Abstract
IMF POLICY PAPER
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IMF POLICY PAPER
MACROECONOMIC DEVELOPMENTS AND PROSPECTS FOR LOW-INCOME COUNTRIES—2024
March 2024
IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its March 29, 2024, consideration of the staff report.
The Staff Report, prepared by IMF staff and completed on February 22, 2024, for the Executive Board’s consideration on March 29, 2024.
A Staff Supplement.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Electronic copies of IMF Policy Papers
are available to the public from
http://www.imf.org/external/pp/ppindex.aspx
International Monetary Fund
Washington, D.C.
© 2024 International Monetary Fund
Press Release
PR 24/95
IMF Executive Board Discusses Macroeconomic Developments and Prospects in Low-Income Countries
FOR IMMEDIATE RELEASE
Washington, DC – April 2, 2024: On March 29, 2024, the Executive Board of the International Monetary Fund (IMF) discussed the IMF staff paper on macroeconomic developments and prospects in low-income countries (LICs) [link], which includes in-depth analysis of strategies for strengthening social safety nets (SSN) in LICs. The paper defines LICs as those 69 countries eligible for the Poverty Reduction and Growth Trust facilities.1
The economic scarring of the COVID-19 pandemic, Russia’s war in Ukraine and ensuing geopolitical tensions, and the tightening of financial conditions following strong inflationary pressures have hit LICs the hardest in recent years.
LICs’ prospects are finally slowly improving, helped by a better global outlook, as economic growth accelerates, inflation decreases, and financial conditions ease. However, significant uncertainties and adverse risks remain in the context of a more shock-prone world. Liquidity conditions remain tight and the burden of high debt service payments limits the space for development spending.
However, there is significant heterogeneity amongst LICs. The poorest countries have been hit hardest by the pandemic and have experienced the strongest scarring in terms of output loss. Fragile and conflict affected states (FCS) have seen their recovery hindered by weak institutions and inherent fragilities. The many LICs whose exports have been concentrated in a few products, have had weaker and more volatile performance. Fuel exporters, in particular, have missed the chance to capitalize on the oil windfall and will now have to consolidate in a less favorable environment. On the contrary, diversified exporters and frontier markets have shown more resilience to shocks. Finally, many Small Developing States who are often tourism-dependent, have recovered comparatively better but need to reduce high debt levels and allocate part of their revenues to critical climate change adaptation investments.
The report points to the fact that decisive efforts are needed to accelerate income convergence with more advanced economies and make progress towards the Sustainable Development Goals. This involves boosting growth, overcoming setbacks in poverty reduction triggered by the COVID-19 pandemic, reversing negative trends in food security and women’s employment, and enhancing resilience to future shocks.
Addressing these challenges requires decisive domestic actions paired with strong external support. On the domestic front, prudent fiscal and monetary policies would be key to maintain macroeconomic stability. The authorities should also focus on accelerating domestic revenue mobilization and prioritizing public spending to create additional space for critical development and social spending. In this context, efficient allocation and expansion of social safety net plays a crucial role in alleviating poverty and building buffers against external shocks. This calls for a re-direction of SSN spending from the better-off to the poorest segments. Strengthening public financial management, governance and transparency would promote accountability and help build political support buy-in for reforms, including ambitious structural reforms that support inclusive growth.
At the same time, all partners should step up external support, including not just financing but also policy advice and technical assistance. In particular, grants and highly concessional financing will be crucial to support development efforts of poorer countries, while efforts to catalyze private financing should be enhanced, in particular in frontier markets. Improved creditor cooperation would be important to ensure timely debt treatment where needed. The Fund is continuing to play its part: lending more than tripled since the pandemic, the bulk of it on concessional terms, and continuing to adapt its support to respond to changing LIC needs.
Executive Board Assessment2
Executive Directors welcomed the timely opportunity to discuss recent macroeconomic developments and prospects in low income countries (LICs). They broadly agreed with the staff’s assessment and the identified policy priorities, including strengthening social safety nets (SSN).
Directors welcomed that after several challenging years marked by the pandemic, Russia’s war in Ukraine, and the tightening of international financial conditions, the macroeconomic outlook for LICs is gradually improving as growth picks up, inflation subsides, and international financial conditions ease. However, risks for LICs are tilted to the downside amid persistent scarring, liquidity challenges (with high debt service putting pressure on the space available for development spending), elevated vulnerabilities to shocks, and relatively low macroeconomic buffers. Some Directors also highlighted the impact of geoeconomic fragmentation on LICs.
Directors acknowledged the significant heterogeneity in macroeconomic outcomes across LICs, with the poorest and fragile and conflict affected states (FCS) facing the toughest challenges. On the other side of the spectrum, frontier markets, and in general LICs with more diversified economies and higher per capita incomes, have typically fared better. In this context, Directors emphasized that carefully tailoring the policy mix to country circumstances is vital.
Directors agreed that more growth, more inclusion, and more resilience are essential to accelerate the path of LICs’ convergence with more advanced economies and support progress toward the Sustainable Development Goals. This entails, among others, reversing adverse trends in areas such as poverty reduction, food security, and women’s labor force participation. Directors emphasized the importance of decisive domestic action in LICs, including further policy tightening where needed; accelerated domestic revenue mobilization and more efficient fiscal spending to create space for urgent development outlays and for protecting the most vulnerable; deepening domestic financial markets; stronger public financial and debt management; progress on governance and transparency; well sequenced and growth enhancing structural reforms; and building climate resilience.
Directors concurred that efficient allocation and expansion of SSNs are vital for substantial poverty reduction in LICs. Both economic growth and increased SSN spending are necessary. They noted that in many LICs, a focus should be placed on better targeting benefits to the poorest segments. Simply redirecting half of the portion of SSN spending going to the richest households toward the poorest would be enough to nearly double the coverage of the most vulnerable. Directors underscored the importance of tailored SSN design to improve the poverty impact of expanding coverage and benefits. Enhancing the adaptability of SSNs to respond swiftly to various shocks is crucial, including by improving the ability to identify vulnerable households, verify their needs, and deliver benefits following shocks, making use of digitalization to the extent possible.
Directors noted staff’s estimates of LICs’ sizable financing needs, while recognizing that such estimates are subject to uncertainty. They agreed that decisive domestic reforms need to be complemented with strong external support by all partners, including through technical assistance and adequate financing. Directors emphasized the criticality of grants and highly concessional financing for the poorest and most fragile LICs. Meanwhile, catalyzing significant financing from the private sector would be crucial, in particular in frontier markets, to accompany their transition to middle income status. In this context, a number of Directors recommended a cautious approach to a further buildup in senior debt held by LICs, which could impact the catalytic effect of Fund financing. Directors noted that while progress has been made, debt restructuring processes, including under the Common Framework, should be further improved through closer creditor coordination to deliver timely debt relief where needed. They welcomed the work of the Global Sovereign Debt Roundtable to support this effort.
Directors commended the Fund’s strong engagement with LICs through targeted policy advice, capacity building, and financing. They underscored the important role played by the Fund in helping LICs maintain or restore a stable macroeconomic environment and achieve their reform agenda. They noted that the Fund’s support to LICs evolved flexibly to help them tackle changing needs and repeated shocks since the pandemic. Directors looked forward to the upcoming review of the PRGT Facilities and Financing, as well as other upcoming policy reviews that will have a bearing on the effectiveness of Fund support for LICs, including the review of the Bank Fund debt sustainability framework for low income countries (LIC DSF). Overall, Directors urged the Fund to continue to work closely with the World Bank and with other development partners and stakeholders, and leverage its comparative advantage to support LICs.
Title page
MACROECONOMIC DEVELOPMENTS AND PROSPECTS FOR LOW-INCOME COUNTRIES—2024
February 22, 2024
EXECUTIVE SUMMARY
Macroeconomic Developments and Prospects
The outlook for Low-Income Countries (LICs) is gradually improving, but macroeconomic vulnerabilities are bound to persist. Coming on the back of the COVID-19 pandemic and Russia’s war in Ukraine, the tightening of international financial conditions and geopolitical tensions weighed on the global environment in 2022–23. In many LICs, the impact was compounded by policy tightening, violence, political instability, and extreme weather events. Their recoveries thus struggled to regain momentum and scarring remains deeper than in more advanced countries. Looking forward, the outlook for LICs is gradually improving as growth picks up, inflation subsides, and international financial conditions are easing. However, risks are tilted to the downside. A chief immediate concern involves liquidity challenges, with high debt service putting pressure on the space available for development spending.
There is important heterogeneity across LICs, with the poorest and most fragile countries facing the toughest challenges. The two-fifths of LICs with per capita income below the IDA threshold experienced the strongest scarring from the COVID-19 pandemic and struggle the most to regain stronger growth. On the other side of the spectrum, Frontier Markets, and in general LICs with more diversified economies and higher per capita incomes, have typically been faring better.
Significant effort is needed to achieve higher and more inclusive growth, and improve resilience. Higher and more inclusive growth are essential to accelerate the path of convergence with more advanced economies and support progress towards the Sustainable Development Goals. This entails reversing adverse trends in areas such as poverty reduction, food insecurity, and women’s labor force participation. Building resilience will also be critical in the more shock-prone world ahead.
Addressing current challenges calls for decisive domestic action, complemented by strong external support and debt relief where needed. Promoting higher and more inclusive growth, as well as addressing persistent vulnerabilities call for strong policy and reform efforts, including further policy tightening where needed; accelerated domestic revenue mobilization and more efficient fiscal spending to create space for urgent development spending; stronger public financial management, including progress on governance and transparency; and structural reforms to support growth, inclusion, and resilience. External partners should step up their policy advice, technical assistance and financial support, especially through grants and highly concessional financing to help cover LICs’ large needs. Debt restructuring processes should also be further improved to ensure timely debt relief where needed.
The Fund is further stepping up its support through targeted policy advice, capacity building, and financing. Total Fund credit outstanding to LICs has reached a record SDR 24.4 billion at the end of 2023, the bulk of which (SDR 18.3 billion) on concessional terms. The upcoming review of the Fund’s Poverty Reduction and Growth Trust provides an opportunity to revisit its concessional support to ensure it remains adequately resourced and well targeted to help those LICs that need it the most.
Strengthening Social Safety Nets in Low-Income Countries
In LICs, particularly Sub-Saharan Africa, poverty remains a significant challenge despite previous progress. The COVID-19 pandemic and subsequent shocks have exacerbated the situation, with poverty rates in Sub-Saharan Africa hovering around 40 percent. The aggregate poverty gap—a rough estimate of the resources needed to eradicate poverty—is about 10 percent of GDP in Sub-Saharan Africa LICs or about $50 billion per year. Social Safety Nets (SSNs), which can be funded through domestic revenue mobilization and spending re-prioritization, emerge as crucial tools in this context, aiding in poverty alleviation, human and physical capital accumulation, and resilience building against shocks. Despite their importance, LICs coverage and benefits remain generally low and a significant portion of spending goes to the better-off.
Efficient allocation and expansion of SSNs are vital for substantial poverty reduction in LICs. Both economic growth and increased SSN spending are necessary to better alleviate poverty. In many countries, a focus should be placed on directing benefits more accurately to the poorest segments. All else equal, cutting in half the share of SSN benefits that go to top quintile households and redirecting these resources to the bottom quintile would increase nearly double coverage of the bottom quintile without increasing the SSNs spending. Recent experience also highlights the importance of tailored SSN design, including choices for expanding coverage and benefits under existing programs and capacity. Enhancing the adaptability of SSNs to respond swiftly to various shocks is crucial, emphasizing the role of digitalization.
An interplay of technical and political factors influences the design, acceptance, and success of SSNs. Political support, perceptions of fairness, and effective communication are central for successful implementation. Better public awareness and stakeholder engagement are also critical.
Approved By
Guillaume Chabert (SPR) and Abdelhak Senhadji (FAD)
Prepared by the Strategy, Policy, and Review Department, and the Fiscal Affairs Department, with helpful comments from other Departments and the World Bank, under the overall guidance of Guillaume Chabert, Bjoern Rother (SPR) and Abdelhak Senhadji (FAD). The team was led by Andrea Gamba (SPR) and Mauricio Soto (FAD) and included Tokhir Mirzoev, Javier Arze, Lukas Kohler (Team Coordinators), Jocelyn Boussard, John-Paul Fanning, Naoya Kato, Maxwell Kushnir, Alexei Miksjuk, Eric Pondi, Yinhao Sun, Holt Williamson, Alexander Zaborovskiy, Yipei Zhang and Lavinia Zhao (all SPR); and Carolina Bloch, Fernanda Brollo, Julieth Pico, and Alberto Tumino (all FAD). Linda Bisman and Katarina Varga provided excellent administrative coordination.
Contents
Glossary
RECENT DEVELOPMENTS AND OUTLOOK
A. A Challenging Global Context in 2023, Gradual Improvement Ahead
B. Low-Income Countries on a Modest Recovery Path
C. Diverse Experiences Across LICs Beneath the Aggregate Trends
D. Stabilizing Debt Levels but Rising Debt Service Pressures
E. Elevated Risks Ahead, Mostly Tilted to the Downside
THREE LONG-TERM CHALLENGES: GROWTH, INCLUSIVENESS, RESILIENCE
A. The Need for More Growth
B. The Need for More Inclusiveness in Economic Development
C. The Need for More Resilience in a Shock-Prone World
AN URGENT AGENDA FOR LICS AND THEIR PARTNERS
A. Advancing the Domestic Policy and Reform Agenda
B. Maintaining Strong External Support
C. The IMF’s Strong Commitment to Supporting LICs
STRENGTHENING SOCIAL SAFETY NETS IN LOW INCOME COUNTRIES
A. Background
LANDSCAPE OF SOCIAL SAFETY NETS IN LOW-INCOME COUNTRIES
OPTIONS TO STRENGTHEN SOCIAL SAFETY NETS
BOXES
1. Low-Income Countries: Heterogeneity in Monetary and Exchange Rate Policy
2. Low-Income Countries: Three Dimensions to Capture Their Diversity
3. Evolution of Official Development Assistance
4. The Global Food Shock: Recent Trends
5. Low-Income Countries: Differentiated Policy Advice
6. Low-Income Countries: the Role of Industrial Policy
7. IMF’s Recent Policy Changes Affecting Low-Income Countries
8. Gender Aspects of Social Safety Nets
9. Building SSN Resilience to Climate Events: Mauritania
10. Political Economy Considerations for Social Safety Nets
FIGURES
1. Global Growth and Inflation
2. Low-Income Countries: Macroeconomic Outturns and Prospects
3. Low-Income Countries: Decomposition of Headline Inflation
4. Low-Income Countries: External Sector Developments
5. Low-Income Countries: Breakdown of Revenue and Primary Expenditure
6. Low-Income Countries: Monetary Policy in 2023
7. Low-Income Countries: Real GDP Growth in 2023
8. Low-Income Countries: Heterogeneity in Macroeconomic Performance
9. Low-Income Countries: Public and Publicly Guaranteed (PPG)
10. Low-Income Countries: Evolution of External Public Debt Sustainability Ratings
11. LICs: Principal Repayments on External PPG Debt by Creditor Type, 1990–2025
12. Marketable Debt Maturing LICs
13. Low-Income Countries: Disbursements and Net Flows by Creditor Category
14. Low-Income Countries: Average Sovereign Bond Spreads
15. Climate, Political and Geo-Fragmentation Risk
16. Low-Income Countries: Vulnerability to Shocks by Channel
17. Low-Income Countries: Real GDP Effects of the COVID-19 Crisis
18. Population Growth Rate and Median Age
19. Low-Income Countries: Selected Socio-Economic Indicators
20. Recommended Policy Mix in some LICs
21. LICs Gross External Financing Needs and Net Financial Inflows
22. Fund Lending to LICs, 2010–23
23. Poverty Rate in Low Income Countries, 1990–2022
24. Population in Low-Income Countries, by Region
25. Poverty Rate and Poverty Gap in Low-Income Countries
26. Aggregate Poverty Gap
27. Social Safety Nets: Expenditure and Main Programs, 2019 or latest available year
28. Coverage and Benefit Adequacy
29. Spending in Social Safety Nets
30. Gross Official Development Aid, 2019 or most recent year
31. Poverty Rate and Income per Capita
32. Poverty Rate and Social Safety Spending
33. Spending in Social Safety Nets and Share of Spending Outside of Poorest Quintile
References
ANNEXES
I. PRGT Eligible Country Groups
II. Assessing LICs’ Vulnerability to Shocks—Assumptions
III. Social Safety Net Responses to COVID-19 in Low Income Countries
IV. Poverty, Growth, and Social Safety Nets
Glossary
| AE | Advanced Economies |
| AfCFTA | African Continental Free Trade Area |
| AREAER | Annual Report on Exchange Arrangements and Exchange Restrictions |
| ASPIRE | Atlas of Social Protection Indicators of Resilience and Equity |
| BOP | Balance of Payments |
| CAR | The Central African Republic |
| CCRT | Catastrophe Containment and Relief Trust |
| CD | Capacity Development |
| CEMAC | Central African Economic and Monetary Community |
| CES | Country Engagement Strategies |
| CF | The G20 Common Framework for Debt Treatments |
| COVID | Coronavirus Disease 2019 |
| CPA | Consistent Policy Assessment |
| CPI | Consumer Price Index |
| DAC | Development Assistance Committee |
| DRC | Democratic Republic of Congo |
| DRM | Domestic Revenue Mobilization |
| DSA | Debt Sustainability Analysis |
| ECF | Extended Credit Facility |
| ECOWAS | Economic Community of West African States |
| EFF | Extended Fund Facility |
| EM | Emerging Markets |
| EME | Emerging Market Economies |
| ER | Exchange Rate |
| FAD | Fiscal Affairs Department |
| FAO | Food and Agriculture Organization |
| FCS | Fragile and Conflict-affected States |
| FDI | Foreign Direct Investment |
| FM | Frontier Markets |
| FSI | Financial Soundness Indicators |
| FSW | Food Shock Window |
| FX | Foreign Exchange |
| FXI | Foreign Exchange Interventions |
| FY | Fiscal Year |
| GDP | Gross Domestic Products |
| GFN | Gross Financing Needs |
| GRA | General Resource Account |
| GNI | Gross National Income |
| HIPC | Heavily Indebted Poor Countries |
| IDA | International Development Association |
| IFPRI | International Food Policy Research Institute |
| IMF | International Monetary Fund |
| LICs | Low-income Countries |
| MDRI | Multilateral Debt Relief Initiative |
| MU | Monetary Union |
| NBER | National Bureau of Economic Research |
| NPL | Non-performing Loans |
| ODA | Official Development Assistance |
| OECD | Organization for Economic Cooperation and Development |
| OLS | Ordinary Least Squares |
| PC | Paris Club |
| PCI | Policy Coordination Instrument |
| PMB | Staff-Monitored Program with Executive Board Involvement |
| PPP | Purchasing Power Parity |
| PRGT | Poverty Reduction and Growth Trust |
| RCEP | Regional Comprehensive Economic Partnership |
| RCF | Rapid Credit Facility |
| REER | Real Effective Exchange Rate |
| RFI | Rapid Financing Instrument |
| RSF | Resilience and Sustainability Facility |
| RST | Resilience and Sustainability Trust |
| SCF | Stand-by Credit Facility |
| SDG | Sustainable Development Goals |
| SDR | Special Drawing Rights |
| SDS | Small Developing States |
| SOEs | State-owned enterprises |
| SSA | Sub-Saharan Africa |
| SSN | Social Safety Net |
| TA | Technical Assistance |
| UCT | Upper Credit Tranche |
| USD | U.S. Dollar |
| WAEMU | West African Economic and Monetary Union |
| WB | World Bank |
| WEO | World Economic Outlook |
| WFP | World Food Programme |
The list can be found in Annex I of the report.
At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
