Fiscal Challenges of Low-Income Nations

GS-3 Mains 

Short Notes or Revision Notes 

Question : Discuss potential strategies for affected countries to address their fiscal challenges and for the IMF to enhance its support in improving investment attractiveness and fostering economic stability.

Context:

• IMF concerned about debt and fiscal challenges of low-income countries.

Growth Slowdown:

• IMF lowered 2024 growth forecast for low-income countries to 4.7% (from 4.9% in January).
• World Bank reports widening income gap with wealthier economies for half of the world’s 75 poorest countries.

Debt Burdens:

• Sub-Saharan Africa: Average debt service payments rose to 12% (from 5% a decade ago).
• Some countries: Debt payments consume up to 20% of revenue, limiting investment in health, education, infrastructure, and jobs.
• High-interest rates in developed economies: Reduced investment and increased borrowing costs for low-income countries.
• Debt trap concerns from China and other emerging creditors.

How IMF Helps:

• Provides financial support (bailouts) during major economic crises, often currency-related.
• Loans come in the form of Special Drawing Rights (SDRs), a basket of five currencies.
• Lending programs include Extended Credit Facility, Flexible Credit Line, and Stand-By Agreements.
• SDRs can be used for various purposes depending on individual circumstances.
• Bailouts often come with conditions like structural reforms to address underlying economic issues.

Significance of IMF Bailouts:

• Stabilize economies, prevent decline, and restore confidence in debt repayment.
• Contain economic damage and stabilize financial systems, preventing crises from spreading.
• Promote economic policy changes and structural reforms for sustainable growth.

Way Forward:

• Affected countries need to:
  • Increase domestic revenue (raise taxes, fight inflation, reduce spending).
  • Develop local capital markets.
  • Become more attractive to investors.
• IMF needs to:
  • Engage with countries to improve investment attractiveness.

About the IMF:

• Established in 1944 (post-Great Depression).
• 190 member countries, with representation on the executive board based on financial importance.
• Initial goal: International economic coordination to prevent currency devaluation wars.
• Current role: Lender of last resort for governments facing severe currency crises.