- Stefania Fabrizio
- Published Date:
- March 2010
The group of LICs analyzed in this work is formed by the 69 Poverty Reduction Growth Facility (PRGF)-eligible countries for which data were available, which include, by region:
Angola, Benin, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Republic of Congo, Côte d’Ivoire, Eritrea, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Nigeria, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zambia.
Middle East and Europe
Armenia, Azerbaijan, Djibouti, Georgia, Kyrgyz Republic, Mauritania, Moldova, Sudan, Tajikistan, Uzbekistan, and Republic of Yemen.
Afghanistan, Bangladesh, Bhutan, Cambodia, India, Lao People’s Democratic Republic, Maldives, Mongolia, Myanmar, Nepal, Pakistan, Papua New Guinea, Sri Lanka, and Vietnam.
Bolivia, Dominica, Grenada, Guyana, Haiti, Honduras, Nicaragua, St. Lucia, and St. Vincent and the Grenadines.
|WEO Spring 2008||Current Projections|
|GDP growth||Reserves (months of imports) 1||Current Acc. Balance 2 in percent of GDP||GDP growth||Reserves (months of imports) 1,3||Current Acc. Balance 2 in percent of GDP|
|Afghanistan, I.R. of||8.6||8.4||3.2||3.1||0.0||-1.0||3.4||15.7||3.6||3.7||-1.6||-0.9|
|Central African Rep.||4.9||5.0||1.6||1.7||-6.4||-6.7||2.2||2.4||3.5||2.4||-9.8||-9.5|
|Congo, Dem. Rep. of||8.8||11.6||0.4||0.5||-10.7||-24.6||6.2||2.7||0.1||0.6||-15.3||-14.6|
|Congo, Republic of||9.2||10.6||7.8||14.3||6.0||10.9||5.6||7.4||10.1||9.3||-1.9||-11.2|
|Lao People’s Dem. Rep.||7.9||8.2||2.2||2.5||-21.7||-15.5||7.2||4.6||2.9||2.6||-16.5||-15.4|
|Papua New Guinea||5.8||4.7||4.1||4.2||3.3||1.7||7.0||3.9||4.8||4.0||2.8||-6.7|
|São Tomé & Príncipe||6.0||6.0||6.2||6.0||-36.1||-32.9||5.8||1.5||5.6||3.0||-29.0||-11.7|
|St. Vincent & Grens.||5.0||4.9||2.2||2.0||-26.7||-23.3||0.9||4.0||2.8||1.2||-33.7||0.0|
|Yemen, Republic of||4.1||8.1||10.8||10.5||-1.4||0.9||3.6||4.2||12.5||9.5||-4.3||-5.2|
Fund staff have simulated the impact of the crisis on precrisis debt sustainability analyses (DSAs) in order to assess more adequately debt vulnerabilities in LICs. In particular, DSAs issued to the Executive Board of the Fund prior to May 31, 2009, are updated using August WEO submissions. DSAs issued to the Board after June 1, 2009, are assumed to be based on macroeconomic frameworks that capture appropriately the impact of the crisis.1 While the more recent DSAs typically show an increase in debt vulnerabilities, only Georgia has experienced a deterioration in its risk of debt distress.2,3
The starting point for the simulations is the most recent LIC DSA undertaken under the joint World Bank–IMF Debt Sustainability Framework (DSF, see Box A1).4,5 DSAs provide information on the evolution of (i) the measures of capacity to repay (GDP, exports, and government revenues); (ii) the variables used to assess the external and fiscal financing needs; and (iii) the measures of indebtedness (present value of public and publicly guaranteed external debt and debt service).
Box A1.Debt Sustainability Framework
The objective of the joint World Bank-IMF Debt Sustainability Framework (DSF), which was introduced in 2005, is to support low-income countries in their efforts to achieve their development goals without creating future debt problems.
The debt sustainability analysis (DSA) under the DSF focuses on five debt burden indicators in order to assess the risk of external public debt distress, namely: (i) the present value (PV) of debt to GDP, (ii) the PV of debt to exports, (iii) the PV of debt to revenues, (iv) the ratio of debt service to revenues, and (v) the ratio of debt service to exports.
A risk of debt distress rating (see table) is derived by reviewing the evolution of debt burden indicators compared to their indicative policy-dependent debt-burden thresholds under a baseline scenario, alternative scenarios, and stress tests. Countries can be classified as: (i) low risk, (ii) moderate risk, (iii) high risk, or (iv) in debt distress.
The thresholds depend on the quality of a country’s policies and institutions as measured by the three-year average of the Country Policy and Institutional Assessment (CPIA) index, compiled annually by the World Bank.
Two updated “baseline” scenarios are produced under the simulations. These scenarios differ in terms of the source of the financing needs (external or fiscal) governing the evolution of the measures of indebtedness. In the first scenario (WEO fiscal scenario), the financing needs are defined as: expenditures – government revenues – grants. In the second scenario (WEO external scenario), the financing needs are defined as: imports – exports – current transfers – net FDI. An increase in financing needs compared to the initial LIC DSA is assumed to translate into additional external borrowing only if the country is running a deficit under the WEO scenario.6,7 Additional financing needs are assumed to be met exclusively through external borrowing in order to gauge the maximum impact on the vulnerability assessment (DSF thresholds relate to external debt).8
Over the 2008–14 period, the WEO country forecasts are used to update the evolution of the measures of capacity to repay and the variables affecting the financing needs (external and fiscal). More specifically, the WEO growth rates are used to update the level of the relevant LIC DSA variables. This methodology broadly preserves the internal consistency of the country-specific macroeconomic forecasts.
Starting in 2015, the measures of capacity to repay, net FDI, net transfers, and grants grow at the same rate envisaged under the initial LIC DSAs. Accordingly, transitory shocks to growth are not reversed in later years, resulting in a permanent shock to the level of variables. Over the 2015–19 period, financing needs in the WEO scenarios return smoothly to their respective LIC DSA level (in percentage of GDP). The expenditure variables (government expenditures and imports) adjust to achieve the targeted financing needs.
Stress tests are not directly conducted in WEO scenarios. Instead, the response of debt burden indicators to standard DSF stress tests is assumed to be similar to the initial LIC DSA.
Countries are deemed to be more vulnerable based on the following criteria:
Countries initially classified as having a low risk of debt distress are deemed more vulnerable if they experience a breach of threshold under the stress tests or the baseline WEO scenarios.
Countries initially classified as having a moderate risk of debt distress are deemed more vulnerable if they experience a breach of a threshold under the baseline WEO scenarios.
Countries initially classified as having a high risk of debt distress are deemed more vulnerable if at least two debt burden indicators experience an average breach over the projection period of more than 15 percentage points.9
(As of end-July 20091)
|Country||HIPC Status||Risk rating under the LIC DSF||Indication of increased debt vulnerability|
|Burkina Faso 2||Post-completion-point country||High|
|Congo, Republic of 2||Interim country||High|
|Côte d’Ivoire||Interim country||High|
|Gambia, The||Post-completion-point country||High|
|Haiti 2||Post-completion-point country||High|
|Lao, PDR 2||Non-HIPC||High|
|São Tomé and Príncipe||Post-completion-point country||High|
|Benin 2||Post-completion-point country||Moderate|
|Central African Republic 2||Post-completion-point country||Moderate|
|Ghana 2||Post-completion-point country||Moderate|
|Kyrgyz Republic||Pre-decision-point country||Moderate|
|Papua New Guinea||Non-HIPC||Moderate|
|Rwanda 2||Post-completion-point country||Moderate|
|St. Lucia 2||Non-HIPC||Moderate|
|St. Vincent and the|
|Sierra Leone||Post-completion-point country||Moderate||Yes|
|Sri Lanka 2||Non-HIPC||Moderate|
|Cameroon 2||Post-completion-point country||Low|
|Mozambique 2||Post-completion-point country||Low|
|Senegal 2||Post-completion-point country||Low|
|Comoros||Pre-decision-point country||In debt distress|
|Congo, Democratic Republic||Interim country||In debt distress|
|Guinea||Interim country||In debt distress|
|Guinea-Bissau||Interim country||In debt distress|
|Liberia||Interim country||In debt distress|
|Sudan||Pre-decision-point country||In debt distress|
|Togo||Interim country||In debt distress|
2009, The Debt Sustainability Framework for Low-Income Countries, IMF Occasional Paper 266 (Washington: International Monetary Fund).
2009, “Fiscal Policy in sub-Saharan Africa in Response to the Impact of the Global Crisis,”IMF Staff Position Note 09/10. Available at www.imf.org/external/pubs/cat/longres.cfm?sk=22938.0.
2009, “The State of Public Finances: A Cross Country Fiscal Monitor,”IMF Staff Position Note 09/21. Available at www.imf.org/external/pubs/cat/longres.cfm?sk=23129.0.
International Monetary Fund, 2009a, “The Implications of the Global Crisis for Low-Income Countries.”Available at www.imf.org/external/pubs/ft/books/2009/globalfin/globalfin.pdf.
International Monetary Fund, 2009b (October), Sub-Saharan Africa: Weathering the Storm, Regional Economic Outlook. Available at www.imf.org/external/pubs/ft/reo/2009/AFR/eng/sreo1009.htm.
2007, “The Cyclical Nature of North-South FDI Flows,”Journal of International Money and Finance, Vol. 26, No. 1, pp. 104–30.
UNCTAD, 2009, World Investment Prospects Survey 2009–11 (New York: United Nations Conference on Trade and Development).
World Bank, 2009a, Protecting Progress: The Challenge Facing Low-Income Countries in the Global Recession. Available at http://go.worldbank.org/V32PFH7C90.
World Bank, 2009b, Migration and Development Brief, No. 10. Available at http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1110315015165/Migration&DevelopmentBrief10.pdf.
Because of data limitations, and unless indicated otherwise, information for LICs reported in this paper refers to the set of 69 countries listed in Appendix 1. The analysis is based on the October 2009 World Economic Outlook (WEO) data.
The projected reserves do not include the Fund’s SDR allocation provided in the third quarter of 2009.
Some categories of spending, such as transfers and other goods and services, have declined on average, although with significant variation across countries.
Revenues are expected to rise on average by almost three-quarters of a percentage point of GDP, while expected spending restraint accounts for the rest of the improvement. Expenditure rationalization is expected to focus mainly on current expenditures, including the wage bill, transfers, and subsidies.
The larger decline in goods exports than in services exports can be explained in part by the depletion of stocks of goods in importing countries after the onset of the crisis. Depletion of stocks temporarily lowers goods imports by more than would be justified on the basis of lower growth in importing countries.
Net FDI to LICs is projected to decline by 7 percent.
The 2005 Gleneagles G8 Summit committed to raising official development assistance (ODA) provided by the members of the OECD’s Development Assistance Committee (DAC) to developing countries by US$50 billion (in 2004 prices), from US$80 billion in 2004 to US$130 billion in 2010. Half of this increase was to go to countries in Africa. ODA provided in 2008 was US$29 billion short of the Gleneagles target for 2010, with a particularly large shortfall for aid to Africa (World Bank, 2009c).
Some banks in LICs, facing difficulties with access to funding from their parent institutions, turned to international financial institutions (the International Finance Corporation, Asian Development Bank, European Investment Bank, and FMO) to secure their long-term liquidity. Although these types of loans have proved to be successful for big banks, small banks have limited access to this type of funding.
For example, Tanzania.
Central banks’ earnings on international reserves will have been similarly affected, which could correspondingly reduce dividend payments to governments.
For example, banks in Cambodia, Côte d’Ivoire, Mali, and Tanzania.
Note that this outcome reflects both constraints in the supply of credit and also, in some instances, a decline in demand for credit as corporations reacted to the deterioration in the economic outlook.
In the period since Lehman Brothers collapsed in September 2008, there have been only two downgrades (Mongolia and Sri Lanka), and one upgrade (Pakistan), with one other on positive outlook (Vietnam); this compares with seven emerging markets upgraded and 21 downgraded, some by several notches, over the same period.
The focus of fiscal stimulus measures on current spending contrasts with the G20 experience with fiscal stimulus, which has been more oriented to capital spending. In addition, however, many LICs are projected to maintain increases in capital spending planned before the onset of the crisis. Thus, explicit overall fiscal stimulus in LICs has been more limited than that implemented in G20 countries. See Horton, Kumar, and Mauro (2009).
As argued in Berg and others (2009), stimulus could also be less effective in these countries, as the stimulus may be unable to make up either directly or indirectly for the lost external demand.
LICs are also incurring costs for bank recapitalization, but appear less exposed to contingent liabilities. Since the summer of 2008, just over one-fourth of LICs have incurred fiscal costs for bank recapitalization, with the budgetary impact averaging about 1.2 percent of GDP. Very few LICs have seen contingent liabilities such as public-private partnerships (PPPs), concession guarantees, and credit guarantees materialize.
In the first eight months of 2009, the Fund’s new concessional lending totaled US$3.1 billion.
The contribution to the estimated financing needs is less than the full US$20 billion for two reasons: first, part of the allocation is for countries not included in our sample; and second, for some countries, the SDR allocation exceeds their estimated financing need.
Although the SDR allocation helps boost reserves, it should not be viewed as substituting for donor support because the use of the allocation is effectively charged at the variable nonconcessional SDR interest rate.
Countries for which DSAs were issued after June 1 include Benin, Burkina Faso, the Central African Republic, the Republic of Congo, Dominica, Georgia, Ghana, Grenada, Haiti, Lao PDR, Mozambique, Rwanda, St. Lucia, and Senegal.
For Georgia, the risk of debt distress was revised to moderate from low. The change reflects the impact of the conflict as well as the global financial crisis.
The Central African Republic also experienced a change in its risk of debt distress (improvement from high risk to moderate) after it received debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).
This includes all countries included in Appendix 1, except Azerbaijan, India, Maldives, Pakistan, and Uzbekistan, for which LIC DSAs are unavailable or were not produced because countries had significant market access.
This rule prevents borrowing by countries running surpluses in the LIC DSA and smaller surpluses in the WEO scenario. In the case where a country is running a surplus in the LIC DSA and a deficit in the WEO scenario, the country is assumed to borrow only the amount of the deficit.
The definitions of financing needs presented here are different from the ones presented in Box 5.1. The definition used here reflects the limited information available in LIC DSAs. In addition, the simulations assess debt vulnerabilities under the most likely scenario (WEO forecasts), rather than the financing needs required under a scenario with limited adjustment (less import compression and higher foreign exchange reserves).
Unlimited additional external financing is assumed to be available at a grant element of 45 percent. If external financing were obtained on less concessional terms, it would result in a greater deterioration of debt burden indicators. Conversely, if part of the fiscal financing needs is met with domestic borrowing, it would result in lower external debt burden indicators.
A 15 percent increase in debt burden indicators above their thresholds is consistent with an increase in the probability of debt distress of about 10 percent.