Economic Growth

Low-income countries can become more resilient. Here's how: IMF

Financing can help countries stabilize their currencies, improve their economic productivity, and create jobs.

Financing can help countries create jobs and improve their economic productivity. Image: Pexels/Quang Nguyen Vinh

Karmen Naidoo
Economist, Middle East and Central Asia Department (MCD) IMF
Nelson Sobrinho
Deputy Division Chief, Finance Department, IMF
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Peace and Resilience

  • Financing can help low-income countries become more resilient to economic shocks.
  • IMF-funded countries have recovered more quickly from the COVID-19 pandemic than unfunded countries.
  • An additional $440 billion in financing for low-income countries through 2026 is essential to help these countries build resilience to shocks and achieve economic growth.
  • Financing can help countries build up their reserves, invest in infrastructure, and improve social safety nets.

Low-income countries face multiple economic challenges—including rapid inflation, food insecurity, costly borrowing, and mounting debt—heightened by shocks from the pandemic and Russia’s war in Ukraine.

As a result, the IMF has revised down its growth projections for low-income countries, where per capita income growth is falling further behind the rates needed to catch up with advanced economies. This threatens to reverse a decades-long trend of steadily converging living standards.

To boost economic growth and put them back on a path to income convergence with advanced economies, we estimate that low-income countries need an additional $440 billion of financing through 2026 from all available sources. As part of this, IMF concessional financing offered at low or zero interest rates will play a key role in helping these countries cushion the impact on growth from ongoing shocks and future crises.

As the Chart of the Week shows, the benefits of such financing were visible during the pandemic, when IMF-funded economies, on average, saw stronger, faster recoveries than unfunded counterparts, based on readings across three indexes tracking economic activity. Two of these are nontraditional metrics: Google Mobility Reports, drawn from smartphone location data, and nighttime satellite imagery, obtained from the Earth Observation Group. The third combines conventional economic indicators like gross domestic product, industrial production, and tourist visits.

IMF funded countries posted a faster and more robust recovery from the pandemic across a range of economic activity indicators compared to unfunded countries.

These indicators include measuring nighttime lights, which are increasingly used as a proxy for economic and social outcomes, including GDP growth as well as mobility based measures, which are positively correlated with overall economic activity. These mobility indicators have been widely used to nowcast GDP and economic activity during the pandemic.

Night lights index
Night lights index. Image: 'The Impact of the IMF’s COVID-19 Support to Developing and Emerging Economies'
Retail and recreational mobility index
Retail and recreational mobility index. Image: 'The Impact of the IMF’s COVID-19 Support to Developing and Emerging Economies'
Transit station mobility index
Transit station mobility index. Image: 'The Impact of the IMF’s COVID-19 Support to Developing and Emerging Economies'
Economic activity index
Economic activity index. Image: 'The Impact of the IMF’s COVID-19 Support to Developing and Emerging Economies'

To complement this data, we also construct an economic activity index using more traditional measures such as direct estimates of quarterly GDP, monthly industrial production, and monthly real imports.

The use of high-frequency indicators enables the analysis of economic dynamics over a shorter period and improves the identification of the effect. Our analysis addresses potential selection bias by excluding high income countries or those that are very fragile, and by controlling for key variables that represent the country-level demand for and availability of financing.

An illustrative 10 percent increase in IMF financing was associated with a 0.2 percentage point increase in economic activity, on average over the course of the pandemic, as we showed in a recent working paper. This finding implies that increasing access to IMF financing by half would be associated with an increase in economic activity by around 1 percentage point in IMF-funded countries relative to unfunded ones. Our study, among the first to gauge the effects of IMF COVID-19 lending, showed the strongest gains in the poorest and more vulnerable recipients of concessional financing.

This study comes after more than $272 billion in support to 94 of our 190 member countries since the start of the pandemic, including $34 billion in emergency financing. Our conclusions hold when we control for a range of country characteristics, including income levels, pandemic severity, lockdown intensity, and other multilateral financing.

The findings also indicate that these effects are larger in low-income countries with interest-free borrowing from the Poverty Reduction and Growth Trust, the IMF’s tried-and-tested vehicle to provide concessional financing to its poorest and most vulnerable members.

Overall, the evidence suggests that PRGT concessional financing can have greater positive effects on low-income countries, partly due to their more constrained policy space and limited access to international credit, compared to advanced and emerging market countries. This underscores the importance of keeping the PRGT adequately financed—so it can continue to provide strong support to low-income countries for years to come.

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