- A sharp increase in government debt.
In
2023 alone, LIC government debt rose by 9 percentage points of GDP on
average— the largest annual increase in more than two decades—to 72
percent of GDP. Nearly half of LICs—twice
the number in 2015—are either in debt distress or at high risk of it.
Not one of them is at low risk. Partly because of elevated interest
payments on debt, government spending has shifted away from crucial
longer-term priorities, such as health and education.
- An inability to unwind large deficits.
The
COVID-19 pandemic sharply increased spending needs in low-income
economies, causing primary deficits to triple to 3.4 percent of GDP in
2020. Since then, low-income economies have
been unable to fully unwind these deficits—which stood at 2.4 percent
of GDP in 2023, nearly three times the average of other developing
economies. The sizable primary deficits that have driven the debt
buildup in these economies have reflected expenditure
pressures amid persistent revenue weakness.
- A collapse in external financing.
Low-income
economies’ ability to attract low-cost financing has largely dried up
in recent years: net official development assistance as a share of GDP
fell to a 21-year low of 7 percent
in 2022, the latest year for which data are available. That has left
the World Bank’s
International Development Association
(IDA) as their single-largest
source of low-cost financing from abroad. In 2022, IDA alone provided
nearly half of all the development aid that these low-income economies
received from multilateral organizations.
- High potential for growth and development.
LICs
enjoy significant potential to boost growth at home and contribute to
broader prosperity and peace as well. Several LICs have abundant oil and
gas resources, mineral deposits, and
significant solar energy and tourism potential. With the right
governance, these natural endowments could generate significant growth
and revenues. LICs can also reap large dividends as their working-age
populations grow significantly over the next half-century,
provided their citizens can be equipped with the right capabilities and
opportunities. If effectively harnessed, natural resource endowments
and demographic dividends could drive economic growth and
transformation.
- A pressing need for comprehensive policy interventions.
Well-designed
national policy interventions supported by the global community can
improve fiscal positions in LICs. National policies should strengthen
domestic revenue mobilization,
improve spending efficiency, upgrade debt management practices, and
foster stronger economic growth. These economies also need stronger help
from abroad—both in the form of greater international cooperation on
trade and investment and in the form of much larger
support for IDA and other international institutions, which can work
with the private sector to mobilize additional resources and help
facilitate structural reforms.
You can download the study here: “Fiscal
Vulnerabilities in Low-Income Countries”. All charts/data featured in the study are available on the report
web page.
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The Great Reversal.
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