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.

Continue reading

Creating Breathing Room in Low-income Countries


By Hugh Bredenkamp

In my previous postings this week, I have talked about the “double whammy” that low-income countries have faced over the past 2-3 years—the surge in food and fuel prices and global financial crisis—and how the IMF has stepped up its support to help them cope with these shocks. Without this support, and that of other agencies and rich-country donors, governments would have to slash spending as their tax revenues slumped. This, of course, is the exact opposite of what any government should be doing in a recession—it would add fuel to the fire.

But preserving or even increasing spending when revenues are declining means larger budget deficits, and more borrowing. Doesn’t the IMF always preach tight budgets? The answer is “not always.” Fiscal discipline and carefully-managed borrowing policies are essential for long-term economic health. But when economies are hit by temporary shocks—and the current recession, though severe, will surely be temporary—it makes sense for governments to use policy to limit the short-term damage.

Continue reading

Low-income Countries: Different Strokes for Different Folks


By Hugh Bredenkamp

In my last post, I explained how the IMF has dramatically scaled up its concessional financial assistance to its low-income country members to help them cope with the current global financial crisis.

Today, I want to get beyond how much is being lent, and turn to the how. It’s not enough simply to push out money—vital though that is. We also need to meet the particular needs of the country in question, and these are quite varied. Precisely with this in mind, the IMF has been changing the way it lends to low-income countries. In the jargon, we call this “facilities reform.”

We want to make lending more flexible, and better tailored to the different needs of an increasingly diverse group of low-income countries. It’s a question of horses for courses, as the expression goes.

What was the case beforehand? Well, the centerpiece of the IMF’s concessional financial support for low-income countries for the last decade has been the Poverty Reduction and Growth Facility (PRGF). Established in 1999, the PRGF addressed deep-seated balance of payments constraints—the very constraints that prevented low-income countries, year after year, from importing necessary goods and services, including the investment goods they needed to grow and develop. With these kinds of problems, there was no quick fix. So country programs under the PRGF emphasized deep structural reform, implemented over several years and supported by concessional loans from the Fund—backed by debt relief in certain cases—to create the conditions for strong, sustainable growth.

It’s no secret that IMF lending to low-income countries attracted some criticism over the years. Some people thought the adjustment policies were too harsh, or even misguided. It is true that, for a while, the results were not encouraging. But all the pieces began to fall into place early in this decade. Governments took heart as outcomes improved, and this created a virtuous circle, with better policies leading to still better results. A strong global economy for much of this time helped too. If we look back now at the overall record, the countries’ efforts paid off—PRGF programs have helped them achieve higher growth and lower inflation, supported by higher levels of foreign aid.

Continue reading

Follow

Get every new post delivered to your Inbox.

Join 742 other followers

%d bloggers like this: