Low Income Economies’ Bottoming Out Bottlenecks
The IMF with a new managing director in place committed to boosting poor country performance, released a mixed annual assessment of 60 members in the category, defined as per capital income under $2700. It covers one-fifth of world population but only 5% of output, with average 5% GDP growth through 2019. Commodity producers lagged more diversified exporters and fragile states were at the bottom. Public debt rose in half the group, and the tax/GDP ratio remains below 15% despite VAT application potential. Bank failures with weak resolution and deposit insurance schemes were a drag, and the longer-term outlook is tied to productivity and business climate improvements along current emerging market standards, the paper notes. It underscores “striking heterogeneity” between fuel and non-fuel commodity frontier market spreads with international financial access. Oil prices rebounded the past year in contrast with the agriculture and metals complex, and half a dozen African sovereigns were repeat bond issuers. Tajikistan, Papua New Guinea and Benin debuted, but half of markets do not receive portfolio inflows and FDI is still the dominant overall source. Remittances and aid increased, but the latter merely retraced previous drops. Growth leaders like Laos and Rwanda benefited from relative diversification and large-scale infrastructure projects, while disaster and war-affected Afghanistan and Mozambique were laggards. Commodity economies have smaller average fiscal deficits at 2.5% of GDP, with tax collection unchanged despite priority status under the Addis Ababa domestic resource agenda. Policy and revenue administration reforms helped selectively, but VAT design and implementation is an outstanding task. On public debt primary and off-budget deficits have been the main drivers, with 45% at high risk or in distress. Non-fuel exporters had the worst current account gaps at 5% of output, often due to capital equipment import surges. International reserves are under the three months trade need threshold, and inflation moderated to 4%, with flexible exchange rate countries easing the most. Interest rate reduction followed, but private credit slackened in one-third the cohort.
On an ominous note, the evaluation cited financial sector difficulties in 40%, double the fraction in 2016. Bank capital adequacy is stable, but bad loans have spiked above 10% in half of countries on a combination of factors, including lower export values and mounting government arrears. Correspondent relationships ended over money laundering and terrorism concerns in places like Nicaragua, Solomon Islands and Nicaragua. Almost 40% of the population now has account access with mobile catalysts, versus over 60% in emerging markets. Only one-tenth if customers have any savings, and private credit to GDP is minimal at 20%. Human capital in terms of education and health is a basic obstacle but labor quality, technology, and the investment climate are broader considerations for infrastructure and World Bank “Doing Business” attention. Power grids and school enrollment have expanded from low bases, with efficiency and results still to be tested. Environmental and China trade risks also cloud the future, with a cross-section of poor economies in the value chain or shipping raw materials for Asian demand. Through the publication date Chinese “A” shares up 30% continued to top the core and frontier MSCI indices, with the so-called “Next 11” barely positive reflecting Fund ambivalence.
