Press Release No. 24/95

IMF Executive Board Discusses Macroeconomic Developments and Prospects in Low-Income Countries

April 2, 2024

Washington, DC: On March 29, 2024,the Executive Board of the International Monetary Fund (IMF) discussed the IMF staff paper on macroeconomic developments and prospects in low-income countries (LICs) [link], which includes in-depth analysis of strategies for strengthening social safety nets (SSN) in LICs. The paper defines LICs as those 69 countries eligible for the Poverty Reduction and Growth Trust facilities. [1]

The economic scarring of the COVID-19 pandemic, Russia’s war in Ukraine and ensuing geopolitical tensions, and the tightening of financial conditions following strong inflationary pressures have hit LICs the hardest in recent years.

LICs' prospects are finally slowly improving, helped by a better global outlook, as economic growth accelerates, inflation decreases, and financial conditions ease. However, significant uncertainties and adverse risks remain in the context of a more shock-prone world. Liquidity conditions remain tight and the burden of high debt service payments limits the space for development spending.

However, there is significant heterogeneity amongst LICs. The poorest countries have been hit hardest by the pandemic and have experienced the strongest scarring in terms of output loss. Fragile and conflict affected states (FCS) have seen their recovery hindered by weak institutions and inherent fragilities. The many LICs whose exports have been concentrated in a few products, have had weaker and more volatile performance. Fuel exporters, in particular, have missed the chance to capitalize on the oil windfall and will now have to consolidate in a less favorable environment. On the contrary, diversified exporters and frontier markets have shown more resilience to shocks. Finally, many Small Developing States who are often tourism-dependent, have recovered comparatively better but need to reduce high debt levels and allocate part of their revenues to critical climate change adaptation investments.

The report points to the fact that decisive efforts are needed to accelerate income convergence with more advanced economies and make progress towards the Sustainable Development Goals. This involves boosting growth, overcoming setbacks in poverty reduction triggered by the COVID-19 pandemic, reversing negative trends in food security and women’s employment, and enhancing resilience to future shocks.

Addressing these challenges requires decisive domestic actions paired with strong external support. On the domestic front, prudent fiscal and monetary policies would be key to maintain macroeconomic stability. The authorities should also focus on accelerating domestic revenue mobilization and prioritizing public spending to create additional space for critical development and social spending. In this context, efficient allocation and expansion of social safety net plays a crucial role in alleviating poverty and building buffers against external shocks. This calls for a re-direction of SSN spending from the better-off to the poorest segments. Strengthening public financial management, governance and transparency would promote accountability and help build political support buy-in for reforms, including ambitious structural reforms that support inclusive growth.

At the same time, all partners should step up external support, including not just financing but also policy advice and technical assistance. In particular, grants and highly concessional financing will be crucial to support development efforts of poorer countries, while efforts to catalyze private financing should be enhanced, in particular in frontier markets. Improved creditor cooperation would be important to ensure timely debt treatment where needed. The Fund is continuing to play its part: lending more than tripled since the pandemic, the bulk of it on concessional terms, and continuing to adapt its support to respond to changing LIC needs.

Executive Board Assessment[2]

Executive Directors welcomed the timely opportunity to discuss recent macroeconomic developments and prospects in low income countries (LICs). They broadly agreed with the staff’s assessment and the identified policy priorities, including strengthening social safety nets (SSN).

Directors welcomed that after several challenging years marked by the pandemic, Russia’s war in Ukraine, and the tightening of international financial conditions, the macroeconomic outlook for LICs is gradually improving as growth picks up, inflation subsides, and international financial conditions ease. However, risks for LICs are tilted to the downside amid persistent scarring, liquidity challenges (with high debt service putting pressure on the space available for development spending), elevated vulnerabilities to shocks, and relatively low macroeconomic buffers. Some Directors also highlighted the impact of geoeconomic fragmentation on LICs.

Directors acknowledged the significant heterogeneity in macroeconomic outcomes across LICs, with the poorest and fragile and conflict affected states (FCS) facing the toughest challenges. On the other side of the spectrum, frontier markets, and in general LICs with more diversified economies and higher per capita incomes, have typically fared better. In this context, Directors emphasized that carefully tailoring the policy mix to country circumstances is vital.

Directors agreed that more growth, more inclusion, and more resilience are essential to accelerate the path of LICs’ convergence with more advanced economies and support progress toward the Sustainable Development Goals. This entails, among others, reversing adverse trends in areas such as poverty reduction, food security, and women’s labor force participation. Directors emphasized the importance of decisive domestic action in LICs, including further policy tightening where needed; accelerated domestic revenue mobilization and more efficient fiscal spending to create space for urgent development outlays and for protecting the most vulnerable; deepening domestic financial markets; stronger public financial and debt management; progress on governance and transparency; well sequenced and growth enhancing structural reforms; and building climate resilience.

Directors concurred that efficient allocation and expansion of SSNs are vital for substantial poverty reduction in LICs. Both economic growth and increased SSN spending are necessary. They noted that in many LICs, a focus should be placed on better targeting benefits to the poorest segments. Simply redirecting half of the portion of SSN spending going to the richest households toward the poorest would be enough to nearly double the coverage of the most vulnerable. Directors underscored the importance of tailored SSN design to improve the poverty impact of expanding coverage and benefits. Enhancing the adaptability of SSNs to respond swiftly to various shocks is crucial, including by improving the ability to identify vulnerable households, verify their needs, and deliver benefits following shocks, making use of digitalization to the extent possible.

Directors noted staff’s estimates of LICs’ sizable financing needs, while recognizing that such estimates are subject to uncertainty. They agreed that decisive domestic reforms need to be complemented with strong external support by all partners, including through technical assistance and adequate financing. Directors emphasized the criticality of grants and highly concessional financing for the poorest and most fragile LICs. Meanwhile, catalyzing significant financing from the private sector would be crucial, in particular in frontier markets, to accompany their transition to middle income status. In this context, a number of Directors recommended a cautious approach to a further buildup in senior debt held by LICs, which could impact the catalytic effect of Fund financing. Directors noted that while progress has been made, debt restructuring processes, including under the Common Framework, should be further improved through closer creditor coordination to deliver timely debt relief where needed. They welcomed the work of the Global Sovereign Debt Roundtable to support this effort.

Directors commended the Fund’s strong engagement with LICs through targeted policy advice, capacity building, and financing. They underscored the important role played by the Fund in helping LICs maintain or restore a stable macroeconomic environment and achieve their reform agenda. They noted that the Fund’s support to LICs evolved flexibly to help them tackle changing needs and repeated shocks since the pandemic. Directors looked forward to the upcoming review of the PRGT Facilities and Financing, as well as other upcoming policy reviews that will have a bearing on the effectiveness of Fund support for LICs, including the review of the Bank Fund debt sustainability framework for low income countries (LIC DSF). Overall, Directors urged the Fund to continue to work closely with the World Bank and with other development partners and stakeholders, and leverage its comparative advantage to support LICs.