Developing country debt and the world economy
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Figure 3 identifies a subset of countries where debt servicing costs are particularly exposed to changing financial conditions, via either a rise in borrowing costs, currency depreciation, or commodity price shock. These diagnostic scenarios are presented in isolation, but should be interpreted in light of the close interaction between financial variables. For example, the collapse in oil prices by more than 50 per cent between and was associated with a 35 per cent devaluation of the Nigerian naira.
This in turn triggered a 3 percentage point rise in interest rates, thus compounding the impact on the interest burden of the commodity shock with both an exchange rate and interest rate shock.
How Countries Deal With Debt
A number of least developed countries LDCs and heavily indebted poor countries HIPCs are identified as being particularly vulnerable to financial shocks. Many low-income countries have experienced a substantial rise in both fiscal and interest burdens in recent years, placing them at high risk of debt distress. Any cutback or delays to critical infrastructure investment will worsen existing structural bottlenecks and constrain productivity growth, further hampering the progress towards sustainable development.
In addition, rollbacks on policy measures to address structural challenges, including measures to tackle high unemployment and rising inequality, could risk triggering political and social unrest.
World Economic Situation And Prospects: July 2018 Briefing, No. 116
In the current environment, policymakers in the developing economies need to assess policy options not only to effectively mitigate external risks, but also to restore fiscal positions to a more sustainable footing. For the commodity-dependent economies, the present fiscal challenges highlight the urgent need to accelerate economic diversification efforts and diversify sources of government revenue.
Measures to improve fiscal management are also important in strengthening public finances and preserving confidence. These measures could include improving the allocation of expenditure, expanding the tax base, and ensuring that public debt is channelled towards productive investment.
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The expansive fiscal stance of the United States sets it apart from most other developed countries, where Governments have tended to adopt a broadly neutral fiscal policy stance for — Recent fiscal stimulus measures are expected to add roughly 0. An associated tightening of global liquidity conditions would have significant repercussions for many of the vulnerable developing countries discussed above. Narrowing fiscal space poses a policy dilemma for Japan, given that it has almost exhausted monetary policy options with its extraordinarily loose monetary stance.
With gross public debt at per cent of GDP in , the Government has repeatedly pledged to undertake more effective fiscal consolidation, including the planned hike in the sales tax rate in October However, the Government is also cautious not to derail the fragile growth in domestic demand. For the fiscal year , only a modest increase in expenditure, mostly on social security spending, has been budgeted.
However, should the economy experience an unexpected slowdown, additional spending is likely.
Fiscal policy is expected to have a broadly neutral impact on growth in — A number of countries, including Austria and Germany, continue to require fiscal spending increases to integrate the large number of migrants. However, fiscal space remains limited in the EU as a whole. While the currently low level of interest rates reduces the cost of debt service, the shift in monetary policy stances towards a normalization of interest rates hints at higher levels of fiscal spending on servicing public debt in the near future.
In the United Kingdom, the budget deficit decreased from 3. However, fiscal policy will remain under pressure from the effects created by the decision to leave the EU. The United Kingdom has to reorganize public support mechanisms and financial flows in a plethora of policy areas, and this administrative exercise alone is already a major cost.
For several economies in the Commonwealth of Independent States CIS , including Kazakhstan, the Russian Federation, Tajikistan and Ukraine, banking sectors bailouts in have exerted significant pressure on public finances. However, the recent rise in oil prices has alleviated some of the fiscal constraints faced by the CIS energy-exporters since Fiscal policy in the Russian Federation remains conservative, due to the implementation of a fiscal rule designed to decrease reliance on hydrocarbon revenues, to rebuild the National Wealth Fund, and to curtail currency volatility.
The possibility of new sanctions targeting Russian sovereign debt is reinforcing fiscal conservatism. However, progress towards the recently announced economic development targets and social spending promises requires raising additional revenue. The Government has proposed an increase in the value-added tax VAT rate in and a gradual increase in the retirement age. Among other large energy-exporting economies in the region, Kazakhstan aims to preserve fiscal sustainability through the phasing out of earlier stimulus measures, thus reducing the budget and the non-oil deficits in to 1.
Meanwhile, Turkmenistan is consolidating public finances after large infrastructure spending in Public debt must be reduced to 71 per cent of GDP by This has allowed some fiscal loosening, including doubling the minimum wage in and plans to increase pensions.
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Due to the internal conflict, defence spending remains significant. For the smaller CIS economies, higher growth, increasing remittances and stronger consumption have boosted fiscal revenues. In —, most economies in Africa were hard hit by the commodity downturn. The drop in commodity revenue led to a deterioration of fiscal positions and sharp rise in government debt.
The Financial and Economic Crisis and Developing Countries
As fiscal deficits remain high in most regions, debt levels are unlikely to recede significantly in the near term. The improvement was mainly due to increased revenues connected to higher commodity prices, although expenditures for the continent as a whole also decreased marginally relative to GDP. North Africa ran a large fiscal deficit of close to 9 per cent of GDP in , which weighed heavily on the continental average. Excluding Egypt and Libya, the fiscal deficit in North Africa averaged 4.
Deficits in East, West and Southern Africa averaged 4. In Central Africa, after a sharp increase peaking at 8. However, in the event of an external shock, most countries in the region have some degree of fiscal space to support domestic economic activity. Compared to other developing regions, fiscal positions in East Asia are relatively stronger, attributed in part to robust GDP growth and more prudent fiscal management.
Over the past five years, fiscal deficits in the region averaged only 1.
Nevertheless, there is still ample room to improve the efficiency and effectiveness of public expenditure among East Asian economies. Over the past year, several governments in the region have announced a range of measures aimed at boosting productivity growth and expanding social protection systems.
Indonesia, the Philippines and Thailand have continued to focus on developing transport infrastructure to improve connectivity. The Indonesian Government has also announced plans to prioritize human capital development, through the expansion of vocational training and apprenticeship programmes. Meanwhile, in the Republic of Korea, the authorities plan to raise spending on welfare, including increasing social service jobs and expanding health insurance coverage.
The strengthening of fiscal accounts is a major medium-term policy challenge in South Asia.
For instance, the public debt-to-GDP ratio is above 60 per cent in Maldives, India, Pakistan and Sri Lanka, and interest payments are close to or exceed 20 per cent of government revenue in several economies. The Jubilee Debt Campaign JDC said a borrowing spree when global interest rates were low had left many developing nations facing repayments bills that were forcing them into public spending cuts. The International Monetary Fund has become increasingly concerned at the financial vulnerability of poor countries and will discuss the issue at its spring meeting in Washington DC next week.
A vital first step is to require that all loans to governments are publicly disclosed, allowing parliaments, media and civil society to hold governments to account for new borrowing. All too often, the lenders who helped to cause the crisis are bailed out, while all the costs of irresponsible lending are borne by people in the borrowing country. Calculations by the JDC found that in the 15 countries with the highest debt payments, public spending per person fell in 10 of them between and All three countries are on IMF programmes.