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Financial Sector

Debt in low-income countries: A rising vulnerability

Patrick Kirby's picture
Download the January 2019 Global Economic Prospects report.

Since 2013, median government debt in low-income countries has risen by 20 percentage points of GDP and increasingly comes from non-concessional and private sources. As a result, interest payments are absorbing an increasing proportion of government revenues in these countries.

This increase in public debt exposes low-income countries to greater currency, interest rate, and refinancing risks. At present 11 low-income economies are in debt distress or at a high risk of debt distress, up from six in 2015. Even those low-income countries that are at low or moderate risk of debt distress face eroding safety margins.

To shield themselves from the risks associated with high debt, low-income countries urgently need to strengthen the effectiveness of domestic resource mobilization, public investment and other spending, and debt management.
 
Debt relief under the Heavily Indebted Poor Countries initiative and the Multilateral Debt Relief Initiative (MDRI) helped to reduce public debt among low-income countries from a median debt-to-GDP ratio of close to 100 percent in the early 2000s to a median of just over 30 percent in 2013. This downward trend reversed sharply thereafter, with the median debt ratio rising to above 50 percent by 2017. The rise was especially sharp for commodity exporters.

Rising debt raises fewer concerns about debt sustainability if it is used to finance investment that raises countries’ potential output, and therefore their ability to repay loans in the future. In some low-income countries, wider fiscal deficits were matched by higher public investment. For most low-income countries, however, a substantial part of the borrowing has been used to finance a rise in current consumption.
 
Gross low-income countries (LIC) government debt

On risk and black swans in developing countries

Carlos Végh's picture

In 2014, the World Bank issued a highly relevant and timely report titled Risk and Opportunity:  Managing Risk for Development. This report analyzed the growing number of heterogenous risks and opportunities affecting developing countries.  A clear challenge in finding a consistent risk management strategy stems from the sharp differences in the risks faced by developing countries; for example, commodity price shocks, financial crises, and natural disasters have all different defining characteristics.  While we could tailor risk management strategies to each one of these types of risks, not having the benefit of a unifying framework can lead to mistakes and mismanagement of the scarce resources available to developing nations to deal with these potentially disastrous events.  Five years after the publication of the report, in a time of growing macroeconomic headwinds for emerging markets and higher exposure to natural disasters, understanding the risks faced by these economies and how to effectively manage them continues to be a key policy challenge.

The rich can stop feeling guilty – and start paying taxes

Davida Connon's picture

Tax avoidance by the world’s wealthiest people and largest companies is widespread. The excuse is that such avoidance is legal. Rich individuals and corporations look for jurisdictions that have low or no tax on personal or corporate income, on dividends, on capital or R&D expenditure. They base their business activities there, at least for the purposes of taxation.

Global solidarity to finance the Sustainable Development Goals

Jeffrey D. Sachs's picture

Achieving sustainable development depends on incremental investments in six priority transformations: building human capacities (health, education, new job skills); decarbonising energy; promoting sustainable agriculture and biodiversity; building smarter cities; implementing the circular economy; and harnessing the digital revolution. As such, sustainable development and the 17 Sustainable Development Goals (SDGs) in particular pose a financing challenge. There are three distinct financing conundrums to solve: financing complex infrastructure, financing public services and amenities, and shifting investments from unsustainable to sustainable technologies. I discuss these in turn.

Helping poor women grow their businesses with mobile savings, training, and something more?

Mayra Buvinic's picture

Growing a business is not easy, and for women firm owners the challenges can be acute, especially when they are poor and run subsistence level firms. In developing countries, 22 percent of women discontinue their established businesses due to a lack of funds, and women are more likely than men to report exiting their businesses over finance problems, according to the Global Entrepreneurship Monitor. Meanwhile, personal savings are a crucial source of entrepreneurial financing, and nearly 95 percent of entrepreneurs globally state that they used their own funds to start or scale up their businesses. Women, however, face unique constraints in accumulating savings to invest in growing their firms.
 

Photo credit: Marijo Silva and the “She Counts” global platform.

Corporate tax avoidance in an era of changing firms

Davida Connon's picture

It is widely accepted that corporate tax avoidance is commonplace, but experts disagree over the precise amount of tax that corporations successfully avoid. One estimate for 2012 suggests that 50 percent of all foreign income of multinationals is reported in jurisdictions with an effective tax rate below 5 percent; another suggests it’s more like 40 percent. The OECD estimates that governments worldwide are missing out on anything between four and ten percent of global corporate income tax revenue every year, or US$100–$240 billion. While the accounting varies, one fact is clear:  there is an unacceptable level of corporate tax avoidance, no matter how you do the math. 

For better returns on development investments, we need a better market

Jorge Moreira da Silva's picture

Financing for development is not a cost, it is an investment. An investment in sustainable cities, quality education, access to healthcare, decent jobs, efficient and responsible agriculture, and ending extreme poverty. In 2015, we recognized that the size of the investment needed to achieve the UN’s Sustainable Development Goals is greater than aid alone can provide. The Addis Ababa Action Agenda called on both public and private actors to use aid, taxation, investment, remittances, philanthropy and innovative financing. This amounts to trillions of dollars in financing of all kinds, which needs to be targeted more strategically to where they are most needed.

Releasing the 2017 Global Findex microdata

Leora Klapper's picture

It’s financial inclusion week—a series of events exploring "the most pressing actions needed to advance financial inclusion globally"—making this a perfect time to launch the 2017 Global Findex microdata.

In April, we released country-level indicators on account ownership, digital savings, savings, credit, and financial resilience. Now comes the microdata – individual-level survey responses from roughly 150,000 adults living in more than 140 economies globally.

The winter is coming: Crisis management should be prepared before a crisis strikes, not in the midst of it

Norman Loayza's picture

2018: It has been 100 years since the Spanish flu pandemic and 10 years since the global financial crisis. The Spanish flu killed more than 50 million people, more than the two World Wars combined. It was so lethal because it occurred when people were at their weakest, suffering from the Great War: malnourished, living in conditions of poor hygiene, on the move as combatants or refugees, and lacking proper medical facilities. A decade ago, the global financial crisis struck, triggering not only a prolonged recession in the United States and other advanced countries but also a deepening distrust of globalization as a force for progress. And this had consequences well beyond the realm of economics. Lacking unity of purpose and grappling with their own domestic troubles, the nations of the West were unable to deal with the Arab uprisings and could not articulate a response to the Syrian crisis. Brexit, the rise of nationalism in Europe, the neo-isolationist policies in the United States, and the recent wave of trade protectionism have deep roots, but their triggers can be traced, in one way or another, to the global financial crisis of 2008.       

Capital account liberalization and controls: Structural or cyclical policy tools?

Poonam Gupta's picture

Capital flows to emerging market economies are deemed volatile, driven more by external than domestic factors. Surges in capital flows often generate macroeconomic imbalances in emerging markets, resulting in rapid credit growth, asset price inflation, and economic overheating. Reversals are disruptive too, often causing financial volatility, economic slowdown, and in some cases distress in the banking and corporate sectors.

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