How low income economies can achieve debt sustainability — IMF Chief

The International Monetary Fund (IMF) on Thursday highlighted three policy priorities to achieve debt sustainability among low-income economies.

The managing director of the Fund, Christine Lagarde, said these priorities include being prudent in taking on new debts; focusing more on attracting foreign direct investment, and boosting tax revenues at home.

Also, Ms Lagarde said all countries must adhere to the rigour and transparency in their borrowing and lending practices, by significantly strengthening institutions that record, monitor, and report debt in individual countries.

Again, the IMF must encourage stronger collaboration between borrower countries and lenders, to cut down on the high rate of debt contracts not publicly disclosed by either the borrowers or lenders.

The IMF boss was speaking in Washington, DC at Sovereign Debt Conference organized by the Strategy, Policy and Review Department of the Fund on the theme: “Managing Debt Vulnerabilities in Low-Income Countries.”

By working together, she said borrowers and lenders would ensure better disclosures, to reduce risks and increase accountability.

Again, the IMF MD stressed the need for better collaboration to prepare for debt restructuring cases involving non-traditional lenders.

With substantial non-Paris Club debts, she said there was need to consider new ways to ensure official creditor coordination to facilitate debt crisis resolution.

Managing debt vulnerabilities, she said, was critical, considering that about 40 percent of low-income countries already facing significant debt challenges, driven by poor governance, off-balance sheet borrowing, and weak debt recording and reporting.

“If obstacles that inhibit smooth debt restructurings now can be addressed, the IMF can more easily play its traditional role in providing financial support and acting as a catalyst for additional flows, including from the World Bank and other major lenders.

Ms Lagarde who identified building trust in sovereign debtors as the ultimate purpose of the conference, said this involved focusing on investment projects with credibly high rates of return.

She said it also means increasing the responsibility of lenders, who need to assess the impact of new loans on the borrower’s debt position before providing the new loans.

“Our (IMF) principal responsibility is to maintain the stability of the international financial system—and healthy sovereign borrowers are the bedrock of that system,” Ms Lagarde said.

“We know that borrowing makes sense for all countries—rich and poor—if it finances things such as schools, hospitals, and physical and digital infrastructure. These are smart investments that can boost potential growth and improve the economic wellbeing of individuals and communities,” she noted.

According to her, one third of low-income countries do not report debt guarantees for state-owned enterprises, while even fewer than one in ten report debt of public enterprises.

She emphasized the need for greater transparency in these borrowings to help prevent the contingent liabilities from turning into massive government obligations in future.

Besides, she said the IMF was ready to work closely with all its member countries to bolster their debt recording and management capacities, and governance frameworks through debt sustainability analysis on potential risks.

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In 2017, Ms Lagarde said the Fund conducted assessments on debt sustainability in 55 low income countries, while a similar exercise is currently being rolled out on its new enhanced debt sustainability framework for these economies.

The new framework, she explained, would bring out more clearly the economic assumptions behind the analysis as well as the obligations covered, and its stress tests highlight vulnerabilities that are particularly relevant for low-income countries such as natural
disasters and commodity price shocks.

Noting that public debt in advanced economies reached new highs not seen since the Second World War, Ms Lagarde if recent trends continue, many low-income countries would be facing unsustainable debt burdens.

Blaming the situation on the impact of the global 2008 financial crisis and the post-crisis policy responses, she said governments in most advanced economies resorted to using their balance sheets to rescue failing financial firms and support demand.

In emerging markets and low-income economies, apart from the impact of rapid spending growth used for public investment, impact of various shocks—from low export prices for commodity producers, to natural disasters, conflicts, and epidemics, also hit hard at low-income countries.

“The bottom line is that high debt burdens have left many governments more vulnerable to a sudden tightening of global financial conditions and higher interest costs.

“For emerging market and frontier economies, concerns about debt levels in this environment could contribute to market corrections, sharp exchange rate movements, and further weakening of capital flows,” the IMF MD said.

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