March 22, 2018
Versions in Português (Portuguese)
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Congested streets in Dhaka, Bangladesh. In a third of low-income countries, including Bangladesh, government deficits finance investment in much needed infrastructure (photo: Motoya Taguchi/Jiji Press/Newscom).[/caption]
Government debt in some of the world’s poorest countries is rising to risky levels, a new IMF report shows. The report looks at economic developments and prospects among the world’s low-income countries, which account for a fifth of the world’s population but only four percent of global output.
The report focuses not only on the rise in government debt, but also on the shift in the composition of creditors. And, because of this shift, it also focuses on the importance of official creditors working together to find ways to ensure efficient coordination in the event of future debt restructurings.
The drivers of the debt build-up vary across countries. They include shocks—the sharp drop in commodity prices of 2014, which hit budget revenues in commodity exporters, natural disasters, including the Ebola epidemic, civil conflict—as well as high levels of public spending that were not linked to financing productive public investment. Ample global liquidity played an important role in allowing for the rise of debt in low-income countries, by making it easier to borrow. Our study calls for action on the part of borrowers, lenders, and the international community.
Government debt is rising
Budget deficits have been rising in most low-income countries during this decade: 70 percent of low-income countries had higher government deficits in 2017 than during 2010-14. For commodity exporters, falling revenues contributed to higher deficits, whereas higher spending was the more important factor in other countries. For the median country, public debt levels increased to 47 percent of GDP last year, up from 33 percent of GDP in 2013.
The current build-up of public debt comes in the wake of the low debt levels and robust growth that followed the international community’s actions to write off most of the debt of highly indebted poor countries—the Heavily Indebted Poor Countries (HIPC) initiative and Multilateral Debt Relief Initiative , which left countries with more resources to spend on investment and education.
Higher public deficits and debt levels are not necessarily undesirable. When countries borrow to pay for infrastructure investment, that can boost long-term growth, which in turn generates revenues to service the higher debt.
Indeed, in about a third of low-income countries, such as Bangladesh, Kenya, Madagascar, Moldova, and Nicaragua, where deficits rose, investment rose by at least the same amount. But in most cases, investment rose by less than the increased deficits—and in half the cases it actually fell. Thus, it appears that in a sizeable share of countries the debt build-up helped finance investment only to a limited extent.
Threat of debt crises is climbing
Although their debt has risen, more than half of low-income countries are still at low or moderate risk of defaulting on their debt service obligations. However, the share of countries at elevated risk of debt distress, for example, Ghana, Lao P.D.R., and Mauritania, or already unable to service their debt fully has almost doubled to 40 percent since 2013.
The IMF anticipates some stabilization of the debt build-up in the coming years. However, this forecast is predicated in part on countries undertaking fiscal adjustment and carrying out ambitious economic reform programs to deliver stronger economic performance. It will be very important that countries implement these reforms—otherwise the debt build-up is likely to continue.
A different set of lenders and data gaps
There are two issues that amplify risks from elevated public debt levels in low-income countries.
First, there has been a marked change in the composition of debt since the completion of the Heavily Indebted Poor Countries and Multilateral Debt Relief initiatives, pushing up servicing costs and making debt resolution harder.
Borrowers have moved away from traditional official creditors such as multilateral institutions and members of the Paris Club, a grouping of major creditor countries organized to provide debt rescheduling or reduction to debtor countries in payment distress. They have moved towards non-Paris Club official bilateral creditors, sovereign bond issues, other foreign commercial lenders, and domestic sources—mainly banks.
The new forms of private credit often come at shorter maturities and higher interest rates, yielding larger debt service burdens for the borrower countries and higher rollover risks when these debts mature. What’s more, these creditors, unlike the Paris Club members, do not have ready mechanisms for coordination with other creditors, which is likely to make any needed debt resolution more difficult.
Second, reliable assessments of debt vulnerabilities require complete data sets, which are often not available for low-income countries.
One third of low-income countries do not report information on government guarantees on debts of state-owned enterprises, fewer than one in ten report debt of public enterprises, and risks from public-private partnerships are rarely reported. All these types of contingent liabilities can rapidly turn into government debt in case of distress.
Risk of a new debt crisis?
Several countries, for example, Chad, Mozambique, and the Republic of Congo, have already fallen into debt distress, with some seeking to restructure their debt. Can this drift into debt distress by low-income countries be contained?
To help contain debt vulnerabilities in low-income countries, borrower countries, lenders, and the international institutions should all work together .
Low-income countries need to proceed prudently on taking up new debt, focusing more on attracting foreign direct investment and boosting tax revenues at home. Their investment plans should focus on projects with credibly high rates of return. And their debt reporting needs to improve to allow them accurately to track the evolution of their debt situations.
Lenders should assess the impact of new loans on borrowers’ debt positions before providing the resources to countries. When debt restructuring is required, timely resolution is of the essence, contributing to lower costs for both the debtor and creditors. Timely resolution generally requires efficient creditor coordination. Thus, prior agreement among official creditors on the general “rules of the game,” including principles for sharing information and approaches to burden-sharing, would be beneficial. Donors should also increase their support to low-income countries.
For its part, the IMF will:
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Advise low-income countries on how best to balance borrowing to finance development spending and managing debt-related risks
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Roll out the recently revised low-income country debt sustainability framework to better inform such analysis
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Strengthen technical assistance in critical areas such as public debt reporting and management.
By working together, we can help low-income countries pursue borrowing strategies that promote development while safeguarding debt sustainability. By doing so, we can also ensure that the 20 percent of the world’s population living in low-income countries can share in the continuing global recovery.