IMF Discusses “Macroeconomic Developments and Prospects in Low-Income Developing Countries—2019”

On November 13, 2019, the Executive Board of the International Monetary Fund (IMF) discussed an IMF staff paper on recent economic developments and near-term prospects in low-income developing countries (LIDCs). The paper also examines the challenges faced by LIDCs in the implementation of a value-added tax system and how financial safety nets can be appropriately tailored to the specific circumstances of these countries.

Background

LIDCs are a group of 59 IMF member countries primarily defined by income per capita level below a certain threshold (set at $2,700 in 2016). This group of countries contain one fifth of the world’s population—1.5 billion people—but account for only 4 percent of global output.

LIDCs are expected to record average annual growth of some 5 percent in 2018–19, a reasonably robust performance against the backdrop of loss of momentum in the global economy. Commodity-dependent economies continue to fare less well than countries reliant on other export sectors, a pattern in place since the drop of commodity prices from mid-2014; experiences vary markedly within these groups, with countries in fragile situations typically recording weaker-than-average performance. Looking ahead, growth is expected to pick up marginally in 2020 and beyond, although risks to the global economy threaten this outlook.

An analysis of the drivers of longer-term growth patterns in LIDCs highlights the importance of investment levels in contributing to growth, but also the drag on growth stemming from inefficient use of resources, weak business climates, and low levels of human capital.

Public debt accumulation in LIDCs has slowed significantly since 2017, having risen markedly in the preceding four years, but debt levels continue to drift upward in about half of the countries.

Progress in boosting domestic revenue mobilization over time has been mixed, with the median tax-GDP ratio in LIDCs, at about 13 percent of GDP, remaining broadly unchanged from the levels recorded in 2013. But one-quarter of the countries have succeeded in increasing this ratio by at least 2 percentage points over this period, showing that sustained progress can be achieved with well-designed reforms.

The value-added tax (VAT) can be a very effective instrument for boosting tax revenues, but many LIDCs have faced significant challenges in building the institutional capacity to execute the provision of VAT credits in a timely manner and to manage VAT registration in a cost-effective manner. As these challenges are addressed, the VAT can be expected to deliver higher revenues with in an efficient and cost-effective manner.

Recent experience with bank failures in some LIDCs has highlighted weaknesses in financial sector safety nets that contribute to financial sector instability. These include the absence of effective bank resolution regimes, of well-designed emergency liquidity assistance frameworks, and of a financially sound deposit insurance system. Upgrading safety nets, including by targeted adaptation of international standards to suit local conditions, can enhance the overall stability of the financial system while bolstering depositor confidence in the security of their savings.

Source / More : IMF

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