The coronavirus crisis has stiffened debt and development-related headwinds that had become strong even before 2020. Sustaining development while maintaining debt sustainability has been made harder by the protracted effects of the pandemic on public finances, earnings and employment, and human capital accumulation of vulnerable populations. The fiscal support programs financed by public debt provided relief and saved lives and livelihoods. But debt-induced uncertainty can now dampen investment and growth, especially given rising global interest rates. Bigger debt servicing burdens will reduce available fiscal space for development and stabilization and growing sovereign debt financing needs can crowd out domestic investment. Over-indebtedness can adversely affect economic development through many channels—"debt overhang,” “fiscal space,” “crowding out” and increased crisis risk —making countries vulnerable to abrupt changes in market sentiment, jeopardizing both stability and growth.
International Monetary Fund. Strategy, Policy, & Review Department
The war in Ukraine risks derailing the global economic recovery at a time when many countries have yet to overcome the consequences of the Covid-19 pandemic. Disruptions have already a severe impact on commodity markets, trade, and financial conditions, while inflation has become a major challenge in many countries and is adding to social pressures. The combination of shocks amplifies complex policy trade-offs that require astute macroeconomic management, for Emerging Market and Developing Economies (EMDEs), this includes preparing for higher interest rates that would translate into costlier terms of borrowing. Fuel and food price increases as well as food insecurity affect vulnerable populations the most, especially in low-income developing countries (LIDCs). Moreover, many LIDCs have only minimal or no policy space to absorb the war’s economic and financial spillovers. Reallocating spending and raising more revenues is paramount, as is advancing reforms that promote resilience. However, LIDCs also need support from the international community to finance priority expenditures and deal with often elevated debt burdens. Multilateral cooperation is more important than ever, and the IMF stands ready to help its members through policy advice, capacity development, and, where needed, financial support.
This paper provides the first review of the adequacy of PRGT finances since the comprehensive reform of the Poverty Reduction and Growth Trust (PRGT) in July 2021. It describes the lending response to the unprecedented pandemic-related demand; updates the PRGT demand scenarios and the estimates of the longer-term PRGT resource needs; reports on progress with the first stage of the two-stage PRGT funding strategy approved in July 2021; and outlines recent developments in the various debt relief initiatives and their status.
The global policy agenda that follows recalibrates priorities to meet the new reality we are facing. The IMF also continues to adjust to respond to the rapidly evolving needs of our membership. Our flexibility has been evident over the past two years of the COVID crisis: unprecedented emergency financing; a historic Special Drawing Rights (SDR) allocation; an innovative plan to end the pandemic. Now, as we face another crisis on top of a crisis, we will continue to step up and support our member countries in every way we can—with financial resources, policy advice, and capacity development—working in collaboration with our international partners.