Press Release No. 17/07

IMF Executive Board Discusses Macroeconomic Prospects and Challenges in LIDCs

January 12, 2017

• The sharp realignment of global commodity prices has been a major setback for commodity-exporting LIDCs, while generally benefitting others. As a result, growth prospects have become increasingly divergent.
• In an era of subdued commodity prices, prospects for commodity exporters are heavily influenced by how successfully they can implement policies to confront high fiscal deficits, reduced foreign reserves, and elevated economic and financial stress.
• The quantity, quality and accessibility of infrastructure in LIDCs is considerably lower than in other economies and enhancing the role of the private sector in its delivery is a priority for many.

As many low-income developing countries (LIDCs) continue to struggle with low commodity prices, the International Monetary Fund (IMF) Executive Board discussed the unique policy issues these countries face, identified financial sector stress and infrastructure deficiencies as priorities to be addressed, and noted the importance of collaborative engagement with affected countries.

On December 19, 2016, the Board discussed a staff paper on macroeconomic developments in LIDCs. The paper examines economic and fiscal prospects and vulnerabilities in this group of countries, financial sector stress and challenges relating to public investment in infrastructure.

The sharp realignment of global commodity prices has been a major setback for commodity-exporting LIDCs, while generally benefitting others. As a result, growth prospects have become increasingly divergent. Commodity exporters have experienced a marked slowdown of economic activity, with some suffering a sharp contraction. In contrast, growth in diversified LIDCs that are less dependent on commodities, has been strong overall growth, although a number of countries have experienced weaker growth due to challenges induced by adverse external spillovers, weak domestic policies, stabilization programs, or natural disasters.

Prospects for commodity exporters continue to be heavily influenced by how successfully they can implement policies to confront severely-constrained fiscal revenues and increasing fiscal deficits, reduced foreign reserves, and exchange rate pressures. While the situation is less urgent in most diversified LIDCs, fiscal and external imbalances have also widened in many.

Many LIDCs need to strike a better balance between supporting development spending versus rebuilding policy buffers and strengthening economic resilience. Debt levels are being pushed up in both commodity and diversified exporters, from already elevated levels in some cases.

Vulnerabilities to a deterioration in macroeconomic performance remain high, particularly in commodity exporters, but also in some diversified exporters, where remittance shocks and poor policies have taken a toll. Furthermore, financial sector stress has emerged in about one-fifth of LIDCs, resulting in bank failures and supervisory interventions; and as many as three-fifths of commodity exporters are at risk of financial sector stress over the next one to two years.

Structural sources of vulnerabilities include a pattern of weaknesses in banking supervision common to many LIDCs: inadequate supervisory powers and independence, under-resourced and weak supervisory capacity, insufficient use of risk-based (rather than compliance-based) assessments, and poor enforcement of regulations and decisions. LIDCs also face substantial fiscal risks from a range of factors such as volatile commodity-related revenue and donor grant disbursements, as well as liabilities from state-owned enterprises and a rising stock of Public-Private Partnerships (PPPs).

Public investment, including in infrastructure, has broadly increased in LIDCs over the last 15 years. Despite this, the quantity, quality and accessibility of infrastructure in LIDCs remains considerably lower than in other economies. Outside the telecom sector, infrastructure services in LIDCs are primarily provided by the public sector. Private participation is largely channeled through PPPs, which are mostly concentrated in the energy sector and whose volume has declined recently after a sharp spike in the early 2010s.

Grants and concessional loans from development partners are an essential and stable source of infrastructure funding in LIDCs. International loans play an important complementary role in a few countries, but lending volume has fallen in the last two years. An IMF desk survey suggests that funding constraints are a common impediment to increased infrastructure investment.

Executive Board Assessment [1]

Executive Directors welcomed the comprehensive assessment of macroeconomic developments in low‑income developing countries (LIDCs), many of which are encountering significant difficulties as a result of lower commodity prices. They appreciated the attention given in the paper to the diversity of situations and experiences across countries, and saw the more in‑depth discussion of financial sector issues and public infrastructure provision as being timely and appropriate.

Directors observed that economic developments in most LIDCs continue to be heavily influenced by the marked decline in commodity prices that began in mid‑2014. Countries reliant on commodity exports have suffered significant erosion of export earnings and budgetary revenues, contributing to a slowing in growth, widening fiscal imbalances, and erosion of foreign reserves. By contrast, LIDCs with a more diversified export base have, in most cases, continued to record strong growth, helped by lower oil import bills, although some have been adversely affected by a fall in remittances, domestic conflict, and natural disasters.

Against this background, Directors underscored the need for vigilance and decisive policy responses by country authorities, as needed. They also noted the importance of close Fund monitoring and tailored advice to affected countries, and working collaboratively with other multilateral institutions and donors to assist LIDCs. In this regard, many Directors called for further reflection on the avenues for strengthening collaboration between the Fund and the Bank in their work on LIDCs.

Directors agreed that many commodity exporters need to undertake further policy adjustments to restore sustainable fiscal and external positions. Fiscal consolidation is an imperative, and exchange rate adjustment where feasible, coupled with monetary tightening, is called for in some cases, together with efforts to rebuild foreign exchange buffers. Directors underscored the need to boost budgetary revenues, including by broadening the tax base, and cut expenditure while protecting growth‑critical spending and shielding the most vulnerable groups. They also emphasized the need to diversify the economic base to improve resilience. Directors called on donors to boost their support for countries undertaking difficult adjustments, noting that the Fund should stand ready to provide appropriately‑calibrated support for strong adjustment programs.

Directors welcomed the strong growth performance in LIDCs with a more diversified export base, while noting that some smaller and fragile countries are faring less well. They expressed concern at the upward drift in fiscal deficits and public debt levels in many fast‑growing economies. While noting that higher levels of public investment have been an important contributory factor in many cases, Directors underscored the importance of getting the balance right between the objectives of raising spending for long‑term development needs versus rebuilding policy buffers and avoiding an unsustainable debt build‑up.

Directors expressed concern that financial sector stresses are increasing in a significant number of LIDCs, particularly commodity exporters. They called for pro‑active oversight by the relevant regulatory authorities to ensure that these stresses are adequately contained. They noted the cross‑cutting weaknesses in financial sector oversight highlighted in the paper, and called on national authorities, supported by their development partners and the Fund, to design and implement reforms to substantially strengthen financial sector regulation and supervision. Directors noted that Fund assessments and technical assistance will be important in this area.

Directors welcomed the staff analysis of the main sources of medium‑term fiscal risk in LIDCs. They called for prioritized efforts to strengthen risk management, taking into account countries’ capacity constraints. They recommended bolstering resilience, including through export product and market diversification and through greater regional integration.

Directors agreed that infrastructure deficiencies continue to be a key constraint on growth in LIDCs. They stressed that financing the required levels of public investment while safeguarding debt sustainability would require action on several fronts. This includes boosting public saving through enhanced domestic revenue mobilization and containing non‑priority outlays; ensuring efficient use of funds by strengthening public investment management; developing local capital markets; and tapping all available sources of concessional financing. Enhancing the role of the private sector in infrastructure delivery should be promoted where feasible. This would require concerted efforts to improve the regulatory and macroeconomic environment and enhance countries’ capacity in negotiating and implementing public‑private partnerships in order to effectively balance risk‑sharing between the public and private partners. The multilateral development banks also have an important role to play in boosting private sector investment in infrastructure through technical support for governments seeking to attract funds, active engagement of their private sector arms in infrastructure projects, and the provision of effectively‑designed risk‑mitigation mechanisms. Directors highlighted the Fund’s role in assessing the macroeconomic gains from infrastructure investment and providing advice and technical assistance on enhancing public investment efficiency and debt management, drawing on cross‑country experiences.

Directors supported the practice of an annual formal Board discussion of macroeconomic and financial conditions in LIDCs to better understand the unique policy issues faced by these countries—including vulnerable countries and countries in fragile situations—and identify priorities for Fund engagement with them. Directors also noted that the paper will be an important input into the forthcoming Board discussions on the LIC Debt Sustainability Framework and the Fund’s Facilities for Low Income Countries.