HomeBusinessIMF Sees Strong Growth, Lingering Risks in Low-Income Countries

IMF Sees Strong Growth, Lingering Risks in Low-Income Countries


IMF Low-Income Countries

AFRICANGLOBE – Low-income countries are now among the fastest-growing economies in the world, but many remain vulnerable to shocks and spillovers from advanced and emerging markets, the IMF says.

“Low-income countries have worked to develop institutional capacity and build fiscal buffers that they were able to use during the crisis, and now, all the hard work has paid off,” said IMF Deputy Managing Director Min Zhu at an IMF seminar.

But these economies should take this opportunity to shore up their resilience to potential new shocks if they hope to sustain their current growth momentum, stressed Zhu and several participants at the IMF-World Bank Spring Meetings, which took place in Washington from April 19-21.

In months leading up to the Spring Meetings, the IMF had stepped up its work on low-income countries, publishing a comprehensive review of its concessional lending instruments as well as new research on growth prospects for economies in this category.

Solid Fundamentals

Low-income countries are experiencing strong expansion that is based on relatively solid fundamentals, observed Hugh Bredenkamp, Deputy Director of the IMF’s Strategy, Policy, and Review Department.

Speaking at the seminar, “Low-Income Countries in the Global Economic Recovery: Strengths, Vulnerabilities, and the Role of the IMF,” Bredenkamp pointed to three clear signs that growth in low-income countries was firmly rooted.

First, low-income countries are relying less on domestic demand and more on external demand as the world starts to recover from the recent crisis. Inflation has also come down steadily in low-income countries, despite occasional spikes related to commodity price shocks. And governments in low-income countries have seen declining debt ratios, thanks to a combination of debt relief, growth, and greater fiscal discipline.

Because of the decline in debt, these countries have been able to spend less on debt service and more on poverty-reducing programs, Bredenkamp added.

“All this suggests that low-income countries’ currently strong economic performance has strong foundations, and from that perspective, we see good chances of it being sustained over the medium term,” Bredenkamp said.

Vulnerabilities Remain

During the 2008-09 global economic crisis, low-income countries did experience a downturn, but they bounced back more rapidly than the rest of the world. Bredenkamp noted that a key reason for their resilience was that they were able to use countercyclical policy-that is, they had the budgetary space to carry out measures to fight the crisis.

However, these measures depleted the countries’ economic buffers, leaving them exposed to future shocks. Since growth resumed in 2010, low-income countries have made limited progress in rebuilding these buffers, he noted.

These developments have two broad policy implications, according to Bredenkamp. First, low-income countries will have to give priority to building up their defenses, even if it means putting other spending needs on the back burner. Second, the IMF needs to be ready to provide support to help countries navigate a shock-prone environment, through both financing and policy advice.

IMF Loans to Low-Income Countries

The analysis of the Spring Meetings comes on the heels of a comprehensive review of its concessional lending instruments, encompassing both the funding model for subsidy resources and the design of the facilities. This latest review follows on the 2009 overhaul of concessional lending, which changed the architecture of the IMF’s lending facilities to make them more flexible and responsive to the diverse needs of low-income countries.

The review accomplished several objectives. First, it established a self-sustaining funding model for the IMF’s concessional lending. It also refined the targeting of its resources to the poorest and most vulnerable countries by:

  • graduating some of the better-off among them from the use of concessional resources;
  • adding three microstates-countries with populations below 200,000-to the eligibility list for subsidized lending; and
  • blending the IMF’s concessional resources with its nonconcessional loan resources for the “better-off” countries within the low-income country group.

The review also aimed to make lending to low-income countries more flexible by:

  • raising the cumulative borrowing limit under the Rapid Credit Facility, the IMF’s channel for delivering quick emergency support;
  • allowing loans to be augmented more quickly when shocks hit; and
  • relaxing some of the restrictions on the use of precautionary lending facilities.

In addition, the IMF is sharpening its policy advice to low-income countries in four key areas: scaling up investment while keeping debt at sustainable levels; managing natural resource wealth wisely; recognizing fragile and small states’ special needs and vulnerabilities; and creating broad-based, inclusive growth so that all segments of a country’s population benefit.

Less Poverty, More Prosperity

The IMF’s reforms to its engagement with low-income countries came just as the World Bank unveiled a new initiative to end poverty and increase prosperity. At the Spring Meetings, World Bank President Jim Yong Kim announced his objective of “setting an expiration date” for extreme poverty by reducing the percentage of people living on less than $1.25 a day to 3 percent by 2030 (from 21 percent in 2010).

This objective, endorsed by the joint IMF-World Bank Development Committee, will lay the foundation of a strategy that the World Bank says it will present at the Annual Meetings in October 2013.

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