Practicing Safe Borrowing in Low-income Countries

By Hugh Bredenkamp

Low-income countries face vast development needs. One of the biggest impediments to rapid growth is a massive “infrastructure deficit.”

In sub-Saharan Africa, for example, indicators of road and rail infrastructure are only about half those in developing countries as a whole—comparisons with advanced economies, of course, would look even bleaker. Insufficient power generation capacity and telecommunications networks are also a big constraint. It is clear that large-scale investment programs, sustained over many years, will be needed to close these gaps. Both private and public sectors will have a role to play.

The snag, of course, is that investment spending typically has to be financed by borrowing, and until quite recently, the ability of low-income country governments to take on more debt has been severely hampered by legacies from the past. Many had built up unsustainable debt as a result of bad borrowing and spending decisions, poor project implementation, weak revenue systems (governments could not collect the taxes needed to service the debts), and often bad luck (as their economies were hit by global shocks). In effect, these countries were caught in a debt trap.

Infrastructure remains a big problem in many low-income countries (photo: Reuters)

Infrastructure remains a big problem in many low-income countries (photo: Reuters)

But the world is changing. Large-scale debt relief, as well as big improvements in policies and public institutions, means that an increasing number of countries can now ramp up investment spending more efficiently than in the past, and borrow more aggressively for that purpose. They are starting with a clean slate. But not all countries are at this point. In fact, the majority still have more to do to on the policy and institution building front, and will need to borrow cautiously in the interim. Nevertheless, the greater diversity we see now among low-income countries needs to be reflected in how IMF-supported programs are designed (alert readers will notice that this has been a theme in my blogs this week).

What does this mean in practice? Well, for a start, we need a more flexible policy for setting limits on government debt in programs. For the past 30 years, the traditional low-income country program has permitted only highly concessional borrowing (that is, on subsidized terms), which generally rules out financing from the private sector, or from lenders who are not willing or able to provide sufficiently generous terms. There were case-by-case exceptions, but this was bascially the way it worked.

We are now moving (effective in December) to a new framework with built-in flexibility, linked directly to the circumstances of individual countries. Those with the lowest debt vulnerabilities and strongest capacity to manage public resources (assessed on the basis of widely-used indicators) will have much greater leeway than in the past to pursue borrowing strategies that mix concessional and nonconcessional sources of finance.

Given more financing options, they should be able to expand their investment programs, and move safely onto a higher growth path. Programs will continue to limit nonconcessional borrowing in countries with the highest vulnerabilities and lowest capacity. But these countries can gain more room for maneuver in the future, as they build capacity and improve their debt indicators—tasks that the IMF and others will help them achieve with advice and technical support.

Together with our colleagues at the World Bank, we are also looking at ways to help countries develop borrowing plans that are somewhat more expansive, but without taking undue risks with debt sustainability. Finding better ways to quantify the growth impact of public investment programs, for example, could lead to more favorable debt sustainability assessments. That, in turn, could imply more room to borrow under the new debt limits policy that I have just described.

A similar result could be obtained by taking remittances from migrant workers into account, since these boost a country’s foreign exchange earnings, and have become very large indeed in some cases. We will continue to work on these issues in the months ahead.

All in all, in the debt policy area as in other aspects of our work with low-income countries, our goal is to find new ways to help them meet their goals—faster growth, reduced poverty, and graduation to middle-income country status in the not-too-distant future. We are the facilitators.

Anyway, it’s now time for me to sign off. The conversation on low-income countries continues next week, when you will hear from the director of the African department, Antoinette Sayeh.

One Response

  1. Very interesting view from Hugh. This was the basis for Ghana accessing capital markets in 2007. The intention was to raise funds to address the infrastructure deficit and hopefully raise the levels of growth. Unfortunately global developments and other domestic policy slippages have complicated the outcome. At that time we thought we had done much on the policy and institutional building front.

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