Shareholders of the International Monetary Fund agreed this week on the importance of addressing challenges faced by low-income countries, many of which are facing unsustainable debt burdens, IMF Managing Director Kristalina Georgieva said. Multiple reports from the IMF and the World Bank this week sounded the alarm about economic developments and prospects in low-income developing countries, which are still grappling with the aftermath of the COVID-19 pandemic and other shocks. 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. In a separate report, the World Bank said half of the world’s 75 poorest countries were experiencing a widening income gap with the wealthiest economies for the first time this century in a historical reversal of development.
Georgieva said the IMF was working to reinforce its ability to support low-income countries hit hardest by recent shocks, including through a 50% quota share increase and by adding resources to its Poverty Reduction and Growth Trust. Georgieva and Saudi Arabia’s Finance Minister Mohammed Al-Jadaan, who chairs the IMF’s steering committee, both said internal reforms adopted by the IMF this week should help make the debt restructuring process speedier and smoother. Georgieva said a meeting of the Global Sovereign Debt Roundtable hosted by the IMF and the World Bank this week had made progress on setting timelines for debt restructurings and ensuring comparability of treatment for various creditors. She said high debt levels posed a huge burden for low-income countries, including many in Sub-Saharan Africa, where countries are now facing debt service payments of 12% on average, compared to 5% a decade ago. High interest rates in advanced economies have lured away investments, and raised the cost of borrowing.
“What is heartbreaking is that in some countries debt payments are up to 20% of revenues,” Georgieva said, adding that this meant those countries had far fewer resources to invest in education, health, infrastructure and jobs. Affected countries needed to increase their domestic revenues by raising taxes, continuing to fight inflation, paring back spending and developing local capital markets, she said. The Bulgarian economist said it was vital for these countries to make themselves more attractive to investors, and said the IMF was engaging with countries to help them do that.
Iolanda Fresnillo, with the non-profit European Network on Debt and Development, said the United Nations should implement a new multilateral legal framework to deal with sovereign debt, in a similar way that is currently being done for a new framework to govern tax cooperation. The current approach is too piecemeal and a broader framework should take into account climate change, environmental degradation and human rights, she said.
U.S. Treasury Undersecretary Jay Shambaugh raised concerns about the situation facing low-income countries last week, warning China and other emerging official creditors against free-riding by curtailing loans to low-income countries just as the IMF or multilateral development banks were pouring funds in. Almost 40 countries saw external public debt outflows in 2022, and the flows likely worsened in 2023, he said.
