Macroeconomic Developments and Prospects For Low-Income Countries—2024
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar
Close
and
World Bank
Search for other papers by World Bank in
Current site
Google Scholar
Close

After a series of global and local shocks that have further exacerbated the economic challenges facing LICs, some of the immediate pressures have begun to subside in 2023 and the outlook is gradually improving. Median GDP growth would gradually regain pre-pandemic levels, but for many LICs—and especially the poorest and most fragile—it will remain too low. In addition, many LICs still face elevated inflation and high debt levels. All these challenges persist amid rising debt service obligations and declining net financing flows, which compress the space available for development spending. Risks to the outlook for LICs remain tilted to the downside due to persistent macroeconomic vulnerabilities and, in many cases, structural and institutional characteristics that make them highly susceptible to shocks.

Abstract

After a series of global and local shocks that have further exacerbated the economic challenges facing LICs, some of the immediate pressures have begun to subside in 2023 and the outlook is gradually improving. Median GDP growth would gradually regain pre-pandemic levels, but for many LICs—and especially the poorest and most fragile—it will remain too low. In addition, many LICs still face elevated inflation and high debt levels. All these challenges persist amid rising debt service obligations and declining net financing flows, which compress the space available for development spending. Risks to the outlook for LICs remain tilted to the downside due to persistent macroeconomic vulnerabilities and, in many cases, structural and institutional characteristics that make them highly susceptible to shocks.

Recent Developments and Outlook

After a series of global and local shocks that have further exacerbated the economic challenges facing LICs, some of the immediate pressures have begun to subside in 2023 and the outlook is gradually improving. Median GDP growth would gradually regain pre-pandemic levels, but for many LICs—and especially the poorest and most fragile—it will remain too low. In addition, many LICs still face elevated inflation and high debt levels. All these challenges persist amid rising debt service obligations and declining net financing flows, which compress the space available for development spending. Risks to the outlook for LICs remain tilted to the downside due to persistent macroeconomic vulnerabilities and, in many cases, structural and institutional characteristics that make them highly susceptible to shocks.

A. A Challenging Global Context in 2023, Gradual Improvement Ahead

1. The global environment remained challenging in 2023 as the recovery from the COVID-19 pandemic continued to lose steam in many countries. Just as the world economy began to recover from the COVID-19 shock, inflation surged, exacerbated by the adverse effects of Russia’s war in Ukraine on fuel and food markets (Figure 1). The ensuing tightening of monetary policy and global financial conditions, as well as an increased risk aversion amid rising geopolitical tensions weighed on growth and worsened the global economic environment. While some of these factors subsided somewhat in 2023—for example, global inflation eased from its 2022 peak of 8.9 percent and key commodity prices came down from their recent peaks— global economic growth further slowed to just 3.1 percent from 3.5 percent in 2022.1

Figure 1.
Figure 1.

Global Growth and Inflation

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

2. Looking forward, the global economic environment is poised to gradually improve.2 Global economic growth is projected to remain stable at 3.1 percent in 2024 and then improve over the medium term. Helped by strong monetary policy action in many economies as well as the recent fall in international food and energy prices, global CPI inflation is expected to decline from 6.8 percent in 2023 to 5.4 percent in 2024 and further to 4.0 percent by 2028. This trend, in turn, underpins the projection of gradually improving global financial conditions. Risks to the outlook have become more balanced as highlighted in the January 2024 WEO update.

B. Low-Income Countries on a Modest Recovery Path

Growth and Inflation

3. LIC growth remained flat in 2023 but is set to improve in 2024 and over the medium term (Figure 2).3 The challenging global environment, structural impediments to growth, and other factors such as conflicts, socio-political instability and extreme climate events (e.g., floods in Mozambique and Malawi, droughts in Kenya and Somalia) weighed on LICs’ post-Covid recoveries. Growth already lost steam in 2022 with median growth decelerating to 4.0 percent from 4.6 percent in 2021; and remained at that level in 2023. Median growth is expected to accelerate to 4.4 percent in 2024 and further toward the pre-COVID average of 4.6 percent over the medium term—with significant variance across countries (see ¶10–14).

Figure 2.
Figure 2.
Figure 2.

Low-Income Countries: Macroeconomic Outturns and Prospects

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: World Economic Outlook (January 2024) database and Fund staff estimates.Note: The median, 25, and 75 percentiles are calculated for each year across all LICs. Prospective imports are one-year-ahead imports of goods and services, with the 2029 projection calculated by applying 2028 growth rates.

4. Inflation pressures have begun to abate and are expected to ease further, but many LICs are still facing a cost-of-living crisis. Median end-of-period consumer price inflation declined to 6.0 percent in 2023 from 9.1 percent the year before, reflecting global disinflation and the retreat of international energy and food prices from their 2022 peaks (Figure 1, Figure 2, top panel). However, price pressures in some LICs remained significant, with more than a quarter of them experiencing double-digit inflation in 2023. These persistent pressures often reflected exchange rate adjustments, monetary financing of budget deficits, and relatively long lags in the pass-through of falling international energy and food prices to domestic markets (Figure 3).4 Helped by a supportive international environment and continued fiscal adjustment, median CPI inflation will likely continue decelerating towards 4.0 percent by 2025 and remain around that level thereafter.

Figure 3.
Figure 3.

Low-Income Countries: Decomposition of Headline Inflation

(Median, in percent)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: IMF CPI database and Fund staff estimates.Note: The bars reflect median inflation contributions of each category across LICs, may not add up to the median inflation.

External Sector

5. Receding commodity prices brought some relief to LICs, but the median current account deficit remains wide and would narrow only marginally over the medium term. Helped by decreasing import prices for energy and food staples and a rebound in tourism, the median current account deficit in LICs improved to 5.1 percent of GDP in 2023 from 6.0 percent of GDP in 2022 (Figure 4, top-left panel). However, of 30 assessed LICs in 2023, 15 countries were found to have an external position weaker than justified by fundamentals. LICs’ median current account would remain virtually unchanged in 2024 and then slightly fall to 4.5 percent of GDP by 2028. This only marginal improvement reflects the often protracted nature of LICs’ balance of payments problems that reflect weak (and volatile) export sectors and in some cases large investments due to development-related import needs.

Figure 4.
Figure 4.
Figure 4.

Low-Income Countries: External Sector Developments

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

6. Pressures on international reserves continued during 2023 and insufficient reserve levels would remain a reality for one quarter of LICs during the years ahead. Following unprecedented external support in 2020 and the general SDR allocation in 2021, median foreign exchange (FX) reserves peaked at 4.5 months of prospective imports at the end of 2021 (Figure 4, top-right panel). However, reserves dropped subsequently to 3.7 months of imports at the end of 2022 and further to 3.6 months at the end of 2023.5 In about one third of LICs—predominantly Fragile and Conflict-affected States (FCS)— international reserves stood below three months of imports, a threshold widely interpreted as a minimum level of adequacy, especially in the context of an increasingly shock-prone world (see Figure 4, lower left panel). Looking ahead, the median reserve cover is projected to rise only slightly to 3.7 months of imports in 2024 before climbing to 4.0 months by 2028 on the back of a gradual improvement in current accounts. However, even at that time, one quarter of LICs would still be left with reserves below three months of imports (See Figure 2, lower right panel).

7. Losses of FX reserves were typically more pronounced in countries that maintained relatively inflexible exchange rate regimes. A large majority of LICs maintained fixed or strongly managed exchange rate regimes in 2023, with the exchange rate often serving as primary nominal anchor in the absence of a credible alternative.6 These arrangements typically helped to contain inflation pressures but this benefit came at the cost of some reserve losses. Pressures were strongest in countries with highly accommodative monetary and fiscal policies and that experienced further increases in already sizeable spreads between official and parallel market exchange rates (e.g., Burundi, Ethiopia, and Malawi). Some countries with crawl-like arrangements or stabilized arrangements, which are de facto anchored to the US dollar (e.g., Burundi, Democratic Republic of Congo, Ghana, Kenya, Lao PDR, and Malawi) eventually adjusted their exchange rates, often after significant depletion of FX reserves (text figure). By contrast, countries with floating exchange rates (e.g., Madagascar, Moldova, and Uganda) absorbed the initial shocks in 2022 through greater exchange rate flexibility while at the same time tightening monetary policy. The tightening contained depreciation pressures for these countries in 2023 (Figure 4, bottom-right panel); and, in general, these countries experienced fewer reserve losses than others (Box 1).

uA001fig01

Change of Reserves in 2022–2023, by ER Regime

(In percent of 2023 GDP)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: WEO and Fund staff estimates.Notes: Red squares=median. Countries with reserves below 3 months excluded. Groupings are defined in relation with their AREAER classification reported in the Figure above: (1) currency board (excl. countries with no separate legal tender); (2)-(6) soft peg; (7)-(8) floating and other managed. Currency board reflects reserve accumulation by Eastern Caribbean tourism-dependent economies in 2023.

Low-Income Countries: Heterogeneity in Monetary and Exchange Rate Policy

Relatively hard pegs and fully floating exchange rates were generally associated with better inflation outcomes than crawl-like or other managed arrangements. This outcome was often supported by relatively contained money growth. However, while many of the floaters avoided a sizable decline in reserves, while pegs required Foreign Exchange Interventions (FXI) and thus prompted larger losses of reserves in 2022–23.1 2

Loose fiscal policy may have complicated the conduct of monetary policy in some cases. Loose fiscal policy may lead to excessive money growth and either depreciation or loss of reserves. The latter is true especially for LICs with hard and conventional pegs, at least one third of which entered 2023 with a loose or moderately loose fiscal stance. In the absence of an independent monetary policy, protracted fiscal loosening could undermine reserve adequacy and confidence in the exchange rate arrangement.

uA001fig02

Inflation in 2023 by Exchange Rate Regime and Historic Money Growth

(In percent)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Note: Dots represent countries categorized by exchange rate regime (1–8), as identified in 2022 AREAER (IMF 2023f), and the history of money growth (high, unidentified, regular). High money growth identifies the countries, which showed money growth in the top quartile across LICs in at least two out of three historic years 2019–21. “Peg under MU” represents countries in a monetary union that maintains conventional peg. Excludes Eritrea (data unavailable), Sudan and Zimbabwe (exc. high inflation)Sources: WEO and Fund staff estimates.
uA001fig03

Fiscal Stance of LICs With Fixed Exchange Rate Regimes

(In percent of countries)1/

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

1/ The fiscal policy stance according to the spring 2023Consistent Policy Assessment exercise: L – Loose,ML – Moderately Loose, N –Neutral, MT – Moderately Tight,T – Tight. Excludes St. Lucia, Chad, Eritrea, Niger, andTuvalu due to data availability.Sources: Fund staff estimates.
1/ Foreign exchange sales exceeded purchases in about three-quarters of the non-pegged countries in the first quarter of 2022 and about half of the non-pegged countries in the second quarter of 2022 (IMF 2023h). 2/ Some LICs peg against the Euro and experienced depreciation against the U.S. dollar in 2022 followed by appreciation in 2023.

Domestic Financial Markets

8. Domestic financial sectors in LICs showed resilience in 2023, but the growing sovereign-bank nexus observed over the past decade points to increasing risks. Overall, recent developments were positive, with credit to the private sector rebounding to pre-pandemic levels amid a slight improvement in NPLs. At the same time, bank profitability declined somewhat and capital adequacy ratios are still lower than before the pandemic. The growing sovereign-bank nexus observed since the early 2010s (text figure) continued in 2023 (e.g., banks in CEMAC and WAEMU member countries have increased their share of sovereign assets with zero-risk weight), raising further concerns of potential crowding out of the domestic private sector from banks’ financing in some countries (e.g., Sierra Leone). Loss-making SOEs have also contributed to increasing sovereign risks on bank balance sheets in some cases.7

uA001fig04

Banks’ Exposure to the Government1

(Percentage points)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

1 Ratio of Claims on Central Government to Banking Institutions’ Assets.Sources: International Financial Statistics, Fund staff estimates.

Trends in Policy Implementation

9. Policy responses to the macroeconomic headwinds often reflected limited policy space and sharp tradeoffs for policymakers.

Figure 5.
Figure 5.

Low-Income Countries: Breakdown of Revenue and Primary Expenditure

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: WEO and Fund staff estimates.1/ Bars represent medians for each category and, by construction, do not add up to the total. Based on a reduced sample of 59 countries due to data gaps.
  • Fiscal adjustment has typically been gradual, incomplete and expenditure-led. (Figure 5). At the height of the COVID-19 pandemic in 2020, LICs’ median primary fiscal deficit widened to 3.0 percent of GDP from 0.7 percent of GDP the previous year. Since then, fiscal adjustment proceeded in fits and starts; and LICs’ median primary deficit still stood at 1.8 percent of GDP in 2023. This means that LICs’ median fiscal stance is not yet supportive of reducing debt. Further consolidation in the time ahead is projected to remain modest and proceed gradually with the median primary deficit falling to 0.9 percent only by 2028. In terms of composition, fiscal consolidation has so far relied mostly on the unwinding of COVID-related spending and current expenditure restraint. Despite median tax revenue surpassing pre-pandemic levels in 2021 and further climbing to 13.9 percent of GDP in 2023,8 overall revenue remained largely flat over recent years as non-tax revenues slid.9

  • Even in the face of significant inflationary pressures, monetary policy tightening has often been elusive owing to fiscal dominance, institutional shortcomings, and weak transmission channels. Among the countries that entered 2023 with a loose or moderately loose monetary policy stance, only about half tightened policy during the year. Unsurprisingly, median 2023 inflation for countries that tightened their monetary policies (e.g., Kenya, Uganda, Zambia) is projected to be lower than for those keeping a lax monetary policy stance (e.g., Sierra Leone, Lao PDR, Zimbabwe). Going forward, monetary policy trends will likely remain heterogenous in line with growing divergence in countries’ inflation paths (Figure 7).

  • Financial sector policies. Having phased out pandemic-related macroprudential measures, most countries focused on containing financial stability risks and strengthening financial sector resilience, often in the context of IMF-supported financing arrangements (e.g., Moldova and Somalia).

Figure 6.
Figure 6.

Low-Income Countries: Monetary Policy in 2023

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

1/ Policy stance based on internal assessments by IMF country teams as part of the Consistent Policy Assessment (CPA) exercise conducted in Spring 2023. The sample excludes hard pegs, CEMAC and WAEMU.2/ Change in a policy stance between the Spring and Fall 2023 CPA exercises. Sources: Fund staff estimates.

C. Diverse Experiences Across LICs Beneath the Aggregate Trends

10. It is critical to recognize significant diversity across LICs when assessing macroeconomic performance and the policy and reform agenda. While the 69 LICs captured in this report face common challenges, they also fall on a wide spectrum of per capita income levels, export structures, and institutional characteristics (Box 2). The poorest countries, like Burundi with per capita income barely exceeding US$240, face very different economic challenges than countries such as Bangladesh that are approaching middle income status. But the picture is more complex: the wealthiest LICs are to a large extent Small Developing States (SDS), facing unique challenges based on geography and size, and are often tourism-dependent. At the other extreme, many of the poorest LICs are Fragile and Conflict-affected States (FCS), in itself the biggest of all LIC subgroups, which struggle to escape the fragility trap. And while Frontier Markets (FMs) are often diversified exporters and equipped with financial structures resembling those of emerging market economies, they are quite diverse regarding their per capita income level and also include a number of FCS. Finally, the small number of fuel exporters are concentrated among the poorer LICs and are all FCS as well. A quick look at the varied growth performance for 2023 confirms the multidimensional heterogeneity of the LIC group (Figure 7).

Figure 7.
Figure 7.

Low-Income Countries: Real GDP Growth in 2023

(In percent, FCS in red font)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Note: Afghanistan, Eritrea, and Sudan are outliers.

Low-Income Countries: Three Dimensions to Capture Their Diversity

This paper analyzes LICs’ economic performance, risks and vulnerabilities across three dimensions: income level, export structure, and institutional characteristics:

  • By per capita income levels, LICs can be divided into four groupings: (1) at or below the IDA threshold (US$1,315 in 2024); (2) less than 1.5 times the IDA threshold; (3) up to three times above the IDA threshold, and (4) the richest with per capita income of more than 300 percent of the threshold. These groupings roughly follow the distribution of LICs (about 40 percent of LICs fall below the threshold, while the richest countries are above the 75th percentile).

  • By export structure, LIC members are classified as follows, broadly in line with the October 2023 World Economic Outlook: fuel, non-fuel commodity, diversified, tourism dependent, and other services.

  • By institutional characteristics, LICs can be disaggregated into four groups: (1) Fragile and Conflict-affected States (FCS);1 (2) Small Developing States (SDS) with populations lower than 1.5 million; (3) Frontier Markets (FM) with past access to international financial markets;2 and (4) all other LICs.

LIC Groupings by Income Level, Export Structure and Institutional Characteristics1

article image

Color coding for export structures: Fuel (Red), Non-Fuel (Green), Diversified (Blue), Tourism (Yellow) and Services (Black).

2/ The four income columns are anchored on the 2022 GNI per capita cutoff of US$1,315 for IDA eligibility. Data for 2022 is used except for Yemen (2018) and South Sudan (2015). 3/ The six rows refer to the four institutional characteristics and their overlaps.
1/ The list follows the IMF’s classification of Fragile and Conflict-affected States as established in the 2022 FCS strategy, which is aligned with the World Bank’s methodology. 2/ The grouping of seventeen Frontier Markets includes all LICs in J. P. Morgan’s Next Generation Market Index, and any additional LICs with outstanding Eurobonds. This methodology is inherently backward-looking and does not take into account the ability to issue on a forward-looking basis. This methodology could be refined, for example, by removing the three Frontier Markets that are currently in debt distress.

11. When looking for patterns in macroeconomic performance across different per capita income levels, one can observe an important divide between (relatively) rich and poor. Many of the LICs with the highest per capita income levels experienced a sharp recession in the direct aftermath of the COVID-19 outbreak but recovered rapidly over 2021–23; and as of today, FX reserves stand at relatively comfortable levels. By contrast, the post-pandemic recovery of poorer LICs has been much weaker, with growth averaging almost one percentage point less over 2021–23 compared with the average over 2003–19. And while growth would pick up in 2024 and return to the pre-pandemic trends over the medium term, FX buffers are expected to stay weak.

12. An analysis of performance based on export structure as a differentiating factor suggests that the degree of economic diversification is a key driver of outcomes (Figure 8).

  • LICs with diversified export structures, many of whom are also FMs, have typically enjoyed relatively stronger economic performance. They typically fared better than other LICs already before the pandemic, posted stronger performance during the pandemic year, and registered a relatively robust recovery. Moreover, and notwithstanding inflationary pressures from high international fuel and food prices and exchange rate adjustments, their median 2023 current account deficit was contained at 4.3 percent of GDP and reserve levels remained at comfortable levels. Diversified economies have also experienced lower economic volatility, in real GDP growth and current accounts relative to other LICs. Looking forward, this LIC grouping is expected to continue on its overall positive trajectory with medium-term growth projected at about 5 percent.

  • Tourism-dependent economies have benefitted from the post-pandemic global recovery in the sector after a severe initial shock, but tailwinds are expected to fade.10 These economies rebounded from the COVID-19 pandemic with strong GDP growth, relatively low inflation (under their hard currency pegs), and declining—albeit still elevated—current account deficits. However, after reaching peaking in 2023, growth would cool off to 3 percent over the medium term, in line with expected tourism trends. Tourism-dependent economies can rely on stronger reserve buffers than other LICs, which are important given their vulnerability to swings in global demand and to the negative impact of climate change.11

  • Non-fuel commodity exporters have generally experienced weaker growth and stronger vulnerabilities than diversified LICs. These countries also saw higher inflation during the COVID-19 pandemic and amid the subsequent oil and food price shocks, but they managed to reduce median inflation to 7 percent by 2023. Median FX reserve levels remain below 3 months of prospective imports.

  • Fuel-exporting economies, which are all FCS, have performed relatively poorly and missed the opportunity to capitalize on oil windfalls. Their growth and current account balances largely followed trends in international energy prices. Structural obstacles to growth and inherent fragility translated into their median GDP growth remaining well below the LIC average; it reached only 3.5 percent in 2023 and would only marginally improve to 4.0 percent by 2028. That said, strong post-pandemic export proceeds supported the fuel-exporters’ exchange rate pegs, which in turn helped to keep inflation low. These proceeds are now under pressure in line with the fall in international energy prices, which already drove a dramatic decline in current account surpluses to 0.2 percent of GDP in 2023 from 6.2 percent in 2022.

13. Moreover, countries’ institutional characteristics matter for outcomes, with higher institutional quality being generally associated with better performance.

  • FMs grew more than other LICs already before the pandemic and were the only grouping among LICs to avoid a recession in 2020. They also rebounded strongly during the past three years. These dynamics may reflect their more diversified economic structures (see above) but also more developed financial systems, access to international capital markets, and generally stronger policy frameworks. There is, however, a challenge on the horizon: median GDP growth is expected to plateau at 5.3 percent over the medium term, down from an average 5.9 percent experienced before the pandemic. More stability in their GDP and current account outcomes over time relative to other LICs may reflect their ability to tap international capital markets as a countercyclical defense against adverse shocks.

  • By contrast, FCS experienced the strongest scarring – output loss from previous trends – from the COVID-19 pandemic and hence the weakest recoveries. Average median FCS growth over 2021–23 was 1.7 percentage point lower than before the pandemic, leading to significant output losses compared to the pre-pandemic trend. Growth only reached 3.0 percent in 2023 and median international reserves remained below 3 months of imports. Structural factors, such as large informal sectors, weak institutions and governance challenges, fewer policy tools to smooth economic fluctuations and, in some instances, conflicts and political turmoil, present major challenges for these countries. Going forward, growth in FCS is expected to gradually improve to 3.6 percent in 2024 and 4 percent over the medium-term.

  • SDS, including three pacific island countries (PICs), were hit particularly hard by the COVID-19 pandemic due to their strong reliance on tourism (see above), before rebounding strongly.12 Given their geographic situation, they are facing significant vulnerabilities to negative climate events.

Figure 8.
Figure 8.

Low-Income Countries: Heterogeneity in Macroeconomic Performance

(Medians)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: WEO and Fund staff estimates.

14. Fiscal policy choices have often mirrored differences in underlying economic and institutional characteristics.

  • FM have managed to adapt fiscal policy to the evolving needs of a fast-changing environment relatively better than other LICs. In response to the COVID-19 shock, their median primary deficit quickly increased by 2.4 points of GDP in 2020 to reach 3.6 percent of GDP. And when the oil and food price shock hit in 2022, the deficit was again increased by 0.5 percent of GDP. By contrast, 2023 saw a strong withdrawal of the support, with the median primary deficit consolidating to 1.7 percent of GDP.

  • On the other side of the spectrum, many FCS had little policy space to react to shocks. They saw a smaller increase in their median primary deficit than other LICs in response to the COVID-19 outbreak in 2020 (only 0.7 percent of GDP), and had difficulties in organizing fiscal adjustment later with a first consolidation effort (0.4 percent of GDP) only occurring in 2023. Oil-exporting LICs represent a special case among FCS: their primary surpluses increased to 6.6 percent of GDP in 2023 from 0.8 percent of GDP in 2019 on the back of higher international energy prices; but a concomitant boost in non-oil spending will require a procyclical policy tightening in the time ahead as oil prices decline.

D. Stabilizing Debt Levels but Rising Debt Service Pressures

15. After increasing steadily over the 2010s amid a changing creditor landscape, LICs’ public debt has recently stabilized at elevated levels.

  • LICs’ median public debt-to-GDP ratio experienced a strong increase to 52 percent in 2020 from 34 percent in 2010. Since 2020, the median debt-to-GDP ratio has been broadly stable at about 53 percent and is expected to marginally decline to 50 percent over the medium-term (See ¶3, Figure 2). While elevated, these levels remain significantly below those that gave rise to the large debt relief initiatives (HIPC and MDRI) in the mid-1990s and mid-2000s.

  • Both domestic and external borrowing expanded quickly, with private and non-Paris Club bilateral creditors significantly increasing their exposure (Figure 9, top- and middle panel). However, the increase in private sector debt has been limited to frontier markets, making their debt profile more similar to that of EMs, while other LICs (including those with higher income per capita) did not manage to significantly increase their sovereign attractiveness to private investors (lower panel).

Figure 9.
Figure 9.

Low-Income Countries: Public and Publicly Guaranteed (PPG) Debt Evolution of PPG Debt

(Median, in percent of GDP)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: WB’s IDS, WDI, WEO, and Fund staff estimates.

16. Debt vulnerabilities remain significant for more than half of all LICs, a number that has remained broadly stable since 2020. The joint WB/IMF debt sustainability assessments (DSAs) identify about 16 percent of LICs (11 countries) as being in debt distress (i.e., where there are ongoing or impending debt restructuring negotiations, or outstanding arrears to external creditors) and an additional 39 percent of LICs (27 countries) at high risk of debt distress (Figure 10), reflecting concerns over liquidity and/or solvency vulnerabilities. Together, these countries represent more than half of all LICs. When looking at these through the lens of structural characteristics and per capita income level, one finds that over 60 percent entail concentrated rather than diversified export structures; and that they are typically either relatively poor with per capita incomes below the IDA cut-off or part of the SDS grouping that are particularly shock prone (see ¶10–14). Perhaps most strikingly, 73 percent of FCS are in debt distress or at high risk thereof, underlying the damaging effect of fragility on macroeconomic outcomes (Figure 10). For those countries for which the elevated vulnerabilities do not necessary signal imminent danger of a major, and highly disruptive, debt event, the main macroeconomic risk is rather that of a slow-moving drain on macroeconomic and social outcomes due to insufficient space to finance investment and social spending, including in priority areas.

Figure 10.
Figure 10.

Low-Income Countries: Evolution of External Public Debt Sustainability Ratings 1/

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: WEO and Fund staff estimates.Note: The external debt distress risk rating remains the primary DSF output, while the overall risk rating is considered supplementary information.

17. The most pressing challenge for many LICs today involves complex liquidity and financing conditions,13 due to several factors:

  • Debt burdens have been growing, leading to larger debt service obligations (text figure). While debt levels are considerably lower as of today, LICs’ outlays for debt service have reached levels last seen during the 1990s. On the one hand, the large volume of external debt accumulated during the last decade is now beginning to fall due: amortization payments in 2023—including to private and non-Paris Club creditors—are estimated to have reached 1.6 percent of LICs’ combined GDP or more than double the average level over 2010–19. On the other hand, LICs’ median exports and fiscal revenues have not kept up with the rising debt service, leading to a sustained increase in both the external debt service-to-exports and external debt service-to-revenue ratios. As reported in a recent IMF blog, the latter is generally about two and a half times higher than a decade earlier, with the median ratio at the end of 2023 standing at 14 percent compared with 6 percent ten years earlier.14 Going forward, sizeable amortization, including large bond repayments, will add to existing pressures (Figures 11, 12).

  • In recent years, LICs have also remained priced out of international bond markets due to tight global financial conditions and, in some cases, domestic challenges. While sovereign spreads for most LICs peaked in 2022, they remained prohibitively high in 2023 (Figure 14).15 It remains to be seen whether Cote d’Ivoire’s successful January 2024 Eurobond issuance (US$2.6 billion), followed by those of Benin (US$0.75 billion) and Kenya (US$1.5 billion). In February signal the beginning of a trend reversal and reopen a broader path for LICs to regain access to international finance. And while many countries still maintained access to syndicated loans and other forms of external private financing even in the presence of tight global financial conditions, the prospects and costs of such borrowing are difficult to assess.

    New financing from official bilateral and private creditors has nearly halved since 2019 as key creditors reassess their exposure (see also Box 3 on ODA). Flows from non-Paris Club creditors have declined significantly to 0.3 percent of GDP in 2022, half their 2019 level and well below the 2014 peak of one percent of GDP. Paris Club flows also recorded a small dip in 2022 to 0.4 percent of GDP, while private flows dropped by a third to 0.3 percent of GDP (Figure 13, left panel). Accounting for rising repayments (see bullet above), net flows from official bilateral and private creditors represented only 0.4 percent of LICs’ GDP in 2022, a third less than in 2021. Overall, total net flows went down to only 1.5 percent of GDP, the lowest levels since 2016 and down from 2.0 percent in 2021 and 2.4 percent in 2019 (Figure 13, right panel). This would have been even lower if it were not for an increase in net flows from multilateral creditors to 1.1 percent of GDP in 2022 (from 0.8 percent in 2021), with more than half coming from IDA (see Box 7 for IMF flows).

  • Finally, LICs have mobilized increasing amounts of domestic market financing, but scope to continue this rapid expansion may be limited without crowding out private credit. The share of domestic debt in total debt increased significantly to 40 percent in 2022 from 34 percent in 2020. This record level was only matched in 2016, when domestic debt also replaced declining external debt flows (text figure). However, further scope to increase domestic borrowing may be limited, especially for LICs without access to international markets (e.g. Malawi, Sierra Leone) and for those with shallow domestic debt markets, large rollover requirements, and high interest rates amid elevated inflation.

uA001fig05

Debt Service on External Public and Publicly Guaranteed Debt

(In percent of revenue net grants)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: Fund staff estimates based on World Bank International Debt Statistics database and IMF WEO database.Note: Debt service includes interest payments and principal repayments.
Figure 11.
Figure 11.

LICs: Principal Repayments on External PPG Debt by Creditor Type, 1990–2025

(In percent of GDP, averages per year)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: IMF staff calculations based on World Bank. International Debt Statistics database and IMF WEO database (October 2023).
Figure 12.
Figure 12.

Marketable Debt Maturing LICs

(In billion USD)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: Bloomberg and Fund staff estimates.
Figure 13.
Figure 13.

Low-Income Countries: Disbursements and Net Flows by Creditor Category

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: International Debt Statistics, Fund staff estimates.

Evolution of Official Development Assistance

Net ODA to LICs from official donors fell recently. Total ODA from official donors to LICs declined for the second year running to US$72.9 billion in 2022 from US$76.3 billion in 2021. This represents a decline to 2.1 percent of LIC GNI from 2.4 percent the previous year (Box 3 Figure 1).1 This fall occurred in the context of a surge in ODA being used to host refugees in donor countries and to support Ukraine, which pushed total bilateral ODA to an all-time high of US$211 billion. In addition, country programmable aid, which excludes unpredictable flows and ODA spent outside of recipient countries, declined to 66 percent of bilateral ODA to LICs in 2021 compared to a 10 year average of 74 percent, indicating fewer resources over which LICs could have significant say. Although data are not yet available, the situation for LICs may have improved in 2023 as foreshadowed by higher grant financing assumptions in their fiscal revenue. Overall, and short of a major increase in overall ODA resources, the future trajectory of ODA going to LICs will likely remain strongly affected by the evolution of flows dedicated to hosting refugees in donor countries and of development and humanitarian needs emanating from conflicts in non-LIC countries.

uA001fig06

Net ODA Received by LICs from all Official Donors2

(Current USD billions and percent)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

1/ Data in this paragraph are from OECD.stat accessed 22 January 2024. Four donor countries achieved the UN target of spending 0.7 percent of their GNI on ODA. 2/ DAC stands for members of the OECD Development Assistance Committee (DAC). Sources: OECD ODA Statistics
Figure 14.
Figure 14.

Low-Income Countries: Average Sovereign Bond Spreads

(Basis points)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: Fund staff estimates.
uA001fig07

LICs: Domestic Debt and Financing Flows

(Percent of PPG debt and Billions of US dollars)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: World Bank’s IDS and IMF staff calculations

E. Elevated Risks Ahead, Mostly Tilted to the Downside

18. While risks to the global outlook have become more balanced, external risks to LICs’ economies remain tilted to the downside amid relatively low macroeconomic buffers. Among the upside risks, a faster fall in inflation may allow central banks to ease monetary policy sooner-than-expected. And stronger reform momentum in China could bolster private demand and generate positive cross-border spillovers. Artificial intelligence could boost productivity and incomes over the medium term.16 While the materialization of these risks would bring benefits to LICs, they would likely develop their impact only slowly given longer lags for example in the transmission of international price trends to domestic price levels. On the downside, new commodity price spikes from geopolitical shocks17 and supply disruptions or more persistent underlying inflation could prolong tight monetary conditions and thus higher financing costs for LICs. Moreover, deepening property sector woes in China could undermine export demand. Finally, given their prevalent non-alignment, LICs are particularly vulnerable to geopolitical fragmentation as trade has been slowing between political blocks to the benefit of trade within these.

19. In addition, LICs are particularly exposed to regional or domestic risks. First, LICs tend to be particularly vulnerable to climate shocks due to their dependence on agriculture, geographic context, limited buffers, and capacity constraints (Text Table 1). Second, political instability and conflict intensity have been on the rise over the past decade as captured by both aggregate statistics and prominent episodes of irregular changes in government (e.g., in Burkina Faso, Chad, Gabon, Guinea, Mali, Myanmar, Niger, and Sudan) and large-scale violence (e.g., in the Sahel region, the Central African Republic, Ethiopia, Haiti, Myanmar, and Sudan). 18 As a result, the number of internally displaced people in LICs more than doubled between 2016 and 2023 from 13 million to 32 million; and LICs host a further 8 million refugees (Figure 15).19, 20 And sixteen major elections in LICs during 2024 (a record) could spawn additional political and social tensions. Finally, the announcement in January 2024 that Burkina Faso, Mali and Niger intend to leave ECOWAS may negatively affect economic performance in the Sahel region.

Text Table 1.

Climate Vulnerabilities by Country Income Groupings

article image
Sources: INFORM Climate Risk with Fund staff estimates.

Reflects the probability of physical exposure associated with specific climate-driven hazards.

The ability of a country to cope with disasters in terms of formal, organized activities and the effort of the country’s government as well as the existing infrastructure which contribute to the reduction of disaster risk.

Economic, political and social characteristics of the community that can be destabilized in case of a hazard event.

Note: The INFORM Climate Change Risk Index is an adapted version of the INFORM Risk Index that incorporates climate and socioeconomic projections to analyze how risk will evolve as a result of climate change. In a scale from 0–10, higher values indicate higher risk. The composite indicator incorporates three dimensions: Hazard & Exposure, Vulnerability, and Lack of Coping Capacity. The composite indicator is calculated with a multiplicative equation that assigns equal weights to the three components.
Figure 15.
Figure 15.

Climate, Political and Geo-Fragmentation Risks

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

20. Stress testing confirms LICs’ strong vulnerability to shocks, with impact strength depending on a country’s economic and institutional characteristics (see Annex II). As shown in Figure 16, negative oil price shocks are particularly harmful to LICs but shocks to food prices, tourism and advanced country exchange rates also carry negative impacts (Panel A).21 More granular analysis illustrates the role of countries’ specific economic and institutional characteristics in gauging their vulnerability (Panel B). SDS and many FCS often have concentrated export structures and are strongly dependent on imports; both factors reinforce their exposure to terms-of-trade shocks. In the case of FCS, inadequate FX reserves and weak policy frameworks make it particularly difficult to cope with such events. By contrast, frontier markets with their often more diversified economic structures and better institutions appear to be more resilient.

Figure 16.
Figure 16.

Low-Income Countries: Vulnerability to Shocks by Channel

(In percent of GDP)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Three Long-Term Challenges: Growth, Inclusiveness, Resilience

Notwithstanding the improved near-term outlook, and the imperative of maintaining macroeconomic stability, LICs have long been facing the three related structural challenges of insufficient growth, poverty and inequality, and strong susceptibility to shocks. Tackling these challenges through higher and more inclusive growth as well as building resilience will take time and establishes tradeoffs for policymakers in the context of often high debt vulnerabilities and limited fiscal space. Success will depend on consistency in the pursuit of these efforts over the long term, while retaining flexibility to adjust course as needed in light of new developments.

A. The Need for More Growth

21. LICs experienced more pronounced long-term scarring from the recent series of global shocks than more advanced countries. As of the end of 2023, LICs’ combined real GDP remained 10 percent below the level implied by a simple extrapolation of its pre-pandemic trend (Figure 17), reflecting deep scarring from the COVID-19 pandemic and subsequent shocks.22 This large output loss exceeds that estimated for emerging and advanced economies (6 percent and 2 percent, respectively) by an important margin.

22. An important consequence is that income convergence of LICs toward advanced economies has seen a setback. At the end of 2023, LIC’s average real GDP per capita represented less than one-tenth of the advanced economy average, broadly unchanged from 2019. Moreover, the convergence path projected over the medium term would move at a slower rate than that expected before the pandemic (Figure 17). And given the higher susceptibility of LICs to important risks amid large global uncertainty, there is a non-trivial likelihood that the income convergence will slow even further. This is a discomforting outlook, especially as growing working-age populations should be in favor of LICs catching up to more developed countries (Figure 18).

Figure 17.
Figure 17.

Low-Income Countries: Real GDP Effects of the COVID-19 Crisis

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

1/ Deviation of the actual level from the level projected pre-pandemic.Sources: WEO (January 2020, January 2024) and Fund staff estimatesNote: Dashed lines indicate projections
Figure 18.
Figure 18.

Population Growth and Median Age

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: United Nations, World Population Prospects (2022); and Our World in Data.

B. The Need for More Inclusiveness in E conomic Development

23. Broader sharing of the growth dividend is another important dimension of successful development, in addition to strong and sustainable growth itself. Research shows that sharing economic gains broadly within societies facilitates sustained growth and overcoming fragility (see, e.g., Dabla-Norris et al., 2015).23 Before the Covid pandemic, many LICs made progress toward critical objectives linked to inclusiveness such as poverty reduction, female labor force participation, and the reduction of informality in the economy (Figure 19). Many of these gains have been reversed during and after the pandemic, and the impact of the war in Ukraine on energy and food prices further fueled a cost-of-living crisis that remains a reality in many LICs. For example, studies suggest that the series of global shocks since 2020 erased at least three years of previous progress with poverty reduction;24 and women employment, especially in the informal sector, was hit hard.

Figure 19.
Figure 19.

Low-Income Countries: Selected Socio-Economic Indicators

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

24. Reversing the recent negative trends in areas critical for inclusive growth, such as informality and food insecurity, will require strong effort. The limited data available suggest that the recent growth in informality cannot be reversed quickly, hindering revenue mobilization, social spending, and investment. And an estimated 238 million people in 48 countries faced acute food insecurity in 2023 (up ten percent from a year before), despite the easing of international food prices.25 At the same time, funding levels for the World Food Programme (WFP) are under pressure;26 and LICs with acute food insecurity also have low external and fiscal buffers (Box 4).27 These are worrisome developments, as food insecurity tends to act as a fragility multiplier.

The Global Food Shock: Recent Trends

Global food prices have come down, but acute food insecurity persists. As of September 2023, IMF staff estimates that 45 countries, most of which are LICs, remain strongly affected by the food shock, only slightly down from a year earlier. Notwithstanding recent declines in international prices for food staples and fertilizers, elevated food inflation in LICs persisted and exceeded 15 percent in about a quarter of them. Moreover, risks to food security remain high, given the expiration of the Black Sea Grain Initiative in July 2023, the ongoing El Niño weather pattern, and the likely incidence of other negative climate events. Despite FAO data showing improvements between 2021 and 2022 in central and western Asia, South America and North Africa, updated data as of August 2023 from the Food Security Information Network suggest that 238 million people in 48 countries are facing acute food insecurity, a 10 percent increase from a year earlier.

Households in many LICs continue to face a cost-of-living crisis and are not yet seeing the benefits of improved global conditions. The persistence of high food price inflation in LICs reflects logistical challenges (e.g., limited storage capacity), domestic market distortions, the offsetting impacts of currency depreciations and local weather shocks, as well as broader socio-economic fragilities and conflict.

Policy space has often been shrinking in the countries most affected by the food shock. In addition to a significant humanitarian cost, the global food shock—combined with higher energy prices and tighter global liquidity conditions—has taken a significant macroeconomic toll. In the most affected countries, median real GDP growth has weakened, headline inflation remains elevated, external imbalances have widened, and fiscal positions remain weak. These pressures have led to a depletion of FX reserves. And with debt levels already elevated and interest payments rising, capacity to respond to future shocks is limited.

Concerted efforts to mitigate the global food shock and prepare for new challenges remain crucial. The agenda includes (i) strengthening social safety nets to protect vulnerable households from the impact of the food shock, (ii) maintaining open trade to ensure a steady flow of food staples to vulnerable countries, (iii) continued financial support from the international community, and (iv) long-term efforts to address food insecurity, including by transforming food production and distribution.

25. Taking an even broader perspective, moving close to reaching the UN’s Sustainable Development Goals by 2030 would require an extraordinary mobilization of resources. Fully achieving the SDGs by 2030 now appears very much at risk, with realized progress relative to the desired trajectories delayed for 16 out of the 17 SDG.28 The Fund’s Fiscal Affairs Department (FAD) derived an annual financing need of about US$500 billion in 2030 to meet the SDGs across 49 LICs.29 In addition to the challenges of mobilizing such an amount on an annual basis, technical as well as macroeconomic capacity constraints would need to be addressed thoroughly to ensure sustainable implementation of a spending program of such scale.

C. The Need for More Resilience in a Shock-Prone World

26. Finally, strengthening resilience to cope with more frequent and deeper shocks will be essential. As discussed in ¶18–20, LICs are particularly vulnerable to a range of shocks. This reflects partially their relatively weak external and fiscal buffers that limit the capacity to swiftly respond with sufficient financial resources to shocks that develop a major economic impact. In addition, and partially as a reflection of limited financial means, many LICs are facing gaps in their infrastructure to prepare for and respond to large-scale disasters such as climate shocks, health crises, and hunger. Against this background, it is imperative for LICs to improve their resilience to shocks through strengthening external and fiscal buffers as well as targeted investments. This will be particularly challenging for the poorest countries facing the most pointed tradeoffs between these priorities and urgent investments to improve social outcomes and growth.

An Urgent Agenda for Lics and Their Partners

The challenges discussed above call for strong policy and reform efforts by LICs, capitalizing on the improved global outlook after the long series of adverse shocks since 2020. External partners will need to support these efforts through sustained and stepped-up engagement. For the Fund, strong support to its low-income members remains a priority.

A. Advancing the Domestic Policy and Reform Agenda

Key Objectives

27. To ensure macroeconomic stability and progress with growth, equality, and resilience, most LICs should focus on fiscal consolidation, further disinflation, and structural reforms. Decisive fiscal adjustment while protecting social cohesion and growth-enhancing investments will remain critical to bring down the large debt stocks that accumulated over the past decade, keep financing needs at prudent levels in light of the continuing liquidity challenges, and alleviate domestic financial sector risks in countries where the sovereign-financial sector nexus is strong. Working in tandem with monetary tightening, fiscal consolidation can also support the disinflation process needed to mitigate the cost-of-living crisis that disproportionally affects the poorer segments of countries’ populations; and help strengthen international reserves.30 The focus on structural reforms derives from the need for higher growth as a means to improve standards of living in an inclusive way; and progress with strengthening resilience in anticipation of more frequent and more potent shocks. Carefully tailoring the policy mix to country circumstances is vital (Box 5).

Policy and Reform Priorities

28. Fiscal consolidation and further disinflation will typically require policymakers to focus on the following areas:

  • Domestic revenue mobilization. The slowdown in net flows of credit and ODA (see ¶15–17) places particular emphasis on equitable domestic revenue mobilization, as there are limits to expenditure-based fiscal adjustment. The potential is significant: with revenue-to-GDP ratios for LICs (and even more so for FCS) typically standing significantly below those for emerging markets and advanced economies, recent IMF research suggests that developing countries could increase their tax-to-GDP ratio by up to 9 percentage points through a combination of tax revenue reforms and institutional capacity building – sufficient to close the gap, although achieving progress of this magnitude would require time.31 Strengthening core taxes, for example through closing exemptions and loopholes, can boost revenue (e.g., the Maldives), while removing inefficient tax expenditure could generate significant budget savings (e.g., Kyrgyz Republic). Maintaining or improving progressivity in taxation would be important to achieve equity consistent with poverty reduction objectives. Medium-term revenue strategies have proven useful to guide comprehensive reforms, for example in Benin and Rwanda. Stronger institutions are particularly important for raising revenue in FCS, as is revenue diversification in fuel exporting LICs.32

  • Re-prioritization of fiscal spending. When resources are (severely) constrained as is the case for many LICs, it becomes particularly important that every dollar is spent as efficiently as possible. This calls for a re-orientation of spending towards health, education, well-targeted social safety nets (see Section 2), and growth-enhancing public investment; and further prioritization based on the quality of such spending. These efforts should be flanked by a careful review of savings potential in areas such as goods and services, public sector wages, and untargeted energy subsidies that often represent a major share of overall budget spending without necessarily compelling economic justification among urgent competing needs. For example, explicit energy subsidies in LICs were estimated at nearly US$13 billion or more than 0.7 percent of GDP, with implicit subsidies much higher.33 There have been encouraging examples of such efforts even in the current difficult economic context: for example, Togo and the Republic of Congo have used fuel price adjustments in 2023 to reduce their subsidy bill; and Zambia is making progress on comprehensive subsidy reforms.34

  • Public financial management to boost spending efficiency. Priority areas for improvements typically include better cashflow management through single treasury accounts, better budget planning through the establishment of medium-term fiscal frameworks, and increased transparency and accountability through publication and debate of budget documents. In addition, more fully incorporating donor support into budget processes would enhance resource allocation and aid utilization. There is typically also scope to enhance public investment management, including for projects related to climate change; as well as the management of resource wealth in commodity-exporting countries. This agenda seems particularly urgent for many FCS with weak institutions and very limited fiscal resources, as well as for fuel exporters that often exhibit pro-cyclical policies.

  • Monetary policy to support disinflation and reserve adequacy. As highlighted in the January 2024 WEO update, elevated uncertainty about the future course of inflation calls for a data-driven approach to setting monetary policy. That said, LICs that still experience high inflation will need to continue with policy tightening until inflation pressures subside. Those that already observed a fall in inflation towards its target range should carefully analyze the behavior of key inflation drivers (including wages and the path of the exchange rate) to avoid premature policy loosening. In many countries, tight monetary policy can also help strengthen international reserve cover—under both fixed and floating exchange rates. Given weak transmission channels for monetary policy, efforts should continue to further develop monetary policy operations (often towards inflation targeting frameworks for countries with flexible exchange rates), deepen domestic markets, reduce fiscal dominance, and ensure consistency of monetary and exchange rate policy frameworks.

Low-Income Countries: Differentiated Policy Advice

The policy agenda discussed in this Section is broadly relevant for all LICs, but it is important to tailor policy advice to country circumstances. Looking at recent Fund advice from the Fund’s Consistent Policy Assessment (CPA, see Box Table), some trends emerge according to countries’ specific economic and institutional context. For example:

FCS. Fiscal tightening has continued across many FCS and typically remains a key priority, as these countries are often facing severe financing constraints. Moreover, strengthening monetary policy frameworks is often important. Where applicable, all efforts should be made to avoid central bank financing of budget deficits. This is crucial to support macroeconomic stability, and especially disinflation, and an increase in often low central bank international reserves.

Frontier markets. While many frontier markets stand to benefit from further fiscal tightening, some countries that already undertook significant consolidation may consider some loosening. Following initial gains with disinflation, Fund advice on monetary policy focused on mitigating second-round pressures. Pockets of vulnerability in domestic financial sectors could be addressed by targeted macroprudential tightening.

SDS. Many SDS (and especially tourism-dependent ones) need to reduce high debt levels, yet some have the flexibility to adopt a more lenient fiscal stance should strong revenue growth continue. This policy space could partially be used for urgent investments aimed at climate change adaptation.

Oil exporters. LICs depending on oil exports are facing the prospect of declining revenues due to a reduction in global energy prices. As they often missed the opportunity to use the unexpected oil windfalls of the recent past for reconstituting their external and fiscal buffers, further fiscal adjustment remains front and center in recent Fund recommendations.

Non-fuel commodity exporters and diversified exporters. Most of these countries are recommended to continue fiscal consolidation to further rebuild policy buffers, reduce debt vulnerabilities, and support disinflation. However, some economies with already lower debt levels and stronger fiscal positions may use some policy space to address urgent spending priorities.

uA001fig08

2024 Policy Advice to LICs 1/

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

1/ Policy advice based on internal assessments by IMF country teams as part of the Consistent Policy Assessment (CPA) exercise conducted in Fall 2023. Sample excludes Afghanistan, Eritrea, and Sudan.2/ IMF Country team’s recommended policy action.3/ Country groupings based on Annex 1 and Text Table 1. FRT stands for Fronter Economies.

29. In addition, LICs could proceed with structural reforms in support of macroeconomic stability, inclusive growth, and resilience:

  • Improvements in transparency, governance and the fight against corruption. Weaknesses in transparency and governance, as well as sometimes high incidences of corruption, can discourage the deepening of economic activity and the efficient allocation of resources.35 They can also undermine trust in economic policy and thus affect its impact on investor and consumer confidence, which can be critical for many LICs especially in the context of multi-year, deep adjustment efforts that are designed to engender a positive supply response. The strengthening of central bank independence and fiscal governance,36 a business-friendly regulatory environment, effective anti-corruption institutions (including asset declaration systems), and procurement rules are typical areas for potential improvements. While broad political will is needed to ensure sustained progress, significant achievements are possible through capacity development, as governance bottlenecks are often related to poor institutional frameworks and technical limitations.

  • Domestic financial market deepening. Developing domestic financial markets can help LICs lower their dependence on external financing, reduce currency risk, and promote financial development and thus growth and inclusion.37 While considerable heterogeneity across LICs’ financial systems implies that there is no one-size-fits-all approach to further reforms, data shows that significant progress is still needed for all countries, including frontier markets: it will be important to strike a balance between measures to foster market development, carefully calibrated public policy interventions,38 and effective macro-prudential oversight to avoid creating new risks such as an excessive sovereign-bank nexus.

  • Other supply-side reforms. Structural reforms can improve supply-side conditions and complement the macroeconomic policy mix in unlocking growth potential. Reform priorities are sensitive to a country’s specific context, but recent experience highlights that liberalization of monopoly markets, for example in the energy sector; reform of labor market institutions; enhanced public infrastructure; and improvements in education, health, and vocational training can all play an important role through their impact on capital, labor, and total factor productivity. Moreover, to mitigate the impact of a potential increase in trade fragmentation, LICs should maintain open trade policies and consider deeper regional integration and cooperation, including AfCFTA and RCEP. Finally, there is renewed interest in the potential role of industrial policy in achieving more economic diversification and higher value-added activities within sectors (Box 6).39 It is too early to draw firm conclusions, but results seem to be more encouraging in the presence of adequate governance frameworks and for approaches that target broader sectors instead of individual firms.

  • Digitalization. Digital transformation can raise incomes in LICs and improve governance, transparency and accountability.40 For example, technology based on mobile telephony can make financial services, including government transfers, more accessible to underserved populations in rural areas and help reduce poverty.41 On the other hand, the costs for upgrading the necessary infrastructure can be significant; and it is important to carefully consider how inclusiveness can be ensured in the implementation of digitalization agendas. Where applicable, crypto-related regulatory frameworks will need to be upgraded to mitigate risks.

  • Building resilience, especially to climate-related shocks. IMF research shows that investing in areas that are critical for development also helps improve resilience to climate-related disasters, requiring close collaboration with international partners, including the World Bank.42 More generally, better human capital, improved infrastructure as well as fast and effective decision-making protocols improve a country’s capacity to mitigate and adapt to disasters.43

Low-Income Countries: the Role of Industrial Policy

The IMF Consistency Policy Assessment – a semi-annual IMF staff internal survey on policy forecast and advice – shows that, although industrial policy is more prevalent in emerging markets and advanced economies, as much as 20 percent of LICs are employing industrial policies. In most cases, industrial policy pursues traditional objectives, such as boosting growth, exports or employment, economic diversification and promoting import substitution, rather than emerging priorities such as climate change mitigation. The most common policy instruments include the creation of special economic zones, provision of subsidies, and tax incentives (Box 6, Figure 3). Industrial policies tend to target primary and secondary sectors.

uA001fig09

Share of Countries Deploying Macrocritical Industrial Policy

(In percent)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

uA001fig10

Objectives of Industrial Policies

(Share of total LICs employing industrial policies)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

uA001fig11

Industrial policy in LICs: Instruments Used

(In percent)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

uA001fig12

Industrial Policy in LICs: Targeted Sectors

(In percent)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: Consistency Policy Assessment Fall 2023 and Fund staff estimates.

Implementation Challenges

30. While the policy and reform agenda for LICs is well established, challenges often occur in its implementation. Experience suggests that ownership of the agenda by country authorities is a critical and necessary determinant of success, which can prove particularly difficult to maintain in election years with heightened interest group pressure. Even so, ownership itself it is not sufficient:

  • Policy consistency. A well-calibrated macroeconomic policy mix, with each individual policy lever set on a sustainable course, helps to distribute the burden of macroeconomic management more evenly especially between monetary and fiscal policy. It thus works towards strengthening overall policy credibility and effectiveness. Looking at the evidence emanating from the Fund’s Consistent Policy Assessment suggests scope for further improvements (Figure 20): for example, about one third of LICs should further tighten monetary and fiscal policies, while more than half of them would have scope for recalibrating their policy mix between monetary and fiscal levers.

  • Sequencing of reforms amid capacity constraints. Adequate sequencing is another challenge in reform implementation. This is true especially in LICs where technical and macroeconomic capacity constraints can become binding, especially when pursuing too many initiatives at the same time. In practice, the optimal sequencing, flanked by adequate capacity development assistance, will be a function of a country’s level of development, institutional quality, and technical and administrative capacity. An IMF study shows that a set of first-generation reforms comprising measures in the areas of governance, anti-corruption, external sector, and business regulation can help to substantially increase output, especially in countries with large initial structural gaps.44 These reforms would often focus on (re-) building basic economic institutions, gradually unwinding inefficient and opaque allocation mechanisms and price controls, and the delivery of basic public services. Second-generation reforms could shift the focus towards fiscal institutions, the labor market, and the financial sector. In addition, to foster higher and more inclusive growth, emphasis can be placed on facilitating competition and on strengthening the business climate. Finally, for LICs moving toward middle-income status, more attention could be given to ensuring the stability of increasingly sophisticated financial systems, managing integration with global capital markets,45 and measures in support of diversification, the green transition, and gender equality.

  • Building broad buy-in. It has often proven hard to assemble and maintain broad coalitions in support of ambitious policy and reform efforts, as those typically imply short-term (and often concentrated) economic pain in exchange for longer-term (and often more widely dispersed) gain. To avoid backlash against reforms especially in their critical early phases, it is important to communicate well to key stakeholders and the general public on reform objectives and expected benefits both from the angle of broad strategy and specific measures. Moreover, it will be important to have mechanisms in place to compensate vulnerable groups for excessive losses, for example by well-targeted safety nets in the event of a withdrawal of energy subsidies.

Figure 20.
Figure 20.

Recommended Policy Mix in some LICs

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: Fund staff estimates.1/ Staff policy advice to LICs based on internal assessment by IMF country teams as a part of the Consistent Policy Assessment (CPA) exercise conducted in Fall 2023. The sample excludes LICs with hard and conventional pegs. Policy advice to tighten one policy lever and loosen (or holding unchanged) another and vice versa is labeled as “recalibrate”.2/ Group 1 comprises countries with closer alignment of policies while group 2 comprises countries with weaker alignment of policies. The alignment is proxied by the difference between scores of the monetary and fiscal policy stances. Based on the sample of PRGT countries with available data excluding hard pegs and other managed arrangements. The length of the box graph whiskers is customized to capture all available observations.

B. Maintaining Strong External Support

31. Decisive policy and reform implementation are critical to support macroeconomic stability and development, but LICs also continue to depend on strong external support. This support is not only about financing—for example, strong growth in LICs will require predictable market access for their exports as well as for sourcing their import needs, including energy and food staples. In addition, strengthening effective and efficient government operations will be facilitated by well-targeted policy advice and capacity building assistance, in traditional areas such as macroeconomic policy frameworks and sectoral policies; but also in new areas such as initiatives to mitigate the impact of climate change.46 That said, ensuring adequate external financing for LICs to help cover their external and fiscal financing needs will be particularly important in the current environment of tight liquidity conditions. Such support will be critical for reducing the economic, political, and social pain associated with urgent and deep macroeconomic adjustment efforts—and hence for increasing their likelihood of success.

32. Mobilizing adequate financing for LICs is a daunting challenge given the orders of magnitude involved. It is difficult to estimate with precision the financing needs that LICs will have over the next years. But some elements of analysis can provide a sense of the orders of magnitude involved:

  • Baseline needs. A first method involves a bottom-up approach of aggregating the gross needs for each country that are underlying the medium-term projections in the IMF’s WEO database.47 These estimates are consistent with the economic outlook under the baseline scenario (from which this report derives the projections for the main macroeconomic aggregates discussed in ¶1–14 and thus reflect available information on countries’ budget plans and financing assumptions. Importantly, the projections take into account debt amortization schedules for each country. When all is said and done, these financing needs are expected to amount to some US$820 billion for the period 2024–28 (Figure 21).

  • Macroeconomic stabilization. The baseline needs do not consider any normative judgment on the desirable path of LIC economies going forward; they merely reflect the needs associated with the most likely trajectory. A first modification to this approach involves adding the external financing needs that would be required to bring the international reserve cover for all LICs to a minimum level considered as “safe”, which in operational terms means meeting at least the threshold of 3 months of import cover. Another US$30 billion over the 2024–28 window would be needed to meet this objective, which is strongly associated with the imperative of crisis-proofing LIC economies for a more shock-prone world.48

  • More developmental ambition. The hardest dimension to analyze involves the needs associated with a more ambitious effort to spur economic development, including due to the difficulty of setting clear anchors for such calculations. This report suggests two methodologies, while emphasizing that there is no consensus on these and parameter uncertainty is high. The following numbers should thus be interpreted as indicative ranges of needs rather than as exercises of any precision. A first approach, already used in the 2022 LIC report, speaks to the issue of LICs’ (currently paused) income convergence with advanced countries. Specifically, it asks how much additional financing would be needed over 2024–28 to ensure again, as was the case in the years prior to the pandemic, that per capita income across LICs grows at a higher rate than that in more advanced economies to gradually close the income gap.49 The answer is a sum of about US$450 billion over five years, up from an estimate of US$267 billion in the last report mainly due to further divergence in growth and population dynamics and higher-than-expected growth in nominal GDP (due to inflation) that acts as a base for the calculations. A second approach, pioneered in this report and discussed in more detail in the online supplement, shifts perspective towards the Sustainable Development Goals (SDGs). Based on an endogenous growth model, it asks how much additional financing would be required to make significant progress towards the SDGs while taking into account realistic constraints on LICs’ absorptive capacity in amping up their respective spending. This calculation yields an additional need of some US$500 billion over the period 2024–28, calibrated on reaching the SDGs by 2040.

Figure 21.
Figure 21.

Low-Income Countries: Gross External Financing Needs and Net Financial Inflows

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

33. Even meeting only a part of LICs’ plausible additional financing needs of some US$500 billion through external flows would require a major effort by many actors. For a starter, these needs that represent up to 26 percent of LICs’ 2023 GDP would come on top of the US$800 billion in gross inflows already assumed in the baseline over 2024–28.50 And the needs meet a challenging global context in which creditors and donors have been struggling with many competing demands. Against this backdrop, there are several urgent priorities:

  • Maximizing domestic resource mobilization within LICs. As already highlighted earlier in this section, sustained development gains will depend on stronger efforts to mobilize domestic revenue in LICs as well as domestic financial market development. More proactive redirection of expenditures towards priority areas would also help. The potential of such initiatives looks promising: for example, boosting LICs’ revenue-to-GDP ratio by 5 points of GDP, while ambitious, could yield at least half of the additional needs (see the online supplement).

  • Stepped-up engagement by external official creditors, especiaiiy through highly concessional and grant financing. Both multilateral and official bilateral creditors will maintain a key role in providing financing to LICs and supporting domestic policy and reform efforts conducive to attracting private capital flows. After providing exceptional support in response to the pandemic,51 the World Bank and the IMF will review their concessional financing envelopes, and associated programmatic priorities such as a stronger focus on domestic revenue mobilization, in the year ahead consistent with their respective mandates—the former on the occasion of the IDA 21 replenishment, the latter in the upcoming PRGT review. Regional Development Banks could explore further scope to leverage their balance sheets and maximize their capacity to support LICs with highly concessional and grant financing. Official bilateral donors and creditors, including traditional providers of ODA confronted with competing demands, and non-Paris Club creditors whose new financing has significantly declined in recent years, could explore how to strengthen financial engagement with LICs. Given particularly high needs in the poorest LICs, their already constrained debt positions, and stronger capacity of wealthier LICs to navigate current challenges, focusing scarce concessional and grant resources on the poorest countries would appear desirable.

  • Crowding in private finance to LICs. The numbers convey a clear message: the resources that can be provided by the official sector, domestically or externally, will not be sufficient by a large margin to cover the financing needs of LICs: private finance will have to play a strong role in facilitating development. While the international community should deepen further its work on risk-sharing instruments that can help crowding-in private finance to LICs, it will also be important for LICs to progress with efforts to strengthen the fundamentals that investors look at, including transparency and governance standards. Given the higher costs associated with private finance, LICs with market access should ensure that private debt is incurred at a pace consistent with absorptive capacity and debt sustainability.

  • Improving international coordination on debt resolution. A more diverse creditor composition puts a premium on effective coordination to help countries experiencing debt distress. The G-20 Common Framework for Debt Treatment (CF) has bridged an important gap between Paris Club and Non-Paris Club official creditors, but implementation has been challenging and would benefit from further improvements in speed and efficiency.52 Coordination between creditors outside the CF, as well as between official and private creditors, has also been difficult. That said, several important milestones were reached during 2023. Somalia reached the HIPC Completion Point, which unlocked US$4.5 billion in debt relief.53 Moreover, debt treatments under the CF advanced for Ghana and Zambia (in addition to Chad that completed its CF debt restructuring in December 2022) and allowed Fund-supported programs to proceed. Important first steps were also taken for Ethiopia (debt service suspension during the negotiation). Lastly, Malawi advanced its bilateral debt restructuring outside the CF, while a few other LICs (e.g., Djibouti, Lao PDR, Zimbabwe) indicated their intention to restructure their debt. All this suggests an important learning curve among creditors, supported by efforts to establish protocols on best practices with debt restructurings, including through the work of the new Global Sovereign Debt Roundtable. It will be important to carry the positive momentum into the future.

C. The IMF’s Strong Commitment to Supporting LICs

34. Since the time of the 2022 LIC report, the Fund has further strengthened its support to LICs. A key focus has been on ensuring well-tailored support that responds to LICs’ specific characteristics and challenges, including high susceptibility to climate-related shocks and food insecurity. The IMF has also stepped up its engagement with FCS, including through the implementation of a comprehensive FCS Strategy approved in 2022. The Strategy provides an operating framework and a set of priorities that will allow the Fund to better support FCS to achieve macroeconomic stability, strengthen resilience, and promote inclusive growth to exit fragility.54

35. The Fund’s policy advice has focused on helping LICs navigate through the challenges emanating from the Covid pandemic, the war in Ukraine, and global monetary tightening. This has typically involved advice on the calibration of macroeconomic tightening to reduce debt-related vulnerabilities and address high inflation. In this context, the Fund emphasized the need for consistent policy mixes as well as to organize adjustment in a growth-friendly and socially cohesive way with a strong emphasis on strengthening social safety nets (see Section 2). In addition, the Fund has underscored the importance of maintaining open trade especially for food staples to mitigate food insecurity; and has expanded its knowledge base in new areas such as the economic impact of climate change, gender, inequality, and industrial policy to be able to continuously advice its membership with well-tailored recommendations grounded in cross-country experience.

36. Capacity Development (CD) continues to provide highly valued and flexible technical assistance and training in LICs closely integrated with surveillance and programs. Donor support from existing and new partners has been crucial for CD, allowing CD spending for LICs to increase by over 40 percent between FY22 and FY23. Engagement has grown especially with FCS, reflecting the importance of CD in the Country Engagement Strategies (CES) that have been prepared in line with the Fund’s new FCS strategy. Technical assistance has been focusing especially on the core areas of macroeconomic management such as statistics, fiscal, monetary and financial sector management, macroeconomic frameworks, and debt management. Demonstrating flexibility, agility, and responsiveness, Fund’s CD has grown on governance and climate adaptation and mitigation.55 Key to the success of the Fund’s CD engagement are its Regional Capacity Development Centers, whose local presence especially in LICs has been instrumental in securing much needed traction and impact.

37. The Fund has also evolved and increased its financial support. Against a backdrop of multiple shocks since 2020, the IMF quickly adapted its toolkit to better serve its LIC members (see Box 7). Total Fund credit outstanding to LICs increased to SDR 24.4 billion at the end of 2023 (see Figure 22), compared with SDR 7.4 billion at the end of 2019.56 After a peak in emergency financing in 2020, most commitments since involved upper-credit tranche programs in the form of ECF or blended ECF/EFF arrangements. Their multi-year orientation and ex post conditionality are best suited to help LICs make significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. In addition, a few countries drew on the temporary food shock window under the RCF/RFI in 2022 and 2023. While all LICs benefit from concessional lending under the Fund’s PRGT, LICs with relatively high per capita income face a cap in access to these limited resources and blend PRGT resources with non-concessional GRA resources.57 That said, only SDR 6.1 billion out of the total credit of SDR 24.4 billion outstanding to LICs at the end of 2023 involved non-concessional financing (Figure 22, right panel). The Fund expects lending activities to continue strongly into 2024.

Figure 22.
Figure 22.

Fund Lending to LICs, 2010–23

(In millions of SDR, unless otherwise indicated)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

1/ In 2010, Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka graduated from the PRGT; Amenia and Georgia graduated in 2013; Bolivia, Mongolia, Nigeria, Vietnam graduated in 2015; and Guyana graduated in 2020.

IMF’s Recent Policy Changes Affecting Low-Income Countries

  • Resilience and Sustainability Facility.1 As of the end of 2023, the Fund’s new facility to support countries cope with macro-critical risks associated with climate change and pandemic preparedness has been used by 9 LICs for total access of SDR 2.5 billion. The financing under the RSF, which facilitates the climate transition and entails close coordination with the World Bank and other IFIs, provides coherent policy advice and helps catalyze additional official and private finance.

  • Temporary increase of annual and cumulative access limits under both the GRA and PRGT.2 The Fund approved a temporary increase in GRA and PRGT access limits raising the annual access limits to 200 percent of quota and the cumulative access limits to 600 percent of quota, respectively. This allows countries more space to draw on Fund financial support below the levels of exceptional access that require meeting additional safeguards.

  • Food shock window under the RCF/RFI. As part of the Fund’s response to the global food shock, the Executive Board approved a temporary Food Shock Window (FSW) in September 2022.3 Six countries have used this window to cope with urgent BOP pressures associated with the spike in prices for food and fertilizers provoked by the war in Ukraine. Three of these (Burkina Faso, Malawi, and Ukraine) have since transitioned to Fund support under a multi-year UCT-quality program. The window will expire at the end of March 2024, with measures already in place to ensure the Fund can continue to support countries affected by the food shock, including where UCT-quality programs are not feasible. In practice, the extension of the higher cumulative access limits for the RCF (see next point) ensures that, at the time of expiration of the FSW, all LICs that were eligible to the FSW will either be under a UCT-quality program or have space for additional emergency financing under the RCF (typically 50 percent of quota or more) to help mitigate the impact of the food shock or other potential future shocks, should a UCT-quality program not be feasible.

  • Extension of higher cumulative access limits for the RCF/RFI.4 To ensure that the Fund had the capacity to support countries qualifying for emergency financing in case of renewed emergency situations, and taking into account that Covid-era emergency financing would only be repaid starting in 2025, the Fund extended temporarily higher cumulative access limits for the RCF/RFI.

  • Expansion and refinement of non-disbursing Fund Instruments.5 The approval of the Program Monitoring with Board involvement (PMB) has so far helped two LICs to build track record with involvement from the Board, and the Policy Coordination Instrument (PCI) has been refined and streamlined.

1/ For details, see The Resilience and Sustainability Facility (RSF). 2/ IMF 2023i, IMF 2023n, and IMF 2024c. The temporarily higher limits will be maintained until end-2024. 3/ IMF 2023j. 4/ IMF 2023k. The temporarily higher cumulative access limits under the RFI will be maintained until end-June 2024. The temporarily higher cumulative access limits under the RCF will be maintained until the completion of the 2024/25 comprehensive review of the Fund’s concessional facilities and financing. 5/ IMF 2023m and IMF 2024b.

38. A major milestone ahead will be the completion of the review of PRGT facilities and financing. This review will provide an opportunity for the IMF to have a comprehensive look at its concessional financing operations for LICs. The review will aim at ensuring the Fund’s ability to provide adequate concessional financing support to LICs in accordance with the Fund’s mandate of providing temporary BOP support, while ensuring the self-sustained nature of the PRGT over the long term and catalyzing additional financing from other sources. Key considerations will include the role of the Fund’s concessional and non-concessional financial support to LICs in the context of increasing financing needs in a more shock-prone world, ways to mobilize sufficient financing to buttress the long-term self-sustainability of the PRGT, and how the Fund may better reflect the heterogeneity across LICs in its operations by targeting its limited concessional financing to those of its members that need it the most (Box 7). Finally, the review will reflect on how the Fund, the World Bank, and other donors and creditors can best work together to support LICs, all in line with their respective mandates.

Strengthening Social Safety Nets in Low Income Countries

A. Background

39. Despite significant progress over the past decades, poverty remains prevalent in low-income countries. The share of the population living in poverty in Sub-Saharan Africa declined by over 1 percentage point per year in 2000–2019 (Figure 23). As noted in Section 1, the pandemic buckled this trend in 2020, and recent shocks to food and energy prices have hit vulnerable households hard. As the region continues to recover, the decline in poverty has resumed, albeit at a slower pace. Today, the poverty rate in Sub-Saharan Africa remains at about 40 percent (over 330 million people) (Figure 24), five percentage points higher (40 million people) than projected under pre-pandemic trends.58 About 90 percent of the poor in low-income countries (LICs) are in Sub-Saharan Africa. In LICs outside of this region, time trends are similar, but poverty rates are lower, reaching 13 percent in 2022.

Figure 23.
Figure 23.

Poverty Rate in Low Income Countries, 1990–2022

(In percent of the population living in poverty)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: World Bank Poverty and Inequality Platform and Fund staff estimates.Note: Bangladesh has about half of the population of LICs outside of Sub-Saharan Africa. Other countries are not displayed because of data limitations.
Figure 24.
Figure 24.

Population in Low-Income Countries, by Region

(In million)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: World Bank Poverty and Inequality Platform and Fund staff estimates.

40. Poverty rates and poverty gaps vary widely across LICs. In Sub-Saharan Africa, poverty outcomes range from countries with poverty rates under 20 percent and poverty gaps under 10 percent (Cabo Verde, Comoros, The Gambia, Guinea, São Tomé, and Senegal) to countries with poverty rates above 60 percent and poverty gaps above 30 percent (Democratic Republic of Congo, Madagascar, Mozambique, South Sudan, and Zambia) (Figure 25)59 The aggregate poverty gap—a rough estimate of the minimum resources needed to eradicate poverty —is about 10 percent of GDP in Sub-Saharan Africa LICs or about $50 billion per year (Figure 26).60

Figure 25.
Figure 25.

Poverty Rate and Poverty Gap in Low-Income Countries

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE, WEO, and Fund staff estimates.Note: Uses poverty line of $2.15 international dollars using 2017 PPP conversion rates.
Figure 26.
Figure 26.

Aggregate Poverty Gap

(In percent of GDP)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE, WEO, and Fund staff estimates.Note: Uses poverty line of $2.15 international dollars using 2017 PPP conversion rates.

41. In low-income countries, Social Safety Nets (SSNs) are an important tool to alleviate poverty. Facing prospects for relatively weak growth and tight financial conditions (Section 1), strengthening SSNs to effectively support vulnerable households remains a priority. Furthermore, fragility and conflict can exacerbate poverty by weakening institutions and impairing the capacity to strengthen SSNs (Cooper 2018). Where fiscal adjustments are needed, expanding SSNs and increasing the effectiveness of existing programs is particularly critical to alleviate poverty, and mitigate the impact of economic reforms on vulnerable households. Stronger SSNs can also prove valuable in building public support for often contentious reforms, for example to boost domestic revenue mobilization or reduce energy subsidies (Dutzler and others 2021).

42. SSNs programs can support human and physical capital accumulation and help build resilience in LICs. SSN transfers have little adverse effects on employment (Banerjee and others 2017). SSNs can increase the resilience of vulnerable households by improving their capacity to prepare for, cope with, and adapt to negative shocks (Grosh and others 2022; Beegle and others 2018; Andrews and others 2018). SSNs are associated with increasing household consumption (Bastagli and others 2016) and food security (Asfaw and Davis 2018), including through spill overs to non-beneficiaries (Taylor, Thome, and Filipski 2014). Furthermore, the literature finds positive effects on asset accumulation, including on household savings (Kenya, Sierra Leone, Tanzania), small livestock ownership (Niger), durables (Ethiopia, Kenya, and Lesotho), and land ownership (Zambia); SSN also boost investments in human capital through greater expenditures on nutrition and education among children (Alderman and Yemtsov 2013). The impact on learning and health outcomes is mixed (Beegle and others 2018). Social assistance and labor market programs can also help in closing economic gender gaps (Box 8).

Gender Aspects of Social Safety Nets

SSN can have notable gender-specific effects, such as increasing women’s bargaining power and decision-making in the household, better educational outcomes for both boys and girls, and advancements in maternal and child health (Barrington and others 2022; Garcia and Saavedra 2017; Hagen-Zanker 2017; Independent Evaluation Group 2014; Peterman and others 2019). For example, direct cash transfers to women can led to increased household expenditure on children’s needs in some contexts (education, health, nutrition), reflecting women’s empowerment and their distinct spending preferences compared to men. Labor market programs and SSNs can close economic gender gaps by increasing women’s employability and access to paid jobs for women. Women are generally overrepresented in the unemployed, and so active labor market policies (ALMPs) tend to have a greater impact on them. Training programs can improve labor force outcomes for women more than for men, particularly in countries with greater employment gender gaps and larger informal employment for women (Bergemann and J. van den Berg, 2006).

43. Recent shocks have exposed gaps in existing SSNs, but also spurred innovative measures to support vulnerable households. In many countries SSNs were limited in scope to protect the most vulnerable. Furthermore, in responding to COVID-19, LICs faced challenges related to limited access to finance, weak administrative capacity, and lack of basic infrastructure. On average less than 10 percent of the population in LICs received emergency transfers (Gentillini 2022). At the same time, several countries relied on novel mechanisms leveraging digitals to scale up SSNs, including Mozambique, Nigeria, and Togo.

44. The section is structured as follows. ¶45–50 reviews the landscape of SSNs in LICs, including adequacy and efficiency considerations, as well as experiences from recent responses to shocks. ¶51–58 discusses options to strengthen SSNs, considering lessons from case studies for Ghana, Mozambique, Uganda, Tanzania, and Zambia which assess potential horizontal or vertical expansions to their main cash transfer programs.

Landscape of Social Safety Nets in Low-Income Countries

45. SSNs comprise noncontributory transfer programs designed primarily to protect households from poverty and destitution. In many cases, these programs also aim at promoting the human and physical capital accumulation, which can help households build resilience to shocks and avoid future poverty (Coady and others 2022). To achieve these objectives, LICs spend about 1 percent of GDP per year in a wide variety of noncontributory programs, with only about a quarter of spending devoted to cash transfers.

  • SSN Spending. On average, LICs spend about 1 percent of GDP in SSNs, equivalent to about half of the SSN spending observed in emerging economies (Figure 27). Of the 56 LICs with SSNs spending data, only ten countries spend over 2 percent of GDP in SSNs (Burundi, Cabo Verde, Central African Republic, Dominica, Kyrgyz Republic, Lesotho, Mauritania, Nepal, Nicaragua, and Timor-Leste), and eleven spend less than 0.20 percent of GDP (Cameroon, Rep. of Congo, Cote d’Ivoire, Guinea-Bissau, Lao P.D.R., Myanmar, Papua New Guinea, Samoa, São Tomé, Tanzania, and Togo).

  • Targeting. In practice, SSN programs typically targeted benefits through various mechanisms, often combining different criteria (Coady and others 2022). Key methods to select beneficiaries include geographic targeting (benefits based on geographic areas); categorical targeting (based on observable characteristics like age or gender); community targeting (relies on local knowledge to identify those in need); and means or proxy-means testing which determine eligibility based on income or socioeconomic factors. Ultimately, the selection of targeting methods reflects program’s goals, as well as the social, political, and country-specific context, with no method universally superior to others (Grosh and others 2022).

  • Composition of SSN spending. Food and in-kind transfers are often the largest SSN program in LICs in terms of spending, comprising about a quarter of SSNs spending in Sub-Saharan Africa, although they play only a minor role outside of the Sub-Saharan African region. Cash transfers, including conditional and unconditional transfers and social pensions, are also about a quarter of LICs’ SSN spending—lower than the two thirds of SSNs devoted to cash transfers in emerging economies. The rest of SSN spending in LICs is distributed across public work programs, fee waivers (including health and education fee waivers, utility allowances, and housing subsidies), and school feeding programs.61

Figure 27.
Figure 27.

Social Safety Nets: Expenditure and Main Programs, 2019 or latest available year

(Percent of GDP)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE, WEO, and Fund staff estimates.

46. Commensurate to the limited spending envelope, SSN in LICs have relatively low coverage and benefits. Two key choices in the design of SSNs—and how these are operationalized—can have important consequences for the impact of SSNs spending on poverty alleviation: the target population and the level of benefits. The share of the population covered by SSNs programs remains low in LICs, particularly in Sub-Saharan Africa where under 20 percent of the population receives SSN benefits (Text Table 2). Moreover, a large share of SSNs spending in Sub-Saharan Africa goes to the better off.

  • Low coverage of the poor in Sub-Saharan Africa. On average, only about a quarter of households in the first quintile of the consumption distribution receive some form of support from SSNs in Sub-Saharan Africa, a share noticeably below that in LICs in other regions or in emerging economies. Only a handful of countries are able to reach over half of households in the poorest quintile (Bangladesh, Burkina Faso, Nepal, Malawi, Honduras, Lesotho, and Zimbabwe) (Figure 28).

  • Low benefit adequacy in LICs in regions other than Sub-Saharan Africa. On average, benefit adequacy (average benefits in percent of pre-transfers consumption for SSNs recipients) in Sub-Saharan Africa seems on par with emerging economies, but it is much lower in LICs outside of the Sub-Saharan Africa region. A few countries manage to provide average benefits over 10 percent of average consumption, including Cote d’Ivoire, DRC, Uzbekistan, and Zimbabwe.

Text Table 2.

Social Safety Nets in LICS: Coverage, Benefit Adequacy, and Incidence

article image
Sources: ASPIRE, WEO, and Fund staff estimates.

47. A sizeable share of SSN spending goes to the better off in Sub-Saharan Africa. On average, only about one-third of SSN (about 0.3 percent of GDP on average) is channeled to the poorest quintile and a large share of the beneficiaries are in the top quintile of the distribution (Figure 29). Only in a handful of countries (Honduras and Lesotho) SSNs cover over 60 percent of households in the poorest quintile.62

Figure 28.
Figure 28.

Coverage and Benefit Adequacy

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE and Fund staff estimates.
Figure 29.
Figure 29.

Spending in Social Safety Nets

(percent of GDP)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE and Fund staff estimates.

48. In LICs, effective SSNs require substantial investments in the capacity to design and implement programs. This includes the development of robust systems for identifying and registering eligible beneficiaries (i.e., ID systems, social registries, household surveys), as well as efficient benefit delivery mechanisms (i.e., bank accounts, mobile money, e-wallets, digital vouchers, one-time passports, and smart cards). While such investments initially divert funds from direct transfers, they are crucial for ensuring coverage of the intended recipients and minimizing leakages. Nevertheless, administrative costs can be sizeable in LICs, on average about 15 percent of spending in LICs (Beegle and others 2018; Ortiz and others 2017) and can vary from 5–10 percent in cash transfer programs to 22 percent for in-kind benefits (Grosh and others 2022). In countries with limited policy space, it is crucial to assess the benefits derived from investments in administrative capacities, such as enhanced targeting accuracy and the introduction of additional social benefits that extend beyond the scope of poverty reduction (Coady and others 2022).

49. The role of development partners in financing SSNs remains critical in many countries. A significant portion of LICs SSNs is financed by development assistance provided by both bilateral and multilateral organizations. FCS particularly depend on this external support, including Cameroon, Republic of Congo, Guinea-Bissau and Sao Tome relying entirely on it (Figure 30). Besides offering financial support, development partners play a crucial role in enhancing capacity, strengthening delivery institutions, and promoting more transparency. However, the presence of multiple partners can lead to fragmentation (Beegle and others 2018).

Figure 30.
Figure 30.

Gross Official Development Aid, 2019 or most recent year

(Development aid for social protection in percent of SSN spending)

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE, OECD, and Fund staff estimates.Note: Red bars indicate FCS. Figure compares social safety net estimates to aid for social protection, thus some of ODA spending might be allocated for non-social safety nets, which tend to be small in LICs.

50. Recent shocks have challenged SSNs in LICs but also led to new ways to help families in need. For instance, during COVID-19, many LICSs struggled with limited financing, weak management systems, and poor infrastructure. While SSNs expanded—average benefits were 80 percent higher than pre-pandemic transfers—they reached less than 10 percent of the population (Annex III). Many LICs relied on innovative digital measures to simplify the design of programs and expand support to households, including to those in the informal sector, and overcome some of the traditional limitations in capacity. Countries that leveraged digital systems for identification, registration, and payments include Benin, Democratic Republic of Congo, Ethiopia, Haiti, Malawi, Mozambique, Rwanda, Sierra Leone, and Togo (Bird and Hanedar 2023).

  • In Democratic Republic of Congo, the integration of digital technologies enhanced the efficiency of humanitarian aid distribution through the STEP-KIN program. This initiative leveraged data-driven approaches, including geographic targeting and mobile phone ownership information, to establish the identity and eligibility of vulnerable households. The use of mobile money transfers facilitated swift and secure disbursements. Within three months, STEP-KIN successfully identified, registered, and paid benefits to over 100,000 vulnerable individuals. The program expanded its reach to assist 250,000 direct beneficiaries, indirectly impacting around 1.3 million individuals in Kinshasa (Mukherjee and others 2023; Bird and Hanedar 2023).

  • Togo implemented the Novissi emergency cash transfer program, targeting informal workers who were severely affected by lockdown restrictions. The program leveraged existing socio-economic data and introduced a new platform for benefit application, engaging various stakeholders for support. Novissi’s effectiveness was largely due to its mobile-based platform, which expedited the identification of beneficiaries and facilitated the distribution of aid within roughly five days of its announcement (Hammad and other 2021). The program rapidly expanded its coverage due to enhanced beneficiary identification and cross-verification processes, initially reaching approximately 550,000 individuals, accounting for 12 percent of the country’s population.

Options to Strengthen Social Safety Nets

51. Both economic growth and SSN spending can play critical roles in reducing poverty. Broad-based economic growth has been long recognized as a crucial source of poverty reduction (Ferreira and Ravallion 2008; Pritchett and Lewis 2022), and in a cross-section of LICs countries with higher GDP per capita tend to experience lower poverty rates (Figure 31). The empirical evidence on the magnitude of the effect is mixed (Adams, 2004), as the impact of income on poverty depends in part on the evolution of inequality which can be shaped by fiscal policy, including the strength of SSNs (Zouhar and others 2021). The association between social safety net spending and poverty rates is only slightly negative, with a range of poverty outcomes for countries with similar levels of low spending (Figure 32). In OLS regressions pooling the data available for LICs, both GDP per capita and social safety net spending generally have an impact on poverty rates—a $1,000 increase in of per capita GDP has about the same impact of an increase in SSN spending of about 0.8 percentage points of GDP, and both associations are affected by the degree of inequality (Annex IV). The results suggest that both growth and SSNs are crucial on addressing the magnitude of the challenge in alleviating poverty in LICs.

Figure 31.
Figure 31.

Poverty Rate and Income per Capita

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE and Fund staff estimates.
Figure 32.
Figure 32.

Poverty Rate and Social Safety Nets Spending

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE and Fund staff estimates.

52. There is ample room for efficiency gains in SSNs spending in most LICs. This is particularly pressing in countries where over 80 percent of SSNs spending is received by households outside of the poorest quintile of income (Burkina Faso, Chad, Niger, Senegal, Tajikistan, Uganda, and Zambia) (Figure 33). Even small improvements in channeling benefits to the poor could have sizeable effects. All else equal, reducing the share of SSN benefits that go to top quintile households in Sub-Saharan Africa from 25 to 10 percent and redirecting these resources to the bottom quintile would increase coverage of the bottom quintile from 24 to 40 percent without increasing the total level of SSNs spending.

53. Increasing social safety net expenditure might be appropriate in some countries. Where SSN spending is relatively low yet well-directed to vulnerable households (Djibouti, Ghana, Myanmar), raising SSN spending can be considered. Considering an expansion of coverage among the most vulnerable (“horizonal expansion”) seem appropriate. In addition, in Ghana and Myanmar, there might be scope to boost benefits (“vertical expansion”). Where benefits are poorly targeted, increasing efficiency remains a priority.

Figure 33.
Figure 33.

Spending in Social Safety Nets and Share of Spending Outside of Poorest Quintile

Citation: Policy Papers 2024, 011; 10.5089/9798400272400.007.A001

Sources: ASPIRE, WEO, and Fund staff calculations.

54. Country-specific considerations related to the design of SSNs are crucial to inform reform options. The online supplement includes case studies for Ghana, Mozambique, Uganda, Tanzania, and Zambia, to assess existing SSNs and examine the impact of selected measures to expand coverage or boost benefits under existing cash transfer programs, while broadly following the current targeting practices under a spending envelope of 0.5 percent of GDP (Text Table 3). Overall, the case studies highlight the importance of country-specific design issues when considering reforms. In Ghana, Tanzania, and Zambia, current targeting is effective at channeling spending to vulnerable households. In these countries, there is scope to extend current programs by raising benefits and expanding coverage to further alleviate poverty. In Mozambique poor targeting weakens the potential of cash transfers to alleviate poverty considering their relatively high fiscal cost. In Uganda, social pensions for individuals 80 and older have an impact on reducing poverty. Expanding this scheme would be less effective at reducing poverty, as most of the spending would continue to go to better off households unless parameters other than age are considered in beneficiary selection.

Text Table 3.

Case Studies

article image
Sources: ASPIRE, SOUTHMOD, WEO, and Fund staff estimates. Notes: Includes selected cash transfer programs, see the online supplement.
  • In Ghana, the flagship cash transfer program (the Livelihood Empowerment Against Poverty, LEAP) is relatively well targeted following proxy means testing (about 60 percent of spending is directed to households in the bottom quintile of income), but there is room for program expansion in terms of both coverage and generosity. Raising LEAP spending to 0.5 percent of GPD would have a large impact on poverty, particularly by focusing on expanding coverage, and nearly double the impact of a one percentage point of GDP in SSN spending on poverty reduction.

  • Mozambique spends about 0.4 percent of GDP in the Basic Social Subsidy Programme (BSSP), a cash transfer to low-income households identified by categorical targeting (including age, chronic illness, or disability; orphans). Only 24 percent of BSSP spending goes to households in the bottom quintile and the program has a relatively low bang for the buck in terms of poverty reduction. Raising BSSP spending to 0.5 percent of GDP while maintaining the existing targeting principles would have only a marginal impact on poverty whether through benefit increases or coverage expansion.

  • In Tanzania, the Productive Social Safety Net (PSSN) targets low-income households with cash transfers that depend on household characteristics. The PSSN seems well targeted (directing over 80 percent of its benefits to households within the lowest two income quintiles) but has a limited impact in poverty due to its relatively small spending envelope. Raising PSSN spending can have a substantial impact on poverty reduction, particularly by focusing on increasing benefits to the population already receiving benefits.

  • In Uganda, the main cash transfer program is the Senior Citizens Grant (SCG) targets the population age 80 and older. SCG costs about 0.1 percent of GDP, of which only about 24 percent goes to households in the poorest quintile. Raising SCG spending to 0.5 percent of GDP would lower the poverty rate by an additional 1 percentage point, either by increasing benefits for current beneficiaries or by expanding benefits to the population 65 and older. Yet, in both reform scenarios the poverty reduction by percentage point in spending declines, likely indicating the limits of poverty reductions from targeting benefits solely by age.

  • Zambia’s cash transfer program targets vulnerable households using proxy means testing, categorical targeting (elderly, disabilities, number of children), and community input to identify potential beneficiaries. Boosting spending from 0.4 to 0.5 percent of GDP by raising benefits to current beneficiaries would result in an additional 0.3 percentage point drop in the poverty rate. Alternatively, broadening coverage by easing eligibility reduce poverty rate by 1.5 percentage points.

55. The extent of poverty, administrative capacity, and fiscal space are also critical prioritizing measures to strengthen SSNs. Administrative capacity is an important factor when considering how to identify and channel benefits to the most vulnerable. Relying on household characteristics such as proxy means testing can help prevent leakages to well off households, but this can also lead to errors of exclusion thereby limiting coverage for vulnerable households (Brown and others 2018). In countries with lower capacity and high informality, relying on less complex methods to identify beneficiaries, such as categorical (old age, early childhood), community or geographical might be appropriate (Coady and others 2022). Where capacity allows, broadening the scope beyond existing programs could be considered.

56. In most LICs, it is also crucial to ensure systems are able to respond quickly to a variety of shocks. Poorer households are usually more exposed and vulnerable to the impacts of shocks. These households are often less prepared to deal with crises (Bowen and others 2020; Hallegatte and others 2016). Recent shocks to food and energy prices have highlighted the role of social safety nets in increasing resilience of vulnerable households. For example, in Chad, Equatorial Guinea, and Honduras social safety nets are being used to mitigate the impact of food insecurity (IMF 2022c, IMF 2023e, IMF 2023q). Furthermore, in fragile and conflict situations, social safety net design must remain flexible to volatile situations on the ground—for example, coping with high levels of insecurity in rolling out cash transfers might influence the decision to use cash or in-kind transfers (Grun and others 2020).

  • Continuing to expand existing social safety nets to vulnerable households. A primary step to build resilience is enhancing the coverage of existing social safety nets for the most vulnerable (Grosh and others 2022; Beegle and others 2018; Andrews and others 2018). When faced with shocks, simple tweaks to the existing SSN programs (relaxing targeting, raising benefits, and increasing the timeliness of payments) can leverage the existing infrastructure to protect vulnerable households from shocks.

  • Increasing the adaptability of social safety nets to shocks. Social safety nets can help households prepare for, cope with, and adapt to shocks (Bowen and others 2020). The key is to enhance measures to identify vulnerable households, including those mostly expose to shocks, promptly verify their need for support following a shock, and quickly pay them benefits (Box 9). Key considerations of emergency cash transfer programs include establishing triggers for program activation, identifying beneficiaries, setting benefit levels and frequency and determining the sunset of benefits (Calcutt and others 2021). Critical to the response is advance planning, including for the potential costs and availability of finance, for which donors can play a major role in LICs.

Building SSN Resilience to Climate Events: Mauritania

Mauritania has implemented two cash transfer programs to mitigate the impacts of climate shocks. The Elmaouna Program is tailored to provide immediate relief during periods of heightened vulnerability, such as droughts and rapid-onset disasters like floods. The Tekavoul Choc is designed to respond to shocks by expanding vertically (offering temporary increases in transfers) and horizontally (increasing the number of beneficiaries). It targets areas not covered by the Elmaouna program. This dual approach allows the program to adapt to varying levels of need, either by augmenting support for existing beneficiaries or by extending aid to additional households. In 2022, these programs collectively reached approximately 69,000 households, responding to the highest level of food insecurity ever recorded in Mauritania. To increase the scope and impact of these programs, in the context of an IMF arrangement under the Resilience and Sustainability Facility, the authorities intend to institutionalize the Tekavoul program, expand the coverage of the Tekavoul Choc to vulnerable households affected by drought, and ensure adequate funding.

Leveraging data. To support these programs, the government has refined the social registry by incorporating an additional 50,000 households expected to be food insecure, and including key indicators related to livelihoods and vulnerability.

Strengthening institutions. The Mauritanian government has established a unified framework to manage the complete cycle of dealing with food insecurity and nutrition shocks. This framework encompasses prevention, preparation, coordination, implementation, monitoring, and capitalization of the national response plan.

Financing. The establishment of a contingent fund is a strategic move to secure and streamline domestic and external funding sources.

Replicability. Institutional capacity and fiscal space, among other factors, might constrain the potential for adoption in other countries.

Sources: IMF (2023r) and Ndoye, Nashin, and Pondi (2023).

57. Digitalization can help strengthen the data and information systems that are central to the effectiveness of adaptive social safety nets. Detailed and up-to-date data on potential beneficiaries, including socio-economic status, geographical location, and vulnerability factors, is crucial. To this end, strengthening social registries is a priority in many LICs—in the context of IMF-supported programs, strengthening social registries has been used increasingly as a Structural Benchmark (including in Benin, Burkina Faso, Republic of Congo, Gambia, Madagascar, Mauritania, Rwanda, Senegal, and Uganda).

58. The design of social safety nets systems reflects ultimately a complex interplay of technical and political elements. Politics plays a key role in the scope, design, and commitment to social safety net programs (Bossuroy and Coudouel 2018). Societal redistributive preferences and fairness considerations can be influenced by various factors, including the level of income, societal norms, and the amount of information available to the public (Pritchett 2005). Political support for social safety nets can depend on how benefits are targeted, support for redistribution, and the complexity of policies (Box 10). Communication to the public and dialogue with key stakeholders is critical for enhancing the acceptance of social safety nets.

Political Economy Considerations for Social Safety Nets

The design of social safety net programs (including its intended coverage and extent of benefits) is a political process. Designs must be technically sound as well as administratively and politically feasible. For example, political considerations can lead to compromises in technical efficiency, such as the introduction of conditionalities to address perceptions of excessive benefit dependency or deservedness (Seekings 2015). This explains why shock such as COVID-19 could help quickly change political attitudes towards social safety nets.

Perceptions of fairness are central for garnering support for social safety net programs and thus their effectiveness. For example, proxy means-testing methods might be more effective in identifying households with lower per capita consumption as well as in being perceived as more legitimate compared to community-based targeting which can be subject to potential manipulation (Premand and Schnitzer 2021). In some cases, political considerations might lead to patronage thereby eliminating the ability of programs to alleviate poverty (Kundo 2017).

The political impact of SSN can be significant. Over time, programs can establish long-term political commitments that are difficult to reverse, thereby reducing fiscal flexibility. Social safety nets can feature in election campaigns, with evidence suggesting that they can affect voting behavior and electoral outcomes. Effective communication with the public and engaging in meaningful dialogue with important stakeholders are essential for increasing the acceptance and support of social safety net programs. For example, in Ghana, a recent survey suggests that only about 45 percent of respondents know how to enroll in the LEAP program, the flagship social safety net program (Abdulai and others 2021).

Sources: Bossuroy and Coudouel 2018; Pritchett 2005.

References

  • Abdel-Latif, Hany, and Mahmoud El-Gamal. 2024. “Fraying Threads: Exclusion and Conflict in Sub-Saharan Africa.” IMF Working Paper, WP/24/4, Washington, DC, January.

    • Search Google Scholar
    • Export Citation
  • Abdulai, Abdul-Gafaru, Adam Salifu, Mohammed Ibrahim, Collins Nunyonameh, Ernestina Dankyi, and Patrick Asuming, 2021, “Citizens’ Knowledge and Perceptions about Poverty, Vulnerability Rights and Social Protection in Ghana: A Baseline Study,” Report Commissioned by UNICEF Ghana.

    • Search Google Scholar
    • Export Citation
  • Adams, Richard H. 2004. “Economic Growth, Inequality and Poverty: Estimating the Growth Elasticity of Poverty.” World Development, Volume 32, Issue 12.

    • Search Google Scholar
    • Export Citation
  • Akitoby, Bernardin, Jiro Honda, and Keyra Primus. 2020. “Tax Revenues in Fragile and Conflict-Affected States—Why Are They Low and How Can We Raise Them?IMF Working Paper, WP/20/143, Washington, DC, July.

    • Search Google Scholar
    • Export Citation
  • Alderman, Harold and Ruslan Yemtsov. 2013. “How Can Social Safety Nets Contribute to Economic Growth?Policy Research Working Paper 6437. World Bank. Washington, DC.

    • Search Google Scholar
    • Export Citation
  • Andrews, Colin, Allan Hsiao, Laura Ralston. 2018. “Social Safety Nets Promote Poverty Reduction, Increase Resilience, and Expand Opportunities,” in Realizing the Full Potential of Social Safety Nets in Africa, Africa Development Forum series, edited by Kathleen Beegle, Aline Coudouel, Emma Monsalve, Washington, DC: World Bank Group.

    • Search Google Scholar
    • Export Citation
  • Asfaw, Solomon and Benjamin Davis. 2018. “Can Cash Transfer Programmes Promote Household Resilience? Cross-Country Evidence from Sub-Saharan Africa.” in Leslie Lipper, Nancy McCarthy, David Zilberman, Solomon Asfaw, Giacomo Branca (ed.), Climate Smart Agriculture. Natural Resource Management and Policy. Springer. pages 227250.

    • Search Google Scholar
    • Export Citation
  • Aslam, Aqib, Samuel Delepierre, Raveesha Gupta, and Henry Rawlings. 2022. “Revenue Mobilization in Sub-Saharan Africa during the Pandemic”. Special Series on COVID-19, African Department, IMF, Washington, DC, January.

    • Search Google Scholar
    • Export Citation
  • Banerjee, Abhijit V., Rema Hanna, Gabriel E. Kreindler, and Benjamin A. Olken. 2017. “Debunking the Stereotype of the Lazy Welfare Recipient: Evidence from Cash Transfer Programs”. The World Bank Observer, 322.

    • Search Google Scholar
    • Export Citation
  • Bastagli, Francesca, Jessica Hagen-Zanker, Luke Harman, Valentina Barca, Georgina Sturge, and Tanja Schmidt. 2016. “Cash Transfers: What Does the Evidence Say? A Rigorous Review of Programme Impact and of the Role of Design and Implementation Features.” With Luca Pellerano. London: Overseas Development Institute.

    • Search Google Scholar
    • Export Citation
  • Bazarbash, Majid, Jan Moeller, Naomi Nakaguchi Griffin, Hector Carcel Villanova, Esha Chhabra, Yingjie Fan, and Kazuko Shirono. 2020. “Mobile Money in the COVID-19 Pandemic.” Special Series on COVID-19, Monetary and Capital Markets Department and Statistics Department, IMF, Washington, DC, October.

    • Search Google Scholar
    • Export Citation
  • Beegle, Kathleen, Aline Coudouel, and Emma Monsalve. 2018. Realizing the Full Potential of Social Safety Nets in Africa. Africa Development Forum series. Washington DC.

    • Search Google Scholar
    • Export Citation
  • Benedek, Dora, Edward Gemayel, Abdelhak Senhadji, and Alexander Tieman, 2021, “A Post-Pandemic Assessment of the Sustainable Development Goals”, IMF Staff Discussion Note, SDN/21/03, Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • Benitez, Juan Carlos, Mario Mansour, Miguel Pecho, and Charles Vellutini. 2023. “Building Tax Capacity in Developing Countries.” IMF Staff Discussion Note, SDN/23/06, Washington, DC, September.

    • Search Google Scholar
    • Export Citation
  • Berg, Andrew G., and Jonathan D. Ostry. 2011. “Inequality and Unsustainable Growth: Two Sides of the Same Coin?IMF Staff Discussion Note, SDN/11/08, Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • Bergemann, Annette and Gerard J. van den Berg. 2006. “Active Labor Market Policy Effects for Women in Europe: A Survey.” IZA Discussion Paper No. 2365.

    • Search Google Scholar
    • Export Citation
  • Bird, Nicolò and Emine Hanedar. 2023. “Expanding and Improving Social Safety Nets Through Digitalization: Conceptual Framework and Review of Country Experiences.” IMF Note.

    • Search Google Scholar
    • Export Citation
  • Bossuroy, Thomas and Aline Coudouel, 2018, “Recognizing and Leveraging Politics to Expand and Sustain Social Safety Nets,” in Beegle, Kathleen, Aline Coudouel, and Emma Monsalve. 2018. Realizing the Full Potential of Social Safety Nets in Africa. Africa Development Forum series. Washington DC.

    • Search Google Scholar
    • Export Citation
  • Bowen, Thomas, Carlo del Ninno, Colin Andrews, Sarah Coll-Black, Ugo Gentilini, Kelly Johnson, Yasuhiro Kawasoe, Adea Kryeziu, Barry Maher, and Asha Williams. 2020. Adaptive Social Protection: Building Resilience to Shocks. International Development in Focus. Washington, DC: World Bank.

    • Search Google Scholar
    • Export Citation
  • Brown, Caitlin, Martin Ravallion, and Dominique van de Walle. 2017. “Reaching Poor People.” Finance & Development, December, Vol. 54, No. 4.

    • Search Google Scholar
    • Export Citation
  • Brown, Caitlin, Martin Ravallion, and Dominique van de Walle. 2018. “A Poor Means Test? Econometric Targeting in Africa.” Journal of Development Economics 134: 10924.

    • Search Google Scholar
    • Export Citation
  • Budina, Nina, Christian Ebeke, Florence Jaumotte, Andrea Medici, Augustus J. Panton, Marina M. Tavares, and Bella Yao. 2023. “Structural Reforms to Accelerate Growth, Ease Policy Tradeoffs, and Support the Green Transition in Emerging Market and Developing Economies.” IMF Staff Discussion Note, SDN/23/07, Washington DC, September.

    • Search Google Scholar
    • Export Citation
  • Calcutt, Evie Isabel Neall, Barry Patrick Maher, and Catherine Anne Fitzgibbon. 2021. “Disaster Risk Financing: Emerging Lessons in Financing Adaptive Social Protection (English).” Washington, DC: World Bank Group.

    • Search Google Scholar
    • Export Citation
  • Carapella, Piergiorgio, Tewodaj Mogues, Julieth Pico-Mejía, and Mauricio Soto. 2023. “How to Assess Spending Needs of the Sustainable Development Goals—The Third Edition of the IMF SDG Costing Tool.” IMF How to Note 23/05, International Monetary Fund, Washington, DC, December.

    • Search Google Scholar
    • Export Citation
  • Cazzaniga, Mauro, Florence Jaumotte, Longji Li, Giovanni Melina, Augustus J. Panton, Carlo Pizzinelli, Emma Rockall, and Marina M. Tavares. 2024. “Gen-AI: Artificial Intelligence and the Future of Work.” IMF Staff Discussion Note, SDN/24/01, Washington, DC, January.

    • Search Google Scholar
    • Export Citation
  • Chuku, Chuku, Prateek Samal, Joyce Saito, Dalia S Hakura, Marcos d Chamon, Martin D. Cerisola, Guillaume Chabert, and Jeromin Zettelmeyer. 2023. “Are We Heading for Another Debt Crisis in Low-Income Countries? Debt Vulnerabilities: Today vs the pre-HIPC Era.” IMF Working Paper, WP/23/79, Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • Coady, David, Geremia Palomba, Fernanda Brollo, Riki Matsumoto, Tohid Atashbar, Deeksha Kale, Baoping Shang, and Kiichi Tokuoka. 2022. “IMF Engagement on Social Safety Net Issues for Surveillance and Program Work IMF.” Technical Notes and Manuals 2022/007.

    • Search Google Scholar
    • Export Citation
  • Collier, Paul, V. L. Elliott, Harvard Hegre, Anke Hoeffler, Marta Reynal-Querol, and Nicholas Sambanis. 2003. “Breaking the Conflict Trap; Civil War and Development Policy.” Oxford University Press.

    • Search Google Scholar
    • Export Citation
  • Colombo, Emilio, Davide Furceri, Pietro Pizzuto, and Patrizio Tirelli. 2022. “Fiscal Multipliers and Informality.” IMF Working Paper, WP/22/082, Washington, DC, May.

    • Search Google Scholar
    • Export Citation
  • Cooper, Rachel, 2018, “Social safety nets in fragile and conflict-affected states,” K4D Helpdesk Report, Brighton, UK: Institute of Development Studies.

    • Search Google Scholar
    • Export Citation
  • Dabla-Norris, Era, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki Tsounta. 2015. “Causes and Consequences of Income Inequality: A Global Perspective.” IMF Staff Discussion Note, SDN/15/13, Washington, DC, June.

    • Search Google Scholar
    • Export Citation
  • Davies, Shawn, Therese Pettersson, and Magnus Oberg. 2023. “Organized violence 1989–2022 and the return of conflicts between states?Journal of Peace Research 60(4).

    • Search Google Scholar
    • Export Citation
  • Deghi, Andrea, Salih Fendoglu, Tara Iyer, Hamid R Tabarraei, Yizhi Xu, and Mustafa Yenice. 2022. “The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic.” IMF Working Paper, WP/22/223, Washington, DC, November.

    • Search Google Scholar
    • Export Citation
  • Dutzler, Barbara, Simon Johnson, Priscilla Muthoora, 2021, “The Political Economy of Inclusive Growth: A Review,” IMF Working Paper No. WP/21/82, International Monetary Fund.

    • Search Google Scholar
    • Export Citation
  • Ferreira, Francisco H. G. and Martin Ravallion. 2008. “Global Poverty and Inequality: A Review of the Evidence.” Policy Research Working Paper 4623. The World Bank, Development Research Group Poverty Team.

    • Search Google Scholar
    • Export Citation
  • Food Security Information Network (FSIN) and Global Network Against Food Crises (GNAFC). 2023. “Global Report on Food Crises—Joint Analysis for Better Decisions, 2023 Mid-Year Update.” Rome, September.

    • Search Google Scholar
    • Export Citation
  • García, Sandra and Juan E. Saavedra. 2017. “Educational Impacts and Cost-Effectiveness of Conditional Cash Transfer Programs in Developing Countries: A Meta-Analysis.” Review of Educational Research, 87 (5), 921965.

    • Search Google Scholar
    • Export Citation
  • Gaspar, Vitor, David Amaglobeli, Mercedes Garcia-Escribano, Delphine Prady, and Mauricio Soto. 2019. “Fiscal Policy and Development: Human, Social, and Physical Investments for the SDGs.” IMF Staff Discussion Note, SDN/19/03, Washington DC, January.

    • Search Google Scholar
    • Export Citation
  • Gentilini, Ugo (2022) Cash transfers in pandemic times: evidence, practices and implications from the largest scale-up in history. World Bank, 2022.

    • Search Google Scholar
    • Export Citation
  • Grosh, Margaret, Phillippe Leite, Matthew Wai-Poi, and Emil Tesliuc, editors. 2022. Revisiting Targeting in Social Assistance: A New Look at Old Dilemmas. Washington, DC: World Bank. doi:10.1596/978-1-1814-1.

    • Search Google Scholar
    • Export Citation
  • Grun, Rebekka, Mira Saidi, and Paul M. Bisca. 2020. “Adapting Social Safety Net Operations to Insecurity in the Sahel.” SASPP Operational and Policy Note Series, Note 1. World Bank. Washington, DC.

    • Search Google Scholar
    • Export Citation
  • Hagen-Zanker, Jessica, Luca Pellerano, Francesca Bastagli, Luke Harman, Valentina Barca, Georgina Sturge, Tanja Schmidt, and Calvin Laing. 2017. “The Impact of Cash Transfers on Women and Girls: A Summary of the Evidence.” ODI Briefing.

    • Search Google Scholar
    • Export Citation
  • Hammad, Maya, Fabianna Bacil, and Fabio Veras Soares. 2021. “Next Practices—Innovations in the COVID-19 Social Protection Responses and Beyond.” Research Report 60. UN Development Programme and International Policy Centre for Inclusive Growth. New York and Brazil.

    • Search Google Scholar
    • Export Citation
  • Independent Evaluation Group. 2014. Social Safety Nets and Gender: Learning from Impact Evaluations and World Bank Projects. World Bank, Washington, DC.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2018. “Review of 1997 Guidance Note on Governance—A Proposed Framework for Enhanced Fund Engagement.” IMF Policy Paper, Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2019a. “Building Resilience in Developing Countries Vulnerable to Large Natural Disasters.” IMF Policy Paper, Washington, DC, June.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2019b. “World Economic Outlook, October 2019.” Washington, DC, October.

  • International Monetary Fund (IMF). 2019c. “Fiscal Monitor—Curbing Corruption.” Washington, DC, April.

  • International Monetary Fund (IMF). 2020a. “Regional Economic Outlook: Sub-Saharan Africa— COVID-19: An Unprecedented Threat to Development.” Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2020b. “World Economic Outlook Update, January 2020.” Washington, DC, January.

  • International Monetary Fund (IMF). 2021. “Meeting the Sustainable Development Goals in Small Developing States with Climate Vulnerabilities: Cost and Financing.” Washington, DC, March.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2022a. “Industrial policy for Growth and Diversification A Conceptual Framework.” African Department and Institute for Capacity Development, IMF Departmental Paper DP/22/07, Washington, DC, September.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2022b, “Republic of Mozambique—Staff Report for the 2022 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility.” Washington, D.C.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2022c, “Equatorial Guinea: Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Equatorial Guinea,” Washington, DC.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023a. “Fall 2023 Food Crisis Update—Recent Developments, Outlook, and IMF Engagement.” Washington, DC, October.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023b. “Managing Exchange Rate Pressures in Sub-Saharan Africa—Adapting to New Realities.” In Regional Economic Outlook: Sub-Saharan Africa—The Big Funding Squeeze, Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023c. “Regional Economic Outlook: Sub-Saharan Africa—The Big Funding Squeeze.” Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023d Cold War II? Preserving Economic Cooperation Amid Geoeconomic Fragmentation – Plenary Speech by IMF First Managing Deputy Director Gita Gopinath, 20th World Congress of the International Economic Association Colombia.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2023e, “Chad: Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Chad,” Washington, DC.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023f. “Geoeconomic Fragmentation: Sub-Saharan Africa Caught Between the Fault Lines.” In Regional Economic Outlook: Sub-Saharan Africa—The Big Funding Squeeze, Washington, DC, April.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023g. “Annual Report on Exchange Rate Arrangements and Exchange Restrictions 2022.” Washington, DC, July.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023h. “Regional Economic Outlook: Sub-Saharan Africa—Light on the Horizon?.” Washington, DC, October.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023i. “Temporary Modifications to The Fund’s Annual and Cumulative Access Limits.” IMF Policy Paper, Washington, DC, March.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023j. “Review of Experience with The Food Shock Window Under The Rapid Financing Instrument and The Rapid Credit Facility.” IMF Policy Paper, Washington, DC, June.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023k. “Review of The Cumulative Access Limits Under The Rapid Financing Instrument and The Rapid Credit Facility.” IMF Policy Paper, Washington, DC, June.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023m. “Review of the Policy Coordination Instrument and Proposal to Eliminate the Policy Support Instrument.” IMF Policy Paper, Washington, DC, October.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023n. “Interim Review of Access Limits Under the Poverty Reduction and Growth Trust and Initial Considerations for Access Limits under the General Resource Account.” IMF Policy Paper, Washington DC, December.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2023p. “World Economic Outlook, October 2023.” Washington DC, October.

  • International Monetary Fund (IMF), 2023q, “Honduras: Article IV Consultation and Requests for an Arrangement Under the Extended Fund Facility and an Arrangement Under the Extended Credit Facility,” Washington, DC.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF), 2023r. “Islamic Republic of Mauritania: First Reviews Under the Arrangements Under the Extended Credit Facility and the Extended Fund Facility, Requests for Modification of Performance Criteria and a Waiver of Nonobservance of Performance Criterion, and Request for an Arrangement Under the Resilience and Sustainability Facility.” Washington, DC.

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (IMF). 2024a. “World Economic Outlook Update, January 2024.” Washington, DC, January.

  • International Monetary Fund (IMF). 2024b. “Review of the Policy on Staff-Monitored Program With Executive Board Involvement”, IMF Policy Paper, Washington, DC, February.