Low-income countries need a sustainable borrowing strategy if they are to achieve development goals
LOW-INCOME countries face serious challenges in meeting their development objectives, embodied in the Millennium Development Goals (MDGs) adopted by world leaders in 2000. Unless they can accelerate economic growth, many of these countries will fall short of achieving the targets, which center on halving by 2015 the proportion of people living in absolute poverty in 1990. While the key to higher sustainable growth lies in the countries’ own efforts to strengthen institutions and pursue sound policies, these efforts need to be complemented by financial and other support from the international community. How can the international community help developing countries boost growth enough to meet the globally adopted goals without creating new debt problems that could derail them on the way? The obvious answer is a sizable increase in grants to these countries, combined with a removal of trade barriers and agricultural subsidies in the industrialized world. In the absence of significant progress on both of these fronts, however, maintaining debt sustain-ability becomes a crucial challenge in achieving the MDGs.
The good news is that the risk of future debt crises is lower now because both debtors and creditors have learned from past mistakes. Many low-income countries have strengthened macroeconomic policies and debt management and have embraced ambitious structural and institutional reform agendas to bolster their long-term growth potential. These policy reforms should, over time, widen production and export bases and reduce vulnerability to shocks, such as adverse terms of trade or destructive weather patterns. Awareness of past mistakes has, in many cases, caused lenders and donors to improve their lending policies and replace nonconcessional financing with concessional loans and grants. Moreover, the Heavily Indebted Poor Countries (HIPC) Initiative is contributing to a significant reduction in the debt burden of qualifying countries, which are also benefiting from more favorable debt-service profiles as a result of the long grace periods and low interest rates on restructured debt and new financing.
Nevertheless, the many weaknesses that remain warrant a cautious approach to new borrowing. Overly optimistic growth projections risk being repeated unless there is a deeper understanding of what drives growth in a particular country. Many structural reforms will take time to bear fruit while most low-income countries will continue for some time to suffer from weak institutions, volatile export and production bases, and limited administrative and debt-management capacity. In addition, the risks of political crisis and war remain significant in many states, while the HIV/AIDS epidemic has posed a new—and, in a number of countries, catastrophic—threat to long-term economic prospects. For these reasons, the most general lesson from the low-income country debt crisis that began in the 1980s and continued into the 1990s—that new borrowing even on concessional terms should be pursued with caution and be based on prudent economic projections and recognition of country-specific circumstances—remains valid today.
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