By Tao Zhang
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:
- Advise low-income countries on how best to balance borrowing to finance development spending and managing debt-related risks
- Roll out the recently revised low-income country debt sustainability framework to better inform such analysis
- 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.
