Low-income countries face high debt challenges – IMF

International Monetary Fund managing director Kristalina Georgieva. Photo: AFP

International Monetary Fund managing director Kristalina Georgieva. Photo: AFP

Published Apr 4, 2024


THE International Monetary Fund (IMF) has cautioned that the economic scarring of the Covid-19 pandemic, geopolitical tensions, and the tightening of financial conditions have hit low-income countries, mainly in Africa, the hardest in recent years.

The IMF defines low-income countries as those 69 countries eligible for the Poverty Reduction and Growth Trust facilities.

IMF managing director Kristalina Georgieva said yesterday that though the outlook for low-income countries was gradually improving, they were still facing persistent macroeconomic vulnerabilities, including liquidity challenges due to high debt service.

Speaking during a joint high-level event with the World Bank, Georgieva said there was significant heterogeneity among low-income countries.

She said the poorest and most fragile countries had faced deep scarring from the pandemic, while those with diversified economies and Frontier Markets were faring better.

“The hit of this shock after shock pandemic, the war in Ukraine, high prices is felt most profoundly. In fact, our analysis shows that scarring from the shocks in advanced economies and emerging market economies is less than we feared, but scarring in low-income countries is higher than we expected,” Georgieva said.

“They today are 10% below in GDP terms than their projected trend from before the pandemic. So imagine, they have 10% less and then what comes on top of it?

“One, the fact that many of them have high debt levels. The average debt service eats up 13% of public revenues. So you’re 10% less and you spend 13% to service debt.

“And what I’m particularly worried about is that with growth being slow, the chances to catch up are actually worsened.”

However, Georgieva acknowledged that not all low-income countries were universal as some had more diversified economies and better fundamentals to handle the crises better.

However, she said some were fragile states, which were “truly facing life or death economic social difficulties”, hence it was so important for the IMF to assist.

During the Covid-19 pandemic, the IMF acted with unprecedented scale to support low-income countries by providing financial support to 53 of 69 eligible low-income countries, with about $14 billion (R266bn) disbursed as 0% interest rate loans from the Poverty Reduction and Growth Trust.

Most of this support was through the Fund’s emergency financing instruments –the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) – which provide immediate, one-time disbursements to countries facing urgent balance of payments needs.

World Bank Group president Ajay Banga said the fact that low-income countries’ debt servicing costs were at high levels also crowded out health and education spending.

In fact, Banga said a number of these countries were spending more on repaying debt than they would be able to spend on health care and education, demonstrating how challenging their own circumstances were.

Banga said that decisive efforts were 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,” he said.

“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 mobilisation and prioritising public spending to create additional space for critical development and social spending.”