IMF Discusses Macro Developments, Prospects in Low-Income Countries

IMF Discusses Macro Developments, Prospects in Low-Income Countries

The International Monetary Fund (IMF) has in a discussion on recent economic developments and prospects in low-income countries (LICs), says LICs require $200 billion to step up covid-19 responses and build financial buffers.

Responding to requests from the International Monetary and Financial Committee (IMFC), the Fund’s policy-guiding ministerial body, and the Group of 20, the paper focuses on estimating financing needs over the period 2021-25, and on sustainable financing options to cover these needs.

Going forward, the IMF estimates that low-income countries would need to deploy around $200 billion up to 2025 to step up response to the pandemic and an additional $250 bn to accelerate their income convergence with advanced economies.

The paper defines LICs as those countries eligible for Poverty Reduction and Growth Trust facilities (69 countries in Africa, Asia, and Latin America).

LICs have been significantly affected by the COVID-19 pandemic and the associated health and economic crises.

They entered this period with limited policy space. Real annual GDP growth in 2020 therefore declined dramatically to 0.3 percent (from above 5 percent in the previous three years).

Looking ahead, the pandemic is set to have long-lasting effects on LICs, leading to higher debt levels and within country inequality and poverty, y and delaying income convergence with advanced economies.

In addition, LICs will have to respond to pre-existing challenges, such as climate change adaptation, and harness new opportunities such as digitalization.

Focusing on what this very challenging context means in terms of LICs’ financing needs, the paper shows that beyond the needs embedded in the World Economic Outlook projections, LICs would require an additional $200 billion between 2021-25 to step up the response to COVID-19 and build adequate financial buffers.

Low-Income Countries Require $200bn to Step Up COVID-19 Response, Build Buffers

To accelerate convergence with advanced economies would require an additional $250 billion. A downside scenario of a slower global recovery could add a further $100 billion to these financing needs.

Meeting these additional needs requires a multi-faceted approach. Implementing domestic reforms—especially related to the governance of economic institutions—raising revenues, and improving the efficiency of spending, will be crucial for LICs.

At the same time, the international community should step up its financing support, including grants and concessional loans by bilateral donors and multilateral institutions.

There is also significant space to expand the role of private sector financing, especially in infrastructure financing by international investors.

Executive Board Assessment [1]

Executive Directors welcomed the assessment of macroeconomic developments, financing needs and sustainable financing options for low-income countries (LICs).

They recognized the heavy toll that the pandemic has taken on LICs, with significant economic and health effects. This was partly due to a lack of fiscal space, elevated debt levels, limited access to financing and little room for monetary policy support.

With this background, Directors broadly agreed with the assessment and policy measures that need to be taken by LICs and the need for international support to assist them in their endeavors. Directors also underlined the need to remain mindful of the vulnerabilities that affect other countries.

Directors were encouraged by ongoing international efforts to assist LICs, including emergency financing from the IMF, support by the World Bank and other multilateral development banks, and the G20-led Debt Service Suspension Initiative and Common Framework.

These efforts have temporarily eased financing constraints for many LICs.

Directors noted, however, that LICs face an uncertain economic outlook, with the risk of renewed lockdowns due to resurgent waves and variants of the virus, and that these downside risks will likely persist until vaccines deliver herd immunity.

They also recognized that LICs are at a disadvantage to recover due to uneven access to vaccines, limited policy space and preexisting vulnerabilities.

In this context, Directors welcomed the estimates of LIC financing needs. They broadly agreed with the assessment that around US$200 billion will be needed to step up the spending response to COVID and rebuild or maintain external buffers.

An additional US$250 billion in investment spending would be needed to accelerate convergence to advanced economies. Should the risks identified in an adverse scenario materialize, an additional US$100 billion would be necessary.

Directors underscored that while the underlying assumptions were subject to uncertainty, the sensitivity tests provided assurance that the estimates are a reasonable approximation of LICs’ additional financing needs relative to the baseline.

At the same time, Directors strongly emphasized the need for decisive policy implementation. They were encouraged that, with appropriate financing and decisive policy implementation, LICs would be able to converge back to their pre-COVID convergence path to advanced economies between 2023 and 2025.

Directors emphasized that covering the additional financing needs would require a multifaceted approach. This approach would need to combine strong domestic reforms, stepped up financing by the international community, debt restructuring where needed, and catalyzing financing from the private sector.

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Addressing governance, institutional capacity, and other structural bottlenecks would be an important part of these efforts, with policy advice and capacity development from the Fund and other development partners.

IMF Discusses Macro Developments, Prospects in Low-Income Countries