Fiscal Challenges Confronting Low-income Nations

The International Monetary Fund (IMF) has expressed its concern over the debt and fiscal challenges confronting low-income nations.

The IMF lowered its 2024 growth forecast for low-income countries as a group to 4.7% from an estimate of 4.9% in January.
Meanwhile, the World Bank noted a concerning trend where half of the world’s 75 poorest countries are experiencing a widening income gap with wealthier economies, marking a reversal in development progress seen earlier this century.

In Sub-Saharan Africa, currently countries face debt service payments of 12% on average, compared to 5% a decade ago.
In some countries debt payments are up to 20% of revenues. Those countries had far fewer resources to invest in education, health, infrastructure and jobs.
High interest rates in advanced economies have lured away investments from low income countries, and raised their cost of borrowing.
There are concerns regarding debt trap challenges from China and other emerging official creditors. Almost 40 countries saw external public debt outflows in 2022.

Countries seek help from the IMF (bailout) usually when their economies face a major macroeconomic risk, mostly in the form of a currency crisis.
The IMF basically lends money, often in the form of special drawing rights (SDRs), to troubled economies that seek the lender’s assistance.
SDRs simply represent a basket of five currencies, namely the U.S. dollar, the euro, the Chinese yuan, the Japanese yen, and the British pound.
The IMF carries out its lending to troubled economies through a number of lending programs such as the extended credit facility, the flexible credit line, the stand-by agreement, etc.
Countries receiving the bailout can use the SDRs for various purposes depending on their individual circumstances.
The IMF usually imposes conditions on countries before it lends any money to them.
For example, a country may have to agree to implement certain structural reforms as a condition to receive IMF loans.

IMF bailouts provide a source of financial support to stabilize a country’s economy, prevent further economic decline and restore confidence in the country’s ability to repay its debts.
IMF bailouts help prevent financial crises from spreading to other countries by containing the economic damage and stabilizing the financial system of the affected country.
IMF bailouts often come with conditions for economic policy changes and structural reforms that help the country address its underlying economic problems and put it on a sustainable path to growth and development.

Affected countries needed to increase their domestic revenues by raising taxes, continuing to fight inflation, paring back spending and developing local capital markets.
It is vital for these countries to make themselves more attractive to investors, and the IMF needs to engage with countries to help them do that.