Macroeconomic Developments and Prospects in Low-Income Developing Countries—2018

International Monetary Fund. Strategy, Policy, &amp; Review Department

doi:10.5089/9781498307291.007.A001

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Macroeconomic Developments and Prospects in Low-Income Developing Countries—2018

Author: International Monetary Fund. Strategy, Policy, & and Review Department

Publication Date:: 22 Mar 2018

eISBN:: 9781498307291

Language:: English

Keywords:: PP; debt; commodity exporter; low-income developing country; challenge; debt accumulation; debt vulnerability; exchange rate; debt level; commodity price; Debt sustainability; Global

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This paper is the fourth in a series that examines macroeconomic developments and prospects in Low Income Developing Countries (LIDCs).

Abstract

This paper is the fourth in a series that examines macroeconomic developments and prospects in Low Income Developing Countries (LIDCs).

Chapter 1: Macroeconomic Developments: Uneven Growth, Fiscal Pressures

A. Introduction

1. Growth in LIDCs picked up in 2017, but significant differences persist between diversified and commodity exporters.¹^,² The sizeable commodity terms of trade shock from mid-2014 continues to play an important role in influencing economic performance, with commodity exporters generally experiencing slower growth than countries less dependent on commodity exports (“diversified” exporters). But there is significant diversity in economic performance within these country groups, with investment levels (favorably) and weak institutions/conflict (adversely) having an important influence on underlying growth.

2. The same divide is at play in fiscal performance, although fiscal pressures are mounting more broadly across LIDCs. Fiscal imbalances have increased in the preponderance of LIDCs in recent years, driven by a mix of revenue declines (more common in commodity exporters) and spending increases (more common in diversified exporters). Wider fiscal deficits are fully accounted for by higher investment levels—the scaling-up narrative—in 30 percent of cases, but reflect only declines in public savings (revenues less current spending) in close to half of the cases. Higher borrowing levels have been reflected in rising public debt levels in many countries (see chapter 2).

3. Inflation has remained contained in most LIDCs, providing space for easing of monetary policy in several countries. That said, 13 (of 59) LIDCs recorded double-digit inflation rates in 2017 (up from 10 in 2017), with inflation drifting upwards in some large commodity exporters, flagging the need for proactive stabilization efforts to restore price stability.

4. Financial sector stresses have materialized in some 30 percent of LIDCs, with the key drivers being the deteriorating quality of loan portfolios and tighter funding conditions (often linked to the weak fiscal position of governments). Problem banks have so far been handled by national authorities with little fiscal cost in the preponderance of (but not all) cases.

5. The global economic environment is becoming more supportive for LIDCs, with global growth picking up and commodity prices significantly improved from 2016 troughs. External borrowing conditions have also improved for those LIDCs with some access to commercial financial markets. However, both aid inflows (since 2013) and remittances from abroad (since 2015) have been declining in nominal (USD) terms, putting pressures on budgetary and balance of payments positions in aid-reliant countries.

Box 1.

What are Low-Income Developing Countries? ^1/

The term “LIDC” refers to countries with low per capita Gross National Income and comparatively weak socioeconomic indicators. The list of LIDCs was revised in 2017 and now includes 59 countries, down from 60 as Bolivia and Mongolia were dropped, reflecting strong income growth in recent years, and Timor-Leste was added (Annex 1). LIDCs account for about one-fifth of the world’s population and 4 percent of global output (PPP-based).

As in past reports, we divide LIDCs into sub-groups to better understand cross-cutting factors driving economic developments. Commodity exporters are countries where commodities account for at least half of goods and services, with all others classified as diversified exporters. ^2/ Commodity exporters where fuel exports comprise at least half of exports are classified as fuel exporters, while the rest are classified as non-fuel commodity exporters. There are 6 fuel exporters, accounting for 25 percent of LIDC PPP GDP and 17 percent of population; this group is dominated by Nigeria (22 percent of LIDC GDP and 13 percent of population). Non-fuel commodity exporters account for 17 percent of LIDC GDP and 27 percent of population; while diversified exporters account for 58 percent of LIDC GDP and 56 percent of population. Other groupings include: (i) frontier market economies, characterized by more developed financial systems and closer linkages to international financial markets; ^3/ and (ii) fragile states, which have weak institutional capacity, armed conflict, or both. The following chart shows the relative GDP shares of select LIDC subgroups.

^1/ Prepared by Atticus Weller and Weijia Yao (SPR).^2/ A more accurate but cumbersome label would be “countries less reliant on commodity exports.” Some countries in this grouping are heavily reliant on a few non-commodity exports (e.g., garments in Bangladesh and Haiti).^3/ For definitions of these groupings, see IMF (2014a).

6. Against this backdrop, average growth in LIDCs is set to reach 5.2 percent in 2018, up from 4.7 percent in 2017. Fiscal positions are projected to improve somewhat among commodity exporters, with little change among diversified exporters; average public debt levels would remain substantially unchanged from 2017, conditional upon implementation of the targeted fiscal programs. Key external risks include a reversal of the partial recovery in commodity prices and an unexpectedly sharp tightening of global financial conditions, with a stronger recovery in commodity prices an upside risk for commodity producers. The main domestic risks are fiscal policy slippages (which were sizable in 2016–17), conflict and social unrest, and other non-economic shocks. Achieving fiscal policy targets is an imperative if the broad-based debt accumulation of recent years is to be contained (see chapter 2).

B. The External Environment Facing LIDCs

7. The global environment is becoming more supportive for LIDCs, with global growth on a somewhat higher trajectory than anticipated a year ago (Table 1, Figure 1). Current and prospective growth has picked up more strongly than expected from its 2016 trough, which together with an expected expansion of global trade will support LIDC export growth. Meanwhile, inflation remains weak across advanced and most emerging market economies, implying minimal external pressure on price levels in LIDCs.³

Table 1.

Comparison of Projection Vintages

Sources: WEO (October 2014, October 2015, October 2016, October 2017, and January 2018 Update).

Table 1.

Comparison of Projection Vintages

	2010–14	2015	2016	2017	2018	2019
				Projections
Global Growth (Percent)
October 2014	3.9	3.8	4.0	4.1	4.0	4.0
October 2015	4.0	3.1	3.6	3.8	3.9	4.0
October 2016	4.0	3.2	3.1	3.4	3.6	3.7
October 2017	4.0	3.4	3.2	3.6	3.7	3.7
January 2018	4.0	3.4	3.2	3.7	3.9	3.9
Petroleum Price (APSP; USD)
October 2014	99.0	99.4	97.3	95.4	94.2	93.2
October 2015	97.7	51.6	50.4	55.4	59.8	62.2
October 2016	97.7	50.8	43.0	50.6	53.1	54.4
October 2017	97.7	50.8	42.8	50.3	50.2	50.5
January 2018	97.7	50.8	42.8	52.7	58.9	56.4
Nonfuel (Commodity) Price (Index, 2013=100)
October 2014	101.2	93.0	92.3	91.5	90.9	90.3
October 2015	101.0	79.8	75.7	76.0	75.9	75.5
October 2016	101.1	79.2	77.1	77.7	77.2	77.0
October 2017	101.2	79.3	77.8	83.3	83.8	83.4
January 2018	101.3	79.3	78.0	83.1	82.7	83.5

Sources: WEO (October 2014, October 2015, October 2016, October 2017, and January 2018 Update).

Table 1.

Comparison of Projection Vintages

	2010–14	2015	2016	2017	2018	2019
				Projections
Global Growth (Percent)
October 2014	3.9	3.8	4.0	4.1	4.0	4.0
October 2015	4.0	3.1	3.6	3.8	3.9	4.0
October 2016	4.0	3.2	3.1	3.4	3.6	3.7
October 2017	4.0	3.4	3.2	3.6	3.7	3.7
January 2018	4.0	3.4	3.2	3.7	3.9	3.9
Petroleum Price (APSP; USD)
October 2014	99.0	99.4	97.3	95.4	94.2	93.2
October 2015	97.7	51.6	50.4	55.4	59.8	62.2
October 2016	97.7	50.8	43.0	50.6	53.1	54.4
October 2017	97.7	50.8	42.8	50.3	50.2	50.5
January 2018	97.7	50.8	42.8	52.7	58.9	56.4
Nonfuel (Commodity) Price (Index, 2013=100)
October 2014	101.2	93.0	92.3	91.5	90.9	90.3
October 2015	101.0	79.8	75.7	76.0	75.9	75.5
October 2016	101.1	79.2	77.1	77.7	77.2	77.0
October 2017	101.2	79.3	77.8	83.3	83.8	83.4
January 2018	101.3	79.3	78.0	83.1	82.7	83.5

Sources: WEO (October 2014, October 2015, October 2016, October 2017, and January 2018 Update).

8. Pressures on commodity producers eased in 2017, as both fuel and most non-fuel commodity prices rebounded from 2016 lows (Figure 1, Panel C). The recovery has been particularly marked for metals, such as aluminum, copper and iron, while agricultural commodity prices have been broadly flat, following a recovery in 2016.⁴ Nonetheless, fuel prices are still down by 40 percent from their 2010–14 averages, and non-fuel commodity prices down 18 percent.

9. External financial conditions have also improved for LIDCs with market access. Portfolio inflows increased significantly from 2016, helped by several sizable sovereign bond issuances (Cote d’Ivoire, Honduras, Nigeria, Senegal and Tajikistan). Bond spreads for both commodity and diversified exporters have narrowed significantly since 2016. FDI and other inflows increased modestly (Figure 2), with FDI flows having remained robust for several years.

10. However, transfers—including aid flows and remittances—have declined, putting pressures on budget and balance of payments positions (Figure 3).

Aid flows to LIDCs in 2016 were unchanged in dollar terms from 2015 levels, but have slipped significantly since 2013—declining from 2.2 percent of LIDC GDP in 2013 to 1.8 percent in 2016, a relative decline likely to have continued since then.⁵
Remittance flows in 2016 were down 6½ percent in dollar terms from 2015 levels (from 5 percent of GDP in 2015 to 4.7 percent in 2016). Remittance flows from non-fuel exporting host countries declined in 2016, having risen steadily through 2015; remittances from fuel exporting host countries have been falling since 2013.

C. Recent Developments in LIDCs

Persistent Performance Divide between Commodity and Diversified Exporters

11. Growth in LIDCs is estimated at 4.7 percent in 2017, with most LIDCs recording higher growth than in 2016 (Figure 4). The aggregate patterns hide marked differences between fuel exporters (where growth has collapsed since 2014); non-fuel commodity (NFC) exporters (where growth has averaged about 4.5 percent in 2016–17, down from close to 6 percent earlier in the decade); and diversified exporters (where growth has remained around 6.5 percent, helped by vigorous growth in the larger countries). Fragile states typically experienced slower growth than other LIDCs, as examined in IMF (2014b) (see Box 2).

12. The growth differential between NFC exporters and diversified exporters is only partly accounted for by commodity price developments (Figure 5). Excluding the oil exporters, econometric analysis suggests that there is not a close linkage between the size of the terms of trade shock experienced since 2013 and the change in the growth rate since then.⁶ Looking further back, growth in NFC exporters has lagged that in diversified exporters over an extended period (2000–14). Contributory factors likely include greater prevalence of fragile states among commodity exporters (73 percent, compared to 42 percent for diversified exporters), lower capital intensity and smaller firms in commodity exporter manufacturing firms,⁷ and somewhat higher frequency of fixed exchange rate regimes (73 percent, compared to 67 percent for diversified exporters).

13. Growth performance in LIDCs varies across regions, but this is largely explained by export structures (Box 3). LIDCs in Asia/Pacific recorded average growth of over 6.5 percent in 2017, unchanged from its long-term trend; by contrast, growth has fallen well below its long-term average in Sub-Saharan Africa (SSA). The divergent experiences are explained in the main by i) the greater prevalence of commodity exporters in SSA compared to Asia/Pacific and ii) the large weight of Nigeria (hit hard by the fall of oil prices) in SSA GDP. The weighted-average growth rates of diversified exporters in SSA are close to those recorded in Asia/Pacific, while growth rates among NFC exporters are higher in SSA.

Box 2.

The Experience of Fragile States ^1/

For analytical purposes, the Fund defines countries in fragile situations (FS) on the basis of weak institutional capacity and/or experience of conflict. Weak institutional capacity is assessed using the World Bank Country Policy and Institutional Assessment (CPIA) score (three-year average score of 3.2 or lower), while conflict is proxied by the presence of a UN and/or regional peace-keeping or peace-building operation over the preceding three years. ^2/ ^3/

As of December 2017, there were 33 LIDCs in fragile situations, with 21 in SSA, 5 in Asia/Pacific, 6 in the Middle East/Central Asia, and 1 in the Western Hemisphere. Collectively, they account for 7 percent of the world population and 0.7 percent of world GDP.

Fragile states typically record lower growth and attract less FDI than other LIDCs. Institutional weakness, domestic conflict, poor security situations, and political uncertainty tend to discourage business investment and encourage emigration of the better-educated. Median per capita income in FS LIDCs is just over half that of other LIDCs, while per capita income increased by a modest 19 percent between 2002–17, as compared with 67 percent in non-fragile LIDCs. Annual FDI flows into FS LIDCs were some 0.8 percent of GDP lower than in non-FS LIDCs over that period.

The IMF is committed to close engagement with countries in fragile situations. A Capacity Building Framework has been designed to support institution-building, strengthen outcome monitoring, and enhance coordination with other development partners; the approach is being piloted in several fragile states, and entails intensified engagement in key areas (in some cases by deploying long-term advisors), providing more hands-on training, and strengthening the links with surveillance/program operations. In FY2017, the Fund delivered more than a quarter of its technical assistance and about a fifth of its training to FS, while one-third of FS LIDCs were in some form of program engagement with the Fund at end-2017.

Fund Engagement in Fragile Situations

Note: As of December 2017.

^1/ Prepared by Kevin Greenidge and Ermal Hitaj (SPR).^2/IMF (2011, 2012, and 2015b).^3/ The CPIA assesses countries against a set of 16 criteria grouped in 4 clusters: economic management, structural policies, policies for social inclusion and equity, and public sector management and institutions.

Box 3.

Growth Differences Across Regions and Time ^1/

The recent growth decline in LIDCs relative to previous years, and differences in growth patterns across regions, can be explained in large part by the slowdown in commodity exporters.

While growth rates in fuel exporters and NFC exporters in 2016–17 were below the 2000–14 averages, there was no significant differences in the pace of growth for diversified exporters.
The better performance in the Asia-Pacific region relative to Sub-Saharan Africa is due largely to export orientation: only a quarter of APD countries are commodity exporters, compared to half in SSA, while fuel exporters have a high weight in SSA GDP.
Growth in the Middle East and Central Asia region has slipped below longer-term averages, due in part to the greater prevalence of conflict and fragility.
Growth in the three Western Hemisphere LIDCs improved relative to longer-term averages, but lagged other regions.

^1/ Prepared by Svitlana Maslova (SPR).

14. LIDCs have had a mixed performance over the past decade on convergence of per capita output towards EM median levels. NFC exporters have given up some of the gains since 2014 as their growth has slowed, while diversified exporters have made steadier gains (Figure 6). Slowing growth in NFC exporters represents a setback for pursuit of the sustainable development goals.

Weakening Fiscal Positions

15. Fiscal balances have deteriorated in 70 percent of LIDCs and across all country groups in recent years (Figure 7). Aside from fuel exporters, the factors at play varied markedly across countries:

Among the six fuel exporters, fiscal balances declined in four countries from 2010–14 to 2017, driven by a median decline of revenues of close to 8 percent of GDP; financing constraints forced fiscal tightening in two cases.
Among the 20 NFC exporters, fiscal balances deteriorated in 15 countries, by an average of 2.5 percent of GDP. Declining revenues was the main contributory factor in 8 of these 15 countries, with higher spending more important in the other 7.
Among the 32 diversified exporters, fiscal balances weakened in 21 countries, by an average of 1.7 percent of GDP. Higher spending was the main factor behind the decline in 13 of these 21 countries and declining revenues in 8 cases.
The presence of an IMF program appears to have a significant influence on fiscal developments: 13 of the 18 countries that recorded stronger fiscal balances in 2017 relative to 2010–14 had IMF programs in place in 2017 (as compared with 14 of the 40 countries that recorded weaker fiscal balances).⁸

16. Lower grants and higher interest expenditures contributed to the fiscal pressures (Figure 8). Grants to LIDCs dropped from 1.2 percent of GDP on average in 2010–14 to 0.9 percent in 2017. At the same time, interest outlays increased by about 0.5 percent of GDP, on the back of higher debt stocks and increased reliance on more expensive commercially-placed debt. The combined impact of those developments on budgets ranged from 0.8 percent of GDP in fuel exporters to around 1 percent in NFC exporters.

Budgetary Revenues and Investment

17. Budget revenue performance has been mixed in recent years, with revenue-GDP ratios falling in NFC exporters and rising in diversified exporters (Figure 9). But experiences varied markedly within the country groups, reflecting both the specifics of tax and export structures and policy efforts to boost revenue mobilization.

The median revenue-GDP ratio was 19.1 percent of GDP in NFC exporters in 2017, down from 21.1 percent in 2010–14. But 2017 revenues exceeded 2010–14 averages in 9 of 20 cases.
For diversified exporters, the median revenue-GDP ratio was 23.6 percent of GDP in 2017, up from 21.6 percent in 2010–14. The revenue improvements was somewhat concentrated in smaller countries; the weighted-average revenue-GDP ratio rose 1 percent. The revenue ratio increased in 16 of 32 countries.

18. Public investment levels have typically moved in the same direction as budgetary revenues, again with marked diversity within country groupings (Figure 10):

Among NFC exporters, the median investment-GDP ratio was 5.2 percent of GDP in 2017, down from 5.7 percent in 2010–14 (with a slightly larger decline in the weighted average). But revenue levels rose in nine NFC countries, facilitating higher public investment in seven cases; investment cuts were recorded in a majority of the cases where revenues fell.
In diversified exporters, median investment was 8.3 percent of GDP in 2017, up from 6.9 percent in 2010–14—although, again, increases were concentrated in smaller countries, with the GDP-weighted average increasing only modestly. In the majority of countries where revenues rose (fell), investment levels also increased (declined).

Public Savings and Investment

19. The narrative of using public borrowing to scale-up public investment is often cited as a justification for running higher deficits (and accumulating debt) in developing countries. To establish the relevance of this narrative for recent developments in LIDCs, it is useful to look at the evolution of public saving and investment levels, making use of the fact that the change in the fiscal deficit equals i) the change in public investment less ii) the change in public savings (budgetary revenues minus current spending).⁹

20. Widening fiscal deficits are fully accounted for by higher levels of public investment in a minority of cases. Looking at 34 cases where fiscal balances deteriorated between 2010–14 and 2017,¹⁰ public investment increased by more than the fiscal deterioration in 10 cases, increased by less than the fiscal deterioration in 8 cases, and declined in 16 cases. Interestingly, the presence of an IMF arrangement in 2017 was most likely in the first group (7 of 10 cases) and least likely in the third group (3 out of 16 cases).

21. Aggregated figures show significant declines in both investment and public savings among fuel and NFC exporters, with a modest increase in investment and drop in public savings among diversified exporters (Figure 11). But the heterogeneity in the experiences of the 34 countries where deficits widened underscores the importance of policy choices in explaining outcomes:

The 10 countries where rising deficits were fully accounted for by higher public investment include 2 NFC exporters (Guinea-Bissau, Mali) and 8 diversified exporters (Cameroon, Cote D’Ivoire, Kenya, Madagascar, along with Bangladesh, Moldova, Nepal, and Nicaragua).
The eight countries where rising deficits reflected a mix of rising investment and falling public savings include five NFC exporters (Burkina Faso, Niger, Sierra Leone, Zambia, Zimbabwe), and three diversified exporters (Benin, Comoros, Tajikistan).
The 16 countries where deficits rose and investment declined include 3 fuel exporters, 6 NFC exporters, and 7 diversified exporters.

22. In summary, although investment would almost certainly have been lower across these 34 countries had borrowing levels not increased, only in a minority of cases was the incremental borrowing used entirely to finance investment scaling-up.

23. The fiscal trends discussed above have contributed to a significant increase in public debt levels in LIDCs in recent years (Figure 12). The evolution of debt stocks and debt vulnerabilities is analyzed in chapter 2 below.

Improving External Position in Commodity Exporters

24. Commodity exporters—especially fuel exporters—have achieved significant external adjustment in the last two years, reflecting sizeable import compression and the partial recovery of commodity prices (Figure 13a). For fuel exporters, the current account balance has returned to a small surplus; for NFC exporters, the current account deficit has steadily narrowed from the 2015 trough; and for diversified exporters, the current account deficit has fluctuated from year to year, with little net change from the years prior to the commodity price decline. Looking at the structural changes in the current account position from 2010–14 through 2017 (Figure 13b):

The position of fuel exporters has (unsurprisingly) weakened somewhat, with large declines in exports of goods and services offset by import compression and an improvement on the income/transfer account (likely helped by falling profit transfers to oil parent companies).
NFC exporters, in the aggregate, have seen about a 1 percent of GDP improvement in the current account deficit (some 4 percent of GDP in 2017), with import compression yielding an improvement in the trade balance (despite weaker exports), partly offset by a decline on income/transfers from abroad. Foreign direct investment levels are down significantly from 2010–14 levels, contributing to weaker investment and growth.
Diversified exporters have also seen little net change in the current account deficit (some 3½ percent of GDP in 2017), but with rising exports driving an improvement in next exports, offset by a sizable decline in income/transfers abroad (likely linked to the weakening of aid flows and remittances). Foreign direct investment levels are up slightly from 2010–14 levels.

25. Commodity exporter adjustment was supported by real exchange rate depreciation (Figure 14). In the median commodity exporter, the real exchange rate (RER) depreciated by about 11 percent between December 2015 and December 2016 but has since stabilized, while the RER has been largely range bound in diversified exporters over the past two years. There was significant variation around the median in both groups, as illustrated in Figure 14c.

26. Foreign reserve levels (in terms of import coverage) have remained broadly unchanged for the median LIDC, but experience varies across countries (Figure 15). The median level of import coverage has shown little change since 2013, albeit improving somewhat for frontier markets. But reserve coverage is estimated to have been less than the conventional benchmark of three months of imports of goods and services in 21 countries at end-2017 (down from 24 at end-2016), with a median level of 1 month in the bottom quartile. Reserve coverage levels are more often low in fragile states (60 percent are below the benchmark) and in countries hit most severely by the decline in commodity prices.

Stable Inflation but Sluggish Credit Growth

27. Inflation has remained contained in most LIDCs, albeit with some notable exceptions (Figure 16). Median inflation was 5.6 percent in 2017, little changed from 5.3 percent in 2016; consistent with long-standing patterns, pegged rate regimes had lower inflation. The dispersion of inflation rates narrowed in 2017, as several countries (e.g., Malawi and Zambia) succeeded in reducing high inflation. However, 13 countries continued to have inflation over 10 percent in 2017 (up from 10 in 2016), while 4 had inflation above 20 percent (up from 2). Inflation was most severe in countries affected by conflict (South Sudan, Yemen).

28. Easing of monetary policies contributed to a decline in real interest rates in many countries. In the nine countries with flexible exchange rates and explicit inflation targets, the direction of change in central bank policy rates was generally in line with inflation objectives: the seven countries with lower average policy rates in 2017 than 2016 had declining or low to moderate inflation (below 8 percent); while the two with higher average rates (Mozambique and Nigeria) had high inflation (Figure 17). The median real policy rate in this group fell from 6.3 percent in 2016 to 4.9 percent in 2017.

29. Growth in credit to the private sector varies between commodity and diversified exporters, with the real stock of credit declining in 2017 in the former, while growing at a slightly slower pace in the latter during 2016–17 (Figure 18). The divergent patterns reflect both weakened banking systems/rising NPLs and slower growth in commodity exporters. There was considerable variation around the median, with 11 countries registering growth in real credit above 10 percent (including Cambodia, Nepal, Myanmar, and Cote d’Ivoire) and eight experiencing a decline in excess of five percent (Zambia, Mozambique, Moldova). The median ratio of private sector credit to GDP across LIDCs remained flat at 25.7 percent in 2016, still up by more than five percentage points since 2011.

Financial Sector Stability: Staff Assessment of Emerging Financial Sector Stress

30. The number of LIDCs experiencing financial sector stress is rising, with some 30 percent of countries now assessed to be in stressed situations.¹¹ A fall 2016 survey of IMF country teams concluded that some 20 percent of LIDCs were experiencing financial sector stress, with that number expected to rise to about 40 percent over the next 12–18 months. In a similar survey undertaken a year later, financial systems in some 30 percent of countries were assessed to be experiencing stress, with that number expected to rise to 45 percent by end-2018. Stress situations are more likely to be observed in commodity exporters, but are also increasing in frequency in other countries (Figure 19).

31. The main drivers of rising stress levels are deteriorating loan quality and tighter funding conditions (Figure 20). Drivers of deteriorating asset quality include i) weak fiscal positions, as governments accumulate arrears to private companies, impairing their ability to service debt (e.g., Chad, Malawi, Zambia); ii) sluggish economic activity (Congo Republic, Malawi, Nigeria); and iii) the impact of exchange rate depreciation on corporate balance sheets and finances (Nigeria and Mozambique). Factors behind tighter funding include (i) weak fiscal positions (as government deposits are drawn down); (ii) private deposit withdrawals (more of a concern for small banks); and (iii) reduced access to external funding in a handful of cases (Burundi, Congo Republic, Zimbabwe).

32. Growth of credit to the private sector has predictably been lower in countries where financial systems are under stress. A cross-check of reported stress against independent data on credit growth shows a negative relationship between stress and credit growth (Figure 21)— with the relationship most pronounced for commodity exporters, where credit has been shrinking in systems under stress.

33. Heightened financial stress has led to bank failures in 18 LIDCs since 2015, while interventions have been deployed to prevent bank failures in a further 8 countries. Interventions have included placing banks under temporary administration, the provision of emergency liquidity assistance, forced mergers, and required recapitalization. Interventions have had significant fiscal costs in two countries (some 6 percent of GDP in both cases), while fiscal costs in a third country could reach as high as 13 percent of GDP by end-2018.

34. Concerns about the health of non-bank financial institutions (NBFIs), including micro-finance institutions, have also increased substantially since end-2015. NBFIs are a significant feature of financial systems in about one-half of LIDCs, although banking systems usually play a dominant role (in quantitative terms) in financial intermediation.¹² Stress on NBFIs is assessed to have increased in 16 countries since end-2015, although staff rated the vulnerability of NBFIs as being high in only 6 countries.

35. Looking ahead, weak economic management is viewed as a key contributor to rising concerns about financial sector stress, with tighter global financial conditions and commodity price declines also seen as important risks (Figure 22). Compared with results of the 2016 survey, concerns about the likely impact of each of these risk factors has increased.

36. Rising financial sector stresses pose a sizeable challenge for regulatory authorities. Tackling budgetary arrears, via fiscal policy adjustments, is an over-arching priority in many countries. Intensified supervision, the scaling back of regulatory forbearance, and the strengthening of bank resolution mechanisms are also seen as key priorities by IMF country teams. Weaknesses in regulation and supervision systems in LIDCs, and how they can best be tackled, are discussed in IMF (2017a, Section 2.C).

IMF Financial Support for LIDCs

37. Reflecting the ongoing economic difficulties in many LIDCs, new IMF lending commitments to LIDCs remained high relative to historic averages in 2017. The IMF approved eight new financial arrangements with LIDCs in 2017, along with one drawing under the Rapid Credit Facility; there were also five augmentations of financial support under existing programs. Countries that are members of the two CFA currency zones accounted for five of the eight new arrangements (two in CEMAC, three in WAEMU) and for four of the five augmentations (two in CEMAC, two in WAEMU). All new commitments of financial support were to countries in Africa (see Box 4).

Box 4.

Fund Financing for LIDCs: Recent Trends ^1/

New IMF lending commitments to LIDCs have increased significantly in recent years, although interpretation of trends is complicated by a large precautionary blended arrangement with Kenya in 2016.

Nine countries received new commitments of financial support from the Fund in 2017, totaling SDR 1.8 billion (with SDR 1.7 billion from the PRGT), well above the 2010–16 average of SDR 1.3 billion. Disbursements to LIDCs amounted to SDR 1 billion, up from the 2010–16 average of SDR 0.7 billion.

Most of the new commitments in 2017 were provided through the Extended Credit Facility, an instrument to provide somewhat longer-term concessional financing (repaid over 5½-10 years).

Eight new ECFs were initiated in 2017, totaling SDR 1.5 billion, almost half of which was accounted for by programs with two CEMAC members (Cameroon, Chad). New ECFs were also approved for six other African countries (Benin, Guinea, Mauritania, Niger, Sierra Leone, and Togo).
An RCF of SDR 12 million was provided to support The Gambia, a fragile country buffeted by shocks.
There were also five augmentations of access under existing arrangements, totaling SDR 332 million: Cote d’Ivoire (of which SDR 108 million was financed from the GRA), the Central African Republic (twice), Madagascar, and Mali.

The majority of the IMF’s financial assistance to LIDCs in 2017 was directed to countries in fragile situations. Separately, five out of the eight new ECFs were provided to members of the two large African currency unions, CEMAC and WAEMU.

Several requests for new Fund financial assistance are expected in 2018, particularly from commodity exporters undertaking continued adjustment efforts. That said, new commitments can fluctuate markedly from year to year, even as actual disbursements show less volatility.

^1/ Prepared by Svitlana Maslova (SPR).

D. The Outlook

38. Against the backdrop of a global economic upswing and some recovery in commodity prices, the (weighted) average growth rate across LIDCs is projected to rise by half a percentage point in 2018, to 5.2 percent (Table 2).¹³ Supply-side factors supporting the pick-up in growth include a rebound in the volume of fuel production (Nigeria, Republic of Congo) and the easing of drought conditions that had depressed agricultural output (Kenya, Malawi, Zambia). ¹⁴

Table 2.

Selected Macroeconomic Indicators

Sources: World Economic Outlook and IMF staff estimates.

Table 2.

Selected Macroeconomic Indicators

				PPP-GDP Weighted Averages
				2010–14	2015	2016	2017	2018	2019–21
							Projections
Growth (Percent)
	LIDCs (59)			6.0	4.7	3.7	4.7	5.2	5.3
		Commodity Exporters (26)		5.7	2.4	0.4	2.1	3.3	3.5
			Fuel Exporters (6)	5.7	0.7	-2.4	0.4	2.4	2.5
			Non-Fuel Exporters (20)	5.7	4.8	4.4	4.4	4.4	4.7
		Diversified Exporters (33)		6.2	6.4	6.0	6.5	6.5	6.5
Inflation (Percent)
	LIDCs			9.3	7.4	9.9	10.3	8.8	7.9
		Commodity Exporters		11.1	9.9	16.4	16.9	14.1	12.2
			Fuel Exporters	10.3	11.4	20.4	18.4	14.7	14.0
			Non-Fuel Exporters	12.2	7.6	10.6	14.8	13.3	10.0
		Diversified Exporters		7.9	5.5	5.3	5.7	5.2	5.1
Fiscal Balance (Percent of GDP)
	LIDCs			-2.5	-4.1	-4.4	-4.2	-4.1	-3.7
		Commodity Exporters		-1.2	-4.1	-4.2	-3.6	-3.2	-2.8
			Fuel Exporters	-1.6	-5.1	-5.5	-4.3	-4.0	-3.4
			Non-Fuel Exporters	-0.5	-2.5	-2.4	-2.6	-2.2	-1.9
		Diversified Exporters		-3.6	-4.2	-4.6	-4.6	-4.7	-4.2
Current Account Balance (Percent of GDP)
	LIDCs			-1.9	-4.2	-2.6	-2.3	-3.1	-3.5
		Commodity Exporters		-0.3	-4.9	-3.0	-0.7	-2.1	-3.0
			Fuel Exporters	2.3	-4.5	-1.6	1.3	-0.5	-0.2
			Non-Fuel Exporters	-4.5	-5.6	-4.9	-3.5	-4.2	-6.6
		Diversified Exporters		-3.1	-3.6	-2.3	-3.4	-3.7	-3.8
	Memorandum Items			Median
				2010–14	2015	2016	2017	2018	2019–21
							Projection
Growth (Percent)
	LIDCs			5.4	4.0	4.1	4.5	5.0	5.3
		Commodity Exporters		5.5	3.2	3.2	3.8	4.1	4.7
			Fuel Exporters	5.1	2.2	-4.6	-0.7	2.6	3.9
			Non-Fuel Exporters	5.8	4.0	3.7	4.1	4.6	4.7
		Diversified Exporters		5.3	5.7	4.7	5.0	5.3	5.6
Inflation (Percent)
	LIDCs			5.7	5.3	5.2	5.4	5.3	5.0
		Commodity Exporters		6.0	5.0	5.3	6.3	8.2	6.1
			Fuel Exporters	5.6	7.9	4.3	8.7	8.4	6.9
			Non-Fuel Exporters	6.1	3.4	6.1	6.3	8.2	6.1
		Diversified Exporters		5.7	5.3	5.2	4.5	5.0	5.0
Fiscal Balance (Percent of GDP)
	LIDCs			-2.5	-3.1	-4.5	-3.7	-3.6	-2.8
		Commodity Exporters		-1.8	-3.4	-4.8	-3.9	-3.3	-2.8
			Fuel Exporters	-1.0	-7.0	-13.2	-0.1	-2.8	-1.2
			Non-Fuel Exporters	-1.9	-3.2	-4.4	-4.4	-3.3	-2.9
		Diversified Exporters		-2.9	-2.8	-4.1	-3.7	-3.8	-2.9

Sources: World Economic Outlook and IMF staff estimates.

Table 2.

Selected Macroeconomic Indicators

				PPP-GDP Weighted Averages
				2010–14	2015	2016	2017	2018	2019–21
							Projections
Growth (Percent)
	LIDCs (59)			6.0	4.7	3.7	4.7	5.2	5.3
		Commodity Exporters (26)		5.7	2.4	0.4	2.1	3.3	3.5
			Fuel Exporters (6)	5.7	0.7	-2.4	0.4	2.4	2.5
			Non-Fuel Exporters (20)	5.7	4.8	4.4	4.4	4.4	4.7
		Diversified Exporters (33)		6.2	6.4	6.0	6.5	6.5	6.5
Inflation (Percent)
	LIDCs			9.3	7.4	9.9	10.3	8.8	7.9
		Commodity Exporters		11.1	9.9	16.4	16.9	14.1	12.2
			Fuel Exporters	10.3	11.4	20.4	18.4	14.7	14.0
			Non-Fuel Exporters	12.2	7.6	10.6	14.8	13.3	10.0
		Diversified Exporters		7.9	5.5	5.3	5.7	5.2	5.1
Fiscal Balance (Percent of GDP)
	LIDCs			-2.5	-4.1	-4.4	-4.2	-4.1	-3.7
		Commodity Exporters		-1.2	-4.1	-4.2	-3.6	-3.2	-2.8
			Fuel Exporters	-1.6	-5.1	-5.5	-4.3	-4.0	-3.4
			Non-Fuel Exporters	-0.5	-2.5	-2.4	-2.6	-2.2	-1.9
		Diversified Exporters		-3.6	-4.2	-4.6	-4.6	-4.7	-4.2
Current Account Balance (Percent of GDP)
	LIDCs			-1.9	-4.2	-2.6	-2.3	-3.1	-3.5
		Commodity Exporters		-0.3	-4.9	-3.0	-0.7	-2.1	-3.0
			Fuel Exporters	2.3	-4.5	-1.6	1.3	-0.5	-0.2
			Non-Fuel Exporters	-4.5	-5.6	-4.9	-3.5	-4.2	-6.6
		Diversified Exporters		-3.1	-3.6	-2.3	-3.4	-3.7	-3.8
	Memorandum Items			Median
				2010–14	2015	2016	2017	2018	2019–21
							Projection
Growth (Percent)
	LIDCs			5.4	4.0	4.1	4.5	5.0	5.3
		Commodity Exporters		5.5	3.2	3.2	3.8	4.1	4.7
			Fuel Exporters	5.1	2.2	-4.6	-0.7	2.6	3.9
			Non-Fuel Exporters	5.8	4.0	3.7	4.1	4.6	4.7
		Diversified Exporters		5.3	5.7	4.7	5.0	5.3	5.6
Inflation (Percent)
	LIDCs			5.7	5.3	5.2	5.4	5.3	5.0
		Commodity Exporters		6.0	5.0	5.3	6.3	8.2	6.1
			Fuel Exporters	5.6	7.9	4.3	8.7	8.4	6.9
			Non-Fuel Exporters	6.1	3.4	6.1	6.3	8.2	6.1
		Diversified Exporters		5.7	5.3	5.2	4.5	5.0	5.0
Fiscal Balance (Percent of GDP)
	LIDCs			-2.5	-3.1	-4.5	-3.7	-3.6	-2.8
		Commodity Exporters		-1.8	-3.4	-4.8	-3.9	-3.3	-2.8
			Fuel Exporters	-1.0	-7.0	-13.2	-0.1	-2.8	-1.2
			Non-Fuel Exporters	-1.9	-3.2	-4.4	-4.4	-3.3	-2.9
		Diversified Exporters		-2.9	-2.8	-4.1	-3.7	-3.8	-2.9

Sources: World Economic Outlook and IMF staff estimates.

39. Inflation patterns are expected to show some improvement in 2018, albeit with the median inflation rate set to ease only marginally from 5.4 percent in 2017 to 5.3 percent in 2018. PPP GDP-weighted average inflation—which has been systematically higher than the median rate in recent years, reflecting elevated inflation rates in several large commodity exporters (including Nigeria, Sudan, and DRC)—is expected to decline from 10.3 percent to 8.8 percent, helped by the easing of price pressures in Ghana, Kenya, and Mozambique. Inflation would remain in double-digits in 10 countries (down from 13 in 2017)—including Ghana, Nigeria, and Sudan—and above 20 percent in 4 cases (unchanged from 2017).

40. Fiscal balances are expected to improve somewhat in commodity exporters in 2018, but show little change among diversified exporters. A pick-up in both growth and export prices should contribute to improved fiscal positions in fuel exporters, with policy tightening set to yield smaller deficits in NFC exporters (with more marked improvements in smaller countries). Fiscal deficits in diversified exporters are expected to remain largely unchanged from 2016–17 levels—still about one percent of GDP above 2010–14 levels. The modest projected improvement in fiscal positions would slow, but not halt, the increase in public debt levels in many countries; the (weighted) average public debt-GDP ratio is forecast to rise by a half a percentage point, to 41 percent of GDP. The aggregate picture outlined here is not a “passive policy scenario”, but rather envisages fiscal consolidation in many LIDCs, particularly commodity exporters; chapter 2 looks more closely at the assumptions underpinning the fiscal and debt projections.

41. Current account positions are expected to weaken among commodity exporters, as stronger domestic demand leads to some reversal of the import compression of recent years. Staff projections also envisage some widening of current account deficits in diversified exporters, facilitated by higher external borrowing. Import coverage ratios would strengthen somewhat on average; the number of countries with import coverage ratios of less than 3 months of goods and services would decline from 21 countries in 2017 to 19.

42. Key external risks to the outlook for LIDCs include reversal of the recovery in commodity prices and an unexpectedly sharp tightening of global financial conditions; a stronger pick-up of commodity prices would favor stressed commodity exporters. The main domestic risks are fiscal slippage (relative to current targets), internal conflict (including spillovers from neighbors), weather shocks, and rising financial sector stress. The Growth Decline Vulnerability Indicator (GDVI)—an index constructed by staff to assess vulnerability to a sharp decline in growth stemming from external shocks—shows some improvement as of 2018, most notably in commodity exporters (Figure 23).¹⁵

43. Fiscal slippages were common among LIDCs in 2016 and 2017, most noticeably among commodity exporters. The median fiscal deficit exceeded one-year forward projections by 1.2 percent annually in NFC exporters, with slippage typically larger in smaller countries;¹⁶ deviations were more modest among diversified exporters, averaging 0.35 percent of GDP. A repeat of such slippages in 2018 could provide some short-term stimulus to output, at the cost of rising debt levels that would be more difficult to finance—with output costs (from fiscal stress and/or retrenchment) likely pushed to 2019 or 2020.

44. The growth projections may also contain some upward bias, at least for countries undertaking fiscal adjustment (see chapter 2 below). The track record of projections in 2016–17 provides some support for this position, with shortfalls concentrated in 2016. For NFC exporters, the median growth rate fell short of one-year forward projections by an average of 0.75 percentage points in 2016–17, with larger shortfalls in smaller countries; the corresponding average shortfall was 0.5 percent for diversified exporters.¹⁷

E. Conclusions and Policy Messages

45. The declines in commodity prices from mid-2014 had substantial effects on economic performance in LIDCs—effects that continue to be seen in differentiated economic performance in 2017–18. Countries dependent on commodity exports are growing at a significantly slower pace than in 2010–14, even excluding the harder-hit oil exporters; countries less reliant on commodity exports are growing at some 6 percent per annum—a pace maintained since 2010—albeit with weaker performance in smaller countries. But there is significant variation in country experiences within these group, with policies and institutional capacity influencing performance.

46. The combination of sluggish per capita income growth and falling investment levels, observed across a sizeable number of LIDCs, represents a significant set-back in the first years of pursuit of the Sustainable Development Goals (SDGs). Declining aggregate levels of remittances and aid inflows to LIDCs are particularly troubling developments, if sustained. Falling aid flows to the world’s poorest countries raises questions about commitments to “leave no-one behind.” Many LIDCs, notably fragile states, are falling behind—even as countries such as Bangladesh, Ethiopia, and Cote d’Ivoire continue to record strong and sustained income growth.

47. The key macroeconomic policy challenges for all LIDCs are to achieve sustainable fiscal positions, devote increasing resources to development spending (including infrastructure), and safeguard financial sector stability. The gravity of these challenges varies markedly across countries: the policy actions needed are familiar, and include boosting domestic revenue mobilization to create fiscal space, enhancing the efficiency of public spending, and maintaining effective oversight of financial systems—issues at the heart of the IMF’s policy dialogue with LIDCs.

48. Reducing high inflation levels and rebuilding foreign exchange buffers are priorities for some LIDCs: double-digit inflation persists in one-fifth of countries, while reserve coverage is low in about one-quarter of cases. Monetary tightening, supported by fiscal adjustment, is called for in such cases—with Fund-supported arrangements a potentially valuable source of support.

49. The extended adverse fall-out from the commodity price declines is a reminder of some wider policy messages for LIDCs (IMF 2017a): i) the importance of economic diversification for growth and resilience over the medium-term; and ii) the need to build strong reserve buffers and maintain borrowing space in “good times” in countries where exports remain highly concentrated.

Chapter 2: Rising Debt Vulnerabilities

A. Introduction

50. This chapter examines the evolution of public debt levels in LIDCs in recent years and assesses its implications. A broad-based increase in debt levels across LIDCs has attracted attention from many observers, who have raised concerns about the threat to fiscal sustainability, the diversion of scarce budgetary resources to meet debt service obligations, and the heightened risks associated with changes in borrowing structure.¹⁸

51. The analysis builds on the findings of a 2015 IMF-World Bank paper on the same topic (IMF-WB, 2015).¹⁹ The 2015 study found that debt ratios and vulnerabilities had declined during 2007–14, helped by HIPC/MDRI debt relief and robust growth, while flagging the emerging risks to debt positions from the sharp declines in commodity prices and from expanded commercial borrowing by frontier economies and some commodity exporters. The 2015 paper also pointed to an ongoing shift in the composition of external public debt away from traditional creditors towards commercial and non-Paris Club bilateral lenders – a trend that has gathered pace in the intervening years.

52. The chapter’s main findings are as follows:

Debt and debt service levels have risen across a wide range of LIDCs since end-2013. The key drivers of rising debt levels have been adverse exogenous shocks (falling commodity prices, civil conflict) and looser fiscal policies, with fraud/corruption playing a key role in a handful of cases. Larger fiscal deficits are fully explained by the increase in public investment in about 30 percent of cases, and partially explained in one quarter of cases (chapter 1)—with investment falling in the remainder.
Rising debt levels have resulted in increased debt vulnerabilities in many countries. While debt vulnerabilities remain contained in the majority of LIDCs, some 40 percent of LIDCs now face significant debt-related challenges, up from 21 percent in 2013. Ten of the thirteen countries that have moved into the “high risk” or “in debt distress” categories are in sub-Saharan Africa. Debt levels are projected to fall gradually over the coming years, but, in many cases, this is predicated on significant fiscal consolidation and a solid pick-up in growth.
LIDC debt is increasingly held by non-Paris Club official bilateral creditors, by foreign commercial creditors, and by domestic creditors (mainly banks). Enhanced reliance on commercially-priced debt has translated into higher debt servicing costs and risks, while new challenges have arisen for potential debt resolutions. The deepening of domestic financial markets has allowed governments to more actively tap into domestic savings.
There are important gaps in the available data on PPG in LIDCs. The coverage of public sector entities is typically too narrow, while the coverage of guarantees is limited, if not omitted— contributing to unfavorable debt surprises as public liabilities accumulate outside the “perimeter” of measured debt. There are also important gaps in information on the terms and conditions of loans and the extent of collateralization—gaps usually revealed only belatedly when countries experience debt distress and begin to default.

53. Key policy messages include:

Countries in high risk of debt distress face a tight fiscal envelope, with limited borrowing space. Increasing public savings over time is needed to create space for raising public investment. In the meantime, investment projects need careful assessment and prioritization if the limited borrowing space is to be used to effectively support growth.
Countries in low/moderate risk of debt distress have some room to scale up public investment via borrowing—but the room for maneuver is narrowing in many cases, again underscoring the importance of using new borrowings to finance only investment projects with credibly high economic rates of return. Where deficits have increased, in most cases this reflects at least in part a decline in public savings—raising debt levels without expanding the capacity to meet debt service obligations.
The increasing importance of non-Paris Club bilateral lenders and plurilateral creditors, including in difficult debt cases, underscores the importance of these creditors exercising due diligence in their lending decisions and in developing contingency plans for engaging in debt restructuring deals. Lenders need to consider the potential benefits of subscribing to principles for sustainable lending and borrowing, such as those being championed by the G-20; and working with existing international fora for creditor information sharing and coordination.
Greater transparency on the scale and terms of lending is needed to avoid further debt surprises and support cooperative solutions to debt workout situations. Lenders can play an important role in this regard, including by sharing information with international financial institutions. More effort is needed to strengthen the compilation and monitoring of public debt and guarantees in LIDCs; there are well-established technical assistance vehicles to deliver this assistance, but a coordinated push from IMF and World Bank staff may be needed to accelerate progress.

B. Stylized Facts on Debt Accumulation in Recent Years

54. This section examines the evolution of public debt levels in recent years, drawing on the data used by IMF country teams in country-level macroeconomic projections. The coverage of public debt varies markedly across countries in terms of institutional coverage of the public sector (central government, state/local governments, extrabudgetary operations, state-owned enterprises) and the inclusion of government guarantees—with coverage typically being narrow in most LIDCs (Appendix 2). The scale and implications of inadequate coverage of public sector liabilities for assessment of public debt sustainability are discussed in section E below.

Evolution of Debt²⁰

55. In the past four years, public debt has risen substantially across a range of LIDCs, having fallen steadily for many years on the back of strong growth and debt relief.²¹

From the early 2000s through end-2013, the median public debt-GDP ratio for LIDCs declined from a high of 94 percent of GDP in 2001 to some 33 percent of GDP during 2010–13 (Figures 24–26).
From end-2013 to end-2017, the median public debt-GDP ratio increased by 13½ percentage points in LIDCs, to reach 47 percent of GDP. The debt-GDP ratio increased by at least 10 percentage points in 29 countries; increased by less than 10 percentage points in 19 countries; and declined/remained unchanged in 8 countries.²²
Among regions, LIDCs in sub-Saharan Africa have recorded the fastest rise in debt levels.
Median debt levels have risen markedly, from already elevated levels, in the Middle East/Central Asia.
Debt levels increased more modestly among Asia/Pacific LIDCs, and remain substantially lower than in other regions.
Debt has remained broadly unchanged, at elevated levels, in the handful of LIDCs in other regions.

56. The debt buildup has been broad-based but slightly larger among commodity exporters (Figure 27). Among the 24 commodity exporters, debt rose by a median 15 percent of GDP, compared to 13¾ percent in diversified exporters; the 2014 commodity price shock and its impact on domestic fiscal positions contributed to this difference. Debt levels increased by similar magnitudes in frontier markets and fragile states, with somewhat smaller debt accumulation in other countries.

57. Interest expense as a share of budgetary revenue has risen broadly in line with debt levels (Figures 28 and 29). Median interest outlays rose to 5.3 percent of revenues in 2017, up 2 percentage points from 2013—which is above the advanced economy median ratio of 4.1 percent but below the 8.3 percent ratio observed in emerging markets. It is noteworthy that the sharpest increases in interest expense have occurred in frontier markets (e.g., Ghana) where external borrowing on commercial terms has contributed to higher interest outlays, while elevated inflation (and hence domestic interest rates) have played a key role in some cases. In some commodity exporters, particularly fuel exporters such as Chad and Nigeria, a sharp decline in resource-related revenues has also pushed up the ratio of interest outlays to budgetary revenues.

58. Gross fiscal and external financing needs have also grown in tandem with rising debt (Figure 30). Fiscal financing needs approached 9 percent of GDP in 2016, the highest level in at least a decade, in part reflecting the increased role of shorter-term domestic debt (see Section D below). External financing needs began to deteriorate with the collapse in commodity prices and widening current account deficits, but improved slightly in 2016.

Drivers of Debt

59. A decomposition of debt dynamics across LIDCs highlights the role of fiscal policies and of the commodity price shock in driving up debt:

The growth-interest rate dynamics were generally benign, with the favorable impact of GDP growth more than outweighing the adverse impacts of interest obligations (thanks in part to concessional borrowing terms).
In diversified exporters, sustained large fiscal primary deficits have been the main driver of debt increases across the years, with residuals featuring significantly (Figure 31). Residuals mainly capture fiscal operations not included in primary deficits.
In commodity exporters, the commodity price shock had a major impact on debt dynamics, contributing to sluggish growth and sharply higher fiscal deficits in 2015, with gradual policy adjustment thereafter. The commodity price shock also contributed to real exchange rate depreciation that further raised the debt burden (Figure 32).

60. An analysis of key debt drivers in the 29 countries where the debt-GDP ratio has risen by at least 10 percent of GDP provides more granular insights:

Four countries were affected by internal conflict (Yemen and Burundi) or epidemics (Liberia, Sierra Leone); in the aftermath, the debt increased by 35 percent of GDP in Yemen and an average of 22 percent of GDP in the two Ebola-hit countries.
In three cases, fraud/corruption made a key contribution to the debt buildup. In Mozambique, unreported debt, and the depreciation that ensued when it was disclosed, were key drivers of debt accumulation; in Moldova, fraud in the banking system led to a large government bailout; and in The Gambia, serious governance issues and embezzlement of funds including of SOEs contributed to the surge in public debt.
Six commodity exporters (Chad, Republic of Congo, Niger, Nigeria, Papua New Guinea, and Zambia), half of them oil exporters, were badly hit by the sustained decline in commodity prices.²³ Dollar GDP fell relative to 2013 levels (by a median 16 percent of GDP), as did fiscal revenue (by a median 4½ percent of GDP). With generally sluggish fiscal adjustment, the median debt-GDP ratio for these countries is now 23 percent of GDP above 2013 levels.
In the remaining 16 countries (all but one diversified exporters), larger (on and off-budget) fiscal deficits were a key contributor to debt accumulation. ²⁴ Larger deficits reflected weaker fiscal revenue in roughly half of these countries, due to a variety of factors including (i) shocks to growth (e.g., a liquidity crunch in Zimbabwe, delays in the start of natural resource production in Sao Tome and Principe) and (ii) weaknesses in revenue administration (e.g. Benin). Larger deficits also reflected (i) current spending overruns (e.g. transfers to SOEs and a rising civil service wage bill in Ghana, elevated spending on goods and services in Kyrgyz Republic); and (ii) higher capital spending (e.g. large hydropower investment in Bhutan, large transportation projects in Djibouti and Kenya, and expansion of the national airline in Rwanda).

61. Higher levels of public investment contributed to the build-up of debt levels in many countries, but were a key driver in only a minority of cases. Fiscal balances deteriorated in 40 LIDCs between 2010–14 and 2017. ²⁵ Only in 30 percent of cases was the deterioration fully matched by higher investment, while public investment levels declined in almost half of the cases (see chapter 1, paragraphs 18–22 for a fuller discussion).

62. The increase in debt over recent years has exceeded projections.

WEO projections of late 2013 envisaged little change in LIDC debt ratios through end-2017, compared with a realized median increase of 14 percent of GDP. The Fall 2015 WEO projections (predicated on much lower levels of commodity prices) also underpredicted end-2017 median debt, albeit by a much smaller 4 percent of GDP.
The source of the projection errors during this period are broadly similar to the drivers of debt accumulation discussed above.²⁶ Looking at the 28 countries where 2017 debt levels exceeded 2013 projections by at least 10 percentage points of GDP), the commodity price decline and various non-economic shocks (conflict, epidemics, instances of fraud/corruption) were important causes of the “debt surprise” in 13 cases. ²⁷ Weaker-than-projected fiscal policies, including extra-budgetary operations, were key factors behind the debt surprise in 15 countries.

63. Fund financial arrangements have helped contain debt accumulation, but there have been significant slippages vis-à-vis debt objectives in a sizeable number of programs (Box 5). Fund programs are associated with stronger fiscal performance (and hence less debt accumulation), as discussed in chapter 1, but debt objectives were missed by non-trivial margins in over one-third of recent arrangements with LIDCs.

Box 5.

Debt Developments Under Fund-Supported Programs ^1/

A survey of Fund financial arrangements since 2010 indicates that debt accumulation exceeded program targets in a considerable number of cases: the key explanatory factors included adverse external shocks and fiscal policy deviations (both budgetary and extra-budgetary).

Public debt developments in 23 LIDCs engaged with the Fund through a financial arrangement during 2010–16 were examined (27 programs in total). ^2/ These programs typically aimed to contain debt through a combination of fiscal restraint and growth-enhancing structural reforms. Specifically, 16 programs envisaged a reduction in the public debt-GDP ratio over the course of program, with a median decline of 2.3 percent of GDP per year, while 11 programs envisaged debt burdens increasing at a median rate of 1.5 percent per year. Some of these 11 programs envisaged substantial investment spending, e.g. for reconstruction in Haiti.
Debt-burden targets were missed by at least 3 percent of GDP in 10 of the 27 programs. ^4/ A review of staff documents for these programs point to shocks as key factors in contributing to unexpected debt accumulation in 8 cases; internal conflict, epidemics, severe drought, and marked deterioration of the terms of trade contributed importantly to target misses. In 5 cases, weak fiscal policies—fiscal policy slippages, materialization of contingent liabilities, and elevated SOE borrowings—played a key role. The largest misses came in programs with Yemen (2014–16) and the Central African Republic (2012–14), reflecting the impact of armed conflict; and the Gambia (2012–15), reflecting governance weaknesses in SOEs and fiscal slippages.
Debt accumulation was lower during program periods than outside program periods. In programs that envisaged a falling debt burden, debt increased at a median rate of 1.1 percent of GDP during program years, compared with a median increase of 1.7 percent of GDP during non-program years in the same countries. Where programs envisaged an increase in the debt burden, debt also grew more slowly during program years (by 1.8 percent of GDP per year) than in non-program years (3.3 percent of GDP per year) in the same countries. ^4/ When PSI-supported arrangements are included, the difference between program and non-program years narrows, but the qualitative findings remain unchanged.

^1/ Prepared by Samuel LaRussa (SPR).^2/ ECFs and SCFs approved after 1/1/2010 and concluded before 12/31/2016. Includes precautionary and blend arrangements. Excludes 3 programs for countries expected to receive debt relief. Years were classified as program years when a country had a program for more than six months, and as non-program years otherwise.^3/ Deviations are calculated as the median difference across programs between observed and programmed debt accumulation.^4/ Of the 16 LIDCs with programs that projected a decrease in debt-to-GDP, 13 experienced at least one non-program year between 2010 and 2016. Of the 9 LIDCs with programs that projected an increase in debt-to-GDP, 7 experienced at least one non-program year.

C. Evolution of Debt Vulnerabilities and Risks to the Outlook

64. We turn in this section to examine the evolution of debt vulnerabilities in LIDCs, drawing on the outputs of staff debt sustainability assessments (DSAs). DSA analyses assess the current and projected evolution of debt levels in present value terms, thereby making due allowance for the concessionality of a significant (but declining) share of external debt—the burden of which is significantly less than commercial debts with a similar face value.

Evolution of Debt Vulnerabilities

65. The rising debt levels discussed in the preceding subsection have been reflected in increased debt vulnerabilities in many LIDCs and in a series of DSA rating downgrades (Figure 33). Two-fifths of LIDCs now face significant debt challenges; three-fifths remain at low or moderate risk of debt distress, although safety margins have been eroded in many cases.

66. Eight countries (14 percent of LIDCs for which DSAs are available) are now in debt distress.²⁸^, ²⁹ There were 4 countries in debt distress (Eritrea, Somalia, Sudan, and Zimbabwe) in 2013. By end-2017, Chad and South Sudan had been rated as in debt distress, while the Republic of Congo and Mozambique were in default to creditors and are classified here as in debt distress.

67. Sixteen countries (29 percent of LIDCs with DSAs) are assessed to be facing high risk of debt distress. Since 2013, nine countries have shifted from moderate to high risk of debt distress (Table 3) – the Central African Republic (2014); Cameroon, Mauritania, and Ghana (2015); Yemen (2016); The Gambia, Lao P.D.R., and Zambia (2017); and Ethiopia (2018).³⁰ Only in two were larger fiscal deficits linked to higher public investment, either in full (Cameroon) or in part (Zambia).

Table 3.

DSA Downgrades in 2014–17

Note: D: distress, H: high, M: moderate, L: low; DM: developing market. Blank indicates there was no DSA in that year. Rating in parenthesis indicate rating in the last DSA available before 2013. Ethiopia was assessed as high risk in its latest DSA, which was approved in Jan., 2018. Source: 2013–17 DSAs.

Table 3.

DSA Downgrades in 2014–17

Country	2013	2014	2015	2016	2017	Export	Development	HIPC
Chad	[H]	H	H	H	D	Fuel	Fragile	HIPC
South Sudan		M			D	Fuel	Fragile	non-HIPC
Central African Republic	[M]	H	H	H	H	Diamond	Fragile	HIPC
Mauritania	[M]		H	H	H	Nonfuel	DM	HIPC
Ghana	M	M	H	H	H	Diversified	Frontier	HIPC
Haiti	[H]	H	M	H		Diversified	Fragile	HIPC
Yemen		M		H		Fuel	Fragile	non-HIPC
Gambia, The	M		M		H	Diversified	DM	HIPC
Lao P.D.R.	M		M		H	Diversified	DM	non-HIPC
Cameroon	L	M	H		H	Diversified	DM	HIPC
Zambia	L		M		H	Copper	Frontier	HIPC
Congo	L	L	M			Fuel	Fragile	HIPC
Ethiopia	L	L	M	M	H	Diversified	DM	HIPC
Liberia	L	L	M	M		Nonfuel	Fragile	HIPC
Madagascar	[L]	L	M	M	M	Diversified	Fragile	HIPC
Timor-Leste	L	L		M		Fuel	Fragile	non-HIPC
Benin	[L]		L		M	Diversified	DM	HIPC

Table 3.

DSA Downgrades in 2014–17

Country	2013	2014	2015	2016	2017	Export	Development	HIPC
Chad	[H]	H	H	H	D	Fuel	Fragile	HIPC
South Sudan		M			D	Fuel	Fragile	non-HIPC
Central African Republic	[M]	H	H	H	H	Diamond	Fragile	HIPC
Mauritania	[M]		H	H	H	Nonfuel	DM	HIPC
Ghana	M	M	H	H	H	Diversified	Frontier	HIPC
Haiti	[H]	H	M	H		Diversified	Fragile	HIPC
Yemen		M		H		Fuel	Fragile	non-HIPC
Gambia, The	M		M		H	Diversified	DM	HIPC
Lao P.D.R.	M		M		H	Diversified	DM	non-HIPC
Cameroon	L	M	H		H	Diversified	DM	HIPC
Zambia	L		M		H	Copper	Frontier	HIPC
Congo	L	L	M			Fuel	Fragile	HIPC
Ethiopia	L	L	M	M	H	Diversified	DM	HIPC
Liberia	L	L	M	M		Nonfuel	Fragile	HIPC
Madagascar	[L]	L	M	M	M	Diversified	Fragile	HIPC
Timor-Leste	L	L		M		Fuel	Fragile	non-HIPC
Benin	[L]		L		M	Diversified	DM	HIPC

68. Some 22 countries (39 percent of LIDCs with DSAs) are assessed to be at moderate risk of debt distress, including 5 countries rated at low risk and 2 countries rated at high risk in 2013.

The median increase (over 2013–17) in public debt levels for countries that have remained at moderate risk of debt distress throughout the period is 8 percent.
For these countries, the “distance” of current debt solvency indicators in the baseline scenario from the threshold levels associated with high risk of debt distress has narrowed in a majority of cases, and in a preponderance of cases regarding liquidity indicators (see Figures 34 and 35).³¹ Further upward drift in projected debt indicators over time (relative to the current baseline) would indicate an increased likelihood of downgrades to “high risk” in the period ahead.
The shift of five countries from low to moderate risk of debt distress since 2013 reflects a mix of factors, including lower oil prices (Timor-Leste) and the Ebola outbreak (Liberia). Debt accumulation was linked in part to higher public investment levels in Benin and Madagascar.

69. Eleven LIDCs (20 percent of LIDCs with ratings) are assessed to be at low risk of debt distress, all but one of which were similarly rated in 2013. Almost all are diversified exporters; a more than proportional share lies in Asia. They split into two groups:

Debt levels have remained broadly unchanged in four countries (Bangladesh, Cambodia, Myanmar, and Nepal), with fiscal deficits close to debt-stabilizing levels and distances from “high risk” thresholds having changed little since 2013.
Debt levels have risen significantly in the other seven countries, often reflecting a renewed investment push financed through increased commercial borrowing, including from domestic markets (as in Kenya and Uganda). As a corollary, the safety margins (distances of debt burden indicators from threshold levels that flag elevated risk) have narrowed, but not sufficiently to create serious stresses under adverse shock scenarios.

70. Most of the countries that have moved into high risk of debt distress or into debt distress since 2013 are in sub-Saharan Africa: specifically, 10 of these 13 countries are in SSA, consistent with the patterns of debt accumulation across regions discussed earlier. Conflict and political turmoil contributed significantly to the deteriorating debt positions in 4 of the 13 countries (Central African Republic, The Gambia, South Sudan, and Yemen). Box 6 takes a closer look at the factors that pushed some of these countries into debt difficulties.

71. The likelihood of a country facing a challenging debt situation is similar for LIDCs that benefited from HIPC debt relief and for those that did not. Fourteen of the 34 LIDCs that received HIPC/MDRI debt relief are now in debt distress (Chad, Mozambique, Republic of Congo) or at high risk of debt distress (Afghanistan, Burundi, Cameroon, Central African Republic, Ethiopia, Ghana, The Gambia, Haiti, Mauritania, Sao Tome and Principe, and Zambia). The ratio of stressed countries to all post-HIPC countries (two-fifths) is similar to that for LIDCs as a whole.

Box 6.

Selected Recent Debt Difficulty Cases ^1/

The commodity price shock, delayed policy response, and lack of control over SOE spending are key themes behind the batch of recent new cases of debt difficulties. This box explores the factors that contributed to debt difficulties in three of the four countries that have recently fallen into debt distress (Chad, Republic of Congo, Mozambique), and another country that came close to it (The Gambia). ^2/

Chad: Despite a dramatic fiscal adjustment in 2015–16 following the fall in oil prices, the considerable contraction in oil revenue together with the burden of external debt service led to an unsustainable debt position. Public debt increased significantly in 2013–14 following two non-concessional advance oil sale operations to cover budget shortfalls as revenues collapsed following a decline in oil volumes, and to finance the purchase of Chevron’s shares in Chad’s largest oil consortium. A rescheduling agreement in 2015 consolidated the two advance sale operations, but restructuring fees led to an increase in the present value of debt. Even with HIPC and MDRI debt relief in 2015 and debt rescheduling, Chad has been unable to service its debt, with external payment arrears accumulating in 2016–17. Domestic debt has also increased sharply, from 9 percent of GDP in 2013 to 24 percent in 2016 due to statutory advances from BEAC (the regional central bank) and issuance of domestic debt on the CEMAC regional market. Chad has restructured its advances from BEAC and some official external debt, and discussions are underway to restructure its commercial debt.

Republic of Congo: The fuel price collapse, delayed policy response, and real depreciation were the main forces behind the public debt increase. Debt had declined to just over 20 percent of GDP in 2010 when Congo reached the HIPC Completion Point, and 34 percent in 2013; since then it has shot up to more than 115 percent of GDP, with private and non-Paris Club bilateral creditors holding the lion’s share of total debt. Congo was highly vulnerable to oil price shocks, with oil generating two-thirds of fiscal revenue; moreover, on the eve of the oil price decline, it undertook a massive pro-cyclical scaling up of public investment and public-sector wage increase. After the oil price had dropped, Congo initially maintained spending by drawing on the country’s assets at the central bank and abroad, statutory advances from regional central bank, oil-backed loans from oil trading companies and accumulation of domestic arrears. Depreciation of the euro against the U.S. dollar, particularly in 2015, and an economic contraction added to debt ratios. Congo is in arrears to official bilateral, multilateral and external private creditors, with whom it is seeking to engage to restructure its debt.

The Gambia: Debt increased primarily due to fiscal slippages and shocks largely stemming from serious governance problems, including unbudgeted support to SOEs and embezzlement of wider state revenues by the previous administration. Weak growth associated with poor harvests and, in 2017, the negative impact of political turmoil on tourism also contributed. Borrowing was mostly through costly short-term treasury bills, with domestic debt rising from 33 percent of GDP at end-2012 to 62 percent of GDP at end-2016. Interest payments on domestic debt consumed 42 percent of government revenue in 2016. Commercial banks hold about three-quarters of T-bills (around one-third of assets) and additional SOE debt. While their willingness to take on sovereign debt acts as an absorber to fiscal shocks, their high exposure to the sovereign represents a potential source of financial stability risk.

Mozambique: The jump in total public debt from 53 percent of GDP in 2013 to 128 percent at end-2016 reflects a delayed fiscal policy response to weaker commodity prices, poor expenditure control related to SOEs, and real exchange rate depreciation in 2016. Domestic debt of SOEs, amounting to 10 percent of GDP has also been included in the coverage of total public debt for end-2016. Depreciation from 2013 to 2016 added 51 percent of GDP to public debt; primary deficits 21 percent (as Mozambique failed to cut spending to offset a 5.3 percent of GDP revenue decline between 2013 and 2016), and initially undisclosed external loans to 2 SOEs a further 11 percent. The freeze of aid disbursement by donors after the SOE loans were disclosed added to fiscal and depreciation pressures; and the debt burden was exacerbated by a growth slowdown (from 7.1 percent in 2010–14 to 5.2 percent in 2015–16). Mozambique is currently in arrears with six official creditors, on Eurobond coupons, and on the recently disclosed loan to SOEs, and is seeking to restructure its debts.

^1/ Prepared by Haimanot Teferra.^2/ A country is assessed to be in debt difficulty if it is classified as being in debt distress in its latest DSA or if it is in default on or has restructured (or announced its intention to restructure) its public debt.

Risks to the Outlook

72. To recap, some 40 percent of LIDCS are now at high risk of/in debt distress, while some 60 percent are assessed to be at low or moderate risk. Severe difficulties are concentrated in a minority of cases—a mix of new problem cases (such as Chad, Mozambique, and Republic of Congo), conflict-affected countries (such as C.A.R. and Yemen), and several long-standing high debt/arrears cases (such as Sudan and Zimbabwe).

73. The assessment of risks is based on current staff projections for individual LIDCs, which collectively envisage that debt burdens will reverse their upward trend and begin to ease.³² For LIDCs as a group, the median debt level is projected to decline by 2 percent of GDP over the next 5 years—predicated on stronger growth (up by 0.7 percentage points), improved fiscal balances (up by 1 percent), and stable real exchange rates. Debt-GDP ratios are predicted to peak in about half of all LIDCs in 2017 or 2018.

74. There are downside risks embedded in these forecasts that warrant mention, aside from the risks to the global economic outlook (discussed in IMF (2018)). Comparison of the drivers of debt accumulation during 2015–17 (actual) with 2018–20 (projections) highlights the assumed differences in economic performance between the two periods (Figure 36). For commodity exporters, debt levels are projected to decline modestly, based on sizeable improvements in fiscal balances and a reversal of real exchange rate depreciations. For diversified exporters, debt levels are set to stabilize, based on marked improvements in fiscal balances, together with some pick-up in growth (from already elevated levels). The broad-based increase in fiscal deficits in recent years, even in fast-growing economies (chapter 1), underscores the fact that staff projections (and hence sustainability assessments) are predicated on a significant shift in fiscal policy compared to the recent past.

75. Narrowing the focus to countries at moderate or high risk of distress, there are indications of downside risks to the growth projections:

Staff projections for 2018–20 envisage improved fiscal balances in more than two-thirds of LIDCs at moderate or high risk of debt distress, while average growth is set to exceed the levels achieved in 2010–14. The growth pick-up is larger in the 11 countries undertaking large fiscal adjustment (2 percent of GDP or more), where the median growth rate is to rise 2 percentage points above the average over the last decade. ³³ Given plausible multiplier effects from fiscal consolidation, this surge in growth seems to be at risk, absent a sizable boost to export prices.
Public sector capital stocks in these LIDCs are expected to grow more slowly over the next five years relative to the average over the last decade.³⁴ As a corollary, capital accumulation will contribute less to growth—implying that the surge in total factor productivity, labor, or private investment will need to be very large by past standards if the growth pick-up is to be realized.

76. A look at specific country cases where debt burdens are projected to decline substantially suggests that outturns may disappoint in these cases. Current projections envisage that 9 LIDCs will reduce debt-GDP ratios by at least 10 percentage points during 2016–21 without recourse to debt relief or restructuring. The historical experience is not encouraging in this regard:³⁵

Since 2000, fewer than 20 percent of the cases where staff projections envisaged a decline in the public debt-GDP ratio of 10 percent or more in LIDCs without debt relief or restructuring were eventually realized.
Large debt reductions where debt relief or restructuring play no role are rare: the entire WEO dataset contains only ten such cases for LIDCs. The seven cases since 2000 where such a reduction was achieved reflected a mix of favorable circumstances and strong policies (Box 7).³⁶ Key factors included favorable prices for export commodities, negative real interest rates on debt, and sustained fiscal tightening: one-off factors (such as financial repression in Myanmar, privatization receipts in Djibouti) also played a role.

77. In conclusion, current staff assessments of debt sustainability, based on staff projections of the medium-term outlook for LIDCs, are subject to some important downside risks. A key takeaway is the overarching importance of achieving higher growth and/or targeted fiscal consolidation in countries where debt has reached, or is nearing, the debt risk thresholds, thereby containing the increase in debt burdens.

Box 7.

Debt Reduction in LIDCs Without Debt Relief or Restructuring ^1/ We examine here the seven cases where substantial and sustained debt reduction was achieved without debt relief/restructuring since 2000.

Papua New Guinea, Uzbekistan, Solomon Islands: The decline in debt burdens was facilitated by rising prices of export commodities, backed by fiscal policies that saved a good part of the associated increase in budgetary resource revenues.
Nepal: Fiscal consolidation made an important contribution to debt reduction, helped by an increase in tax revenue (underpinned by a surge in relatively easy to tax imports and some revenue administration measures) and expenditure restraint that partly reflected limited capacity to execute investment spending.
Djibouti, Lao PDR: High investment levels produced robust GDP growth that lowered debt ratios. In Lao, major hydroelectric works proceeded with a large private investment component; in Djibouti, privatization receipts contributed to debt reduction even as large public investment weighed on the fiscal accounts.

In all cases, negative real interest rates helped lower debt—exceptionally so in the case of Myanmar, where very high inflation in an environment of financial repression eroded the burden of domestic public debt—while the accounting contribution of growth to debt reduction exceeded 10 percentage points of GDP in all countries other than Papua New Guinea.

Debt Reduction Events Without Restructuring

Sources: World Economic Oultook and Fund staff estimates.

^1/Data on fiscal revenues, expenditures, and primary balances unavailable in WEO dataset.

^{^2/}Valuation effects on stocks. Where unavailable in WEO, shares of FX debt estimated based on data in Article IV staff reports.

Debt Reduction Events Without Restructuring

Country				Myanmar	Papua New Guinea	Lao, PDR	Uzbekistan	Nepal	Solomon Islands	Djibouti
Year of peak debt				2001	2001	2002	2002	2003	2004	2009
Year of trough				2008	2008	2008	2013	2011	2016	2016
				(in percent of GDP)
Cumulative reduction				-163.0	-25.3	-45.5	-51.4	-28.8	-62.8	-27.7
	Est. contribution from:
		Primary deficits		18.7	-31.9	14.4	-41.9	-1.1	-34.1	57.9
		Interest-growth differential		-233.5	-10.1	-69.8	-73.2	-35.8	-43.8	-23.3
			Real interest rate	-154.2	-2.7	-37.7	-58.0	-21.8	-19.7	-7.0
			Real growth	-79.3	-7.4	-29.8	-15.2	-14.0	-24.1	-16.3
		Exchange rate ^2/		40.1	-7.3	-12.4	27.5	-1.7	-7.3	0.0
		Other factors		11.6	24.0	20.0	36.2	9.8	13.5	-62.2

Sources: World Economic Oultook and Fund staff estimates.

^1/Data on fiscal revenues, expenditures, and primary balances unavailable in WEO dataset.

^{^2/}Valuation effects on stocks. Where unavailable in WEO, shares of FX debt estimated based on data in Article IV staff reports.

Debt Reduction Events Without Restructuring

Country				Myanmar	Papua New Guinea	Lao, PDR	Uzbekistan	Nepal	Solomon Islands	Djibouti
Year of peak debt				2001	2001	2002	2002	2003	2004	2009
Year of trough				2008	2008	2008	2013	2011	2016	2016
				(in percent of GDP)
Cumulative reduction				-163.0	-25.3	-45.5	-51.4	-28.8	-62.8	-27.7
	Est. contribution from:
		Primary deficits		18.7	-31.9	14.4	-41.9	-1.1	-34.1	57.9
		Interest-growth differential		-233.5	-10.1	-69.8	-73.2	-35.8	-43.8	-23.3
			Real interest rate	-154.2	-2.7	-37.7	-58.0	-21.8	-19.7	-7.0
			Real growth	-79.3	-7.4	-29.8	-15.2	-14.0	-24.1	-16.3
		Exchange rate ^2/		40.1	-7.3	-12.4	27.5	-1.7	-7.3	0.0
		Other factors		11.6	24.0	20.0	36.2	9.8	13.5	-62.2

Sources: World Economic Oultook and Fund staff estimates.

^1/Data on fiscal revenues, expenditures, and primary balances unavailable in WEO dataset.

^{^2/}Valuation effects on stocks. Where unavailable in WEO, shares of FX debt estimated based on data in Article IV staff reports.

^1/ Prepared by Geoffrey Keim (SPR).

D. The Changing Composition of Public Debt and its Implications

78. LIDCs have obtained expanded access to credit from both non-traditional external creditors and from deeper domestic financial markets. The expansion of available borrowing opportunities has provided LIDCs more room to expand development-oriented spending and address infrastructure gaps. But long-term growth is enhanced only if borrowed funds are used productively, yielding a high economic rate of return that exceeds borrowing costs; as was noted above, higher budgetary borrowing levels have been associated with a drop in public investment in many LIDCs.

79. Many LIDCs have tapped into these new sources of credit, with the result that the composition of public debt in LIDCs has changed substantially. The trend towards increased borrowing from non-Paris Club (NPC) bilateral official creditors, commercial creditors, and domestic markets described in IMF-WB (2015) has gathered pace, while new regional creditors are playing a larger role in some countries (Table 4, left panel).

Traditional multilateral creditors have declined in importance as a source of credit—largely reflecting HIPC/MDRI debt relief—while “plurilateral” creditors have expanded lending activities in LIDCs. (See Appendix 3 for a listing of multilateral and plurilateral lenders.)
NPC bilateral creditors are now the dominant source of official bilateral credits to LIDCs, with the shrinking share of Paris Club creditors since 2013 reflecting limited extension of new credits. In a handful of countries, mainly commodity exporters, NPC official creditors now account for over half of the external debt stock.
External borrowing from commercial creditors has grown quickly from a low base, taking various forms, including Eurobonds and syndicated loans in frontier market economies. Commodity traders are among the “other” commercial creditors who have extended sizeable loans in some countries (Chad, Republic of Congo).
Domestic debt (defined on a currency basis) has increased significantly as a share of public debt. This debt is held mainly by the domestic financial system; by non-banks (including suppliers, where government arrears have been securitized) in some cases; and by foreign portfolio investors in some frontier market economies (Ghana, Nigeria, Vietnam).

80. The shift in the composition of debt has been particularly marked in several post-HIPC countries now at high risk of/in debt distress (Table 4, right panel). The rise in debt levels since 2013 has been financed by a mix of NPC bilateral creditors, commercial external creditors, and the domestic financial system. The modest contribution of traditional creditors (the multilateral development banks, Paris Club creditors) in part reflects creditor lending practices: traditional bilateral creditors limit their provision of loans to countries at high risk of/in debt distress, while MDBs, like the World Bank, are more likely to provide grant finance in such cases.

Table 4.

Total Public and Publicly Guaranteed Debt by Creditor, 2007–16

(in percent of GDP)

^{^1/}Based on 37 LIDCs where continous data is available from 2007 to 2016.

^{^1/}Countries included are: Cameroon, Chad, Congo, Ethiopia, Ghana, Mauritania, Mozambique, and Zambia.

Note: Figures are in simple averages, and may be overly influenced by the experience of countries with very high levels of debt. External and domestic debt defined based on currency denomination. Other commercial creditors include oil traders. Sources: 2017 Survey of IMF country desks; BIS-IMF-OECD-WB Joint External Debt Statistics; WB International Debt Statistics; IMF International Financial Statistics; and Various IMF Staff Reports.

81. The changes in the composition of creditors and debt instruments have increased the risks of encountering debt service difficulties:

Refinancing, interest rate, and capital flow reversal risks have risen. Higher borrowing at shorter maturities from NPC creditors and external commercial creditors has led to higher refinancing risk (the risk of not being able to replace maturing debt) and interest rate risk (the risk that the average interest rate on outstanding debt may rise), while the share of variable interest rate debt has also risen. Growing non-resident participation in domestic debt markets in some countries has made them more vulnerable to sudden capital outflows, which could trigger exchange rate depreciations and funding shortfalls.
Challenges for debt resolution have risen. Important official bilateral creditors are not part of a creditor coordination mechanism (such as the Paris Club), while Paris Club creditors typically hold only a very limited share of the debt. The diversity of private sector external creditors— bond-holders, bank loans, commodity traders—is likely to complicate debt workouts in some cases. Finally, higher reliance on domestic borrowing creates its own challenges when much of this debt is held by domestic banks (which may face solvency threats from a restructuring).
There is also an emerging risk of a potential “race to seniority” that may make debt resolution more difficult in some cases. First, collateralized debt has become significant in at least some LIDCs (Chad, Republic of Congo), creating an uneven hierarchy of creditors that can complicate debt resolution. Second, the status of new plurilateral lenders in the creditor hierarchy is unclear; many of these lenders may see their claims as senior to bilateral claims, although the acceptability of this position has not yet been fully tested.

E. Public Sector Debt Data Gaps and Lack of Transparency

82. The quality of debt sustainability analyses (DSAs), whether conducted by the IMF-World Bank or by national authorities, depends on the quality of the public debt data used in the analysis. To ensure a thorough analysis, debt data should cover public and publicly guaranteed (PPG) debt, where the public sector includes central government, state and local governments, social security funds, and public corporations).³⁷ Sustainability analysis also requires having a thorough understanding of the terms and conditions of debt, as well as taking account of contingent liabilities that may convert into public debt at a future point in time.

83. In practice, the quality of data available to Bank-Fund staff and Finance Ministry officials usually falls well short of these standards: three-quarters of LIDCs report only debts of t

Fund Program Engagement (current or planned)		19
	ECF Programs	10
	SMP	3
All fragile LIDCs		33

Fund Program Engagement (current or planned)		19
	ECF Programs	10
	SMP	3
All fragile LIDCs		33

All LIDCs ^1/
(in percent of GDP)
				2007	2013	2016
Total				47.1	39.8	52.7
External				36.5	28.7	37.3
	Multilateral, o/w			19.6	14.4	15.7
		WB, IDB, IMF, AfDB, AsDB		16.8	9.4	9.9
		Other		2.8	5.1	5.8
	Bilateral, o/w			14.2	11.4	16.0
		Paris Club		7.4	2.3	2.2
		Non-Paris Club, o/w		6.8	9.1	13.8
			China	0.3	2.5	4.2
	Commercial, o/w			2.7	2.9	5.6
		Bonds		0.5	0.6	1.4
		Commercial banks		1.1	0.8	1.1
		Other		1.1	1.5	3.2
Domestic, o/w				10.5	11.1	15.3
		Central bank claim (net)		-0.8	0.3	2.8
		Deposit money banks		0.6	2.6	6.2
		Non-banks		10.7	8.2	6.3
Memorandum:
Domestic, o/w by instrument
		Marketable		3.1	5.9	7.0
		Non-marketable		7.4	5.2	8.3

Post-HIPC LIDCs in Debt Difficuties ^1/
(in percent of GDP)
				2007	2013	2016
Total				44.7	41.2	72.1
External				32.8	30.3	53.4
	Multilateral, o/w			10.5	12.1	15.9
		WB, IDB, IMF, AfDB, AsDB		6.6	6.4	8.2
		Other		4.0	5.7	7.7
	Bilateral, o/w			17.3	12.9	22.2
		Paris Club		8.0	1.8	2.8
		Non-Paris Club, o/w		9.3	11.1	19.4
			China	0.2	6.2	11.6
	Commercial, o/w			4.9	5.2	15.3
		Bonds		1.0	1.6	4.2
		Commercial banks		0.9	1.4	2.9
		Other		2.9	2.3	8.2
Domestic, o/w				12.0	11.0	18.7
		Central bank claim (net)		-1.1	0.4	4.3
		Deposit money banks		0.0	2.7	6.9
		Non-banks		13.0	7.9	7.6
Memorandum:
Domestic, o/w by instrument
		Marketable		5.9	7.2	9.1
		Non-marketable		6.1	3.8	9.6

All LIDCs ^1/
(in percent of GDP)
				2007	2013	2016
Total				47.1	39.8	52.7
External				36.5	28.7	37.3
	Multilateral, o/w			19.6	14.4	15.7
		WB, IDB, IMF, AfDB, AsDB		16.8	9.4	9.9
		Other		2.8	5.1	5.8
	Bilateral, o/w			14.2	11.4	16.0
		Paris Club		7.4	2.3	2.2
		Non-Paris Club, o/w		6.8	9.1	13.8
			China	0.3	2.5	4.2
	Commercial, o/w			2.7	2.9	5.6
		Bonds		0.5	0.6	1.4
		Commercial banks		1.1	0.8	1.1
		Other		1.1	1.5	3.2
Domestic, o/w				10.5	11.1	15.3
		Central bank claim (net)		-0.8	0.3	2.8
		Deposit money banks		0.6	2.6	6.2
		Non-banks		10.7	8.2	6.3
Memorandum:
Domestic, o/w by instrument
		Marketable		3.1	5.9	7.0
		Non-marketable		7.4	5.2	8.3

Post-HIPC LIDCs in Debt Difficuties ^1/
(in percent of GDP)
				2007	2013	2016
Total				44.7	41.2	72.1
External				32.8	30.3	53.4
	Multilateral, o/w			10.5	12.1	15.9
		WB, IDB, IMF, AfDB, AsDB		6.6	6.4	8.2
		Other		4.0	5.7	7.7
	Bilateral, o/w			17.3	12.9	22.2
		Paris Club		8.0	1.8	2.8
		Non-Paris Club, o/w		9.3	11.1	19.4
			China	0.2	6.2	11.6
	Commercial, o/w			4.9	5.2	15.3
		Bonds		1.0	1.6	4.2
		Commercial banks		0.9	1.4	2.9
		Other		2.9	2.3	8.2
Domestic, o/w				12.0	11.0	18.7
		Central bank claim (net)		-1.1	0.4	4.3
		Deposit money banks		0.0	2.7	6.9
		Non-banks		13.0	7.9	7.6
Memorandum:
Domestic, o/w by instrument
		Marketable		5.9	7.2	9.1
		Non-marketable		6.1	3.8	9.6

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Abstract

Chapter 1: Macroeconomic Developments: Uneven Growth, Fiscal Pressures

A. Introduction

B. The External Environment Facing LIDCs

C. Recent Developments in LIDCs

Persistent Performance Divide between Commodity and Diversified Exporters

Weakening Fiscal Positions

Budgetary Revenues and Investment

Public Savings and Investment

Improving External Position in Commodity Exporters

Stable Inflation but Sluggish Credit Growth

Financial Sector Stability: Staff Assessment of Emerging Financial Sector Stress

IMF Financial Support for LIDCs

D. The Outlook

E. Conclusions and Policy Messages

Chapter 2: Rising Debt Vulnerabilities

A. Introduction

B. Stylized Facts on Debt Accumulation in Recent Years

Evolution of Debt20

Drivers of Debt

C. Evolution of Debt Vulnerabilities and Risks to the Outlook

Evolution of Debt Vulnerabilities

Risks to the Outlook

D. The Changing Composition of Public Debt and its Implications

E. Public Sector Debt Data Gaps and Lack of Transparency

Evolution of Debt²⁰