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.


  • 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.


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