in investment was less than the increase in the deficit and in half of the cases it actually decreased. Thus, it would appear that in a considerable portion of countries the increase in debt helped finance investment only to a limited extent.

The threat of debt crisis grows

The threat of debt crisis grows

Although their debt has increased, more than half of low-income countries continue to have a low or moderate risk of default on their debt service obligations. However, the share of countries at high risk of over-indebtedness, for example, Ghana, the Lao People’s Democratic Republic, and Mauritania, or already struggling to fully meet their debt obligations, almost doubled since 2013 and reaches 40%.

The IMF expects a slight stabilization of debt accumulation in the coming years. However, this forecast is based in part on countries that are making a fiscal adjustment and pursuing ambitious economic reform programs to achieve better economic results. It is extremely important that countries implement these reforms because otherwise, the debt accumulation process is likely to continue.

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