Low Income Economies’ Grinding Ground Stops
The International Monetary Fund’s latest annual poor region survey covering 60 countries offers a lengthy economic, banking system and debt worry list which has already prompted program rescues across Africa and elsewhere and is likely to invite additional public and private sector scrutiny around the April spring meeting. The group is subdivided into commodity and diversified exporters, frontier markets commercially borrowing overseas and fragile states in conflict or weak administration. Average GDP growth was under 5% in 2017 and should rise to just above that level this year, with raw materials producers lagging. Fiscal deficits have increased, and inflation is in double-digits for one-quarter and problem banks plague one-third the universe despite improved global conditions, although aid and remittances are down. In commodities metals have rebounded in particular, and foreign direct and portfolio inflows were “robust” in the wake of a half dozen sovereign bond placements. The 30 fragile countries are at the bottom of these ranks, but nonfuel exporters’ slowdown widened the distance to the Sustainable Development Goals. Fiscal deficits are worse in 70% of low-income economies, at around 5% of GDP, and the rationale that they are tied to higher public investment applies to only a minority. Current account gaps remain in the 3-4% range despite bridging, with reserve coverage under the 3 month recommended threshold in 20 countries. Median inflation is 5.5% and lower with pegged exchange rate regimes as in the two Francophone zones, while real interest rates fell with bad loan ratios in double digits. Private credit/GDP is stuck at 25% with spreading bank failures and non-bank stress is up in 15 locations. A dozen new Fund arrangements and augmentations were approved last year in Africa, and several requests are in the pipeline with per capita income and investment lagging medium-term forecasts.
A separate chapter is devoted to rising debt, with an estimated 40% facing vulnerabilities and creditors now predominantly non-Paris Club, commercial and domestic. Private external markets carry steeper servicing costs and risks, and official managers often lack a comprehensive view of liabilities and structures. Greater transparency on both sides can facilitate cooperative workouts and the Fund and World Bank provide technical assistance to strengthen country capacity. In the past five years public debt spiked a dozen points to almost 50% of output with the most pronounced changes in Sub-Sahara Africa, the Middle East and Central Asia. Interest outlays are 5% of revenue, above the advanced economy norm, and the 10% of GDP fiscal financing requirement is a decade high. Civil war and epidemics were non-economic causes, and fraud was a driver in Mozambique and Moldova. Commodity shocks partially contributed to the rest of debt takeoff, but runaway budget and off-budget spending were chief culprits. Eight poor nations are currently in distress and Republic of Congo and Mozambique have formally defaulted on global bonds and are in restructuring talks. The latter after conducting an audit of undisclosed loans and missing funds unveiled an initial exchange offer in March with big haircuts creditors rejected. In Congo’s case collateralized loans may have complicated resolution with a “seniority race.” Public-private partnerships are rarely captured in reporting and are another obstacle in post-HIPC category redesign, the report concludes.
