The International Monetary Fund (IMF) has warned that higher debt service costs of most developing countries will slow down their ability to recover from the economic downturn.
The organisation also cautioned that the various intervention funds received by these countries to cushion the effects of the COVID-19 pandemic have consequences.
The fund also listed rising poverty, growing inequality and difficulties in correcting the setback in human capital accumulation as other fallouts.
The Managing Director of the IMF, Kristalina Georgieva, while speaking at the IMF Spring Meetings 2021 on Tuesday, said many low-income countries entered the pandemic with a huge debt burden and were finding it difficult to service such debts due to poor economic growth.
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She noted that 56 per cent of low-income countries were at a higher risk of debt distress and many of them have economies that are structurally deficient.
“We are concerned of two risks of these countries face. Because the vaccination is slower and capacity to recover is smaller, they are going to lag years beyond advances economies unless we act very strongly to support them,” Georgieva said.
“What does it means for countries with high debt level? They fall in a debt trap. They cannot generate enough growth to bring down their debt level and the debt level hold them back. This is very real for many of these countries.
The second risk i see for these countries is that good news for some will turn into bad news for others.
She said there was a need for international financial organisations like IMF to help these countries recover faster by ensuring they have access to more grants, more concessional finance and support them to bring down their debt level.
In its Global Financial Stability Report released on Tuesday in Washington, DC, the IMF also predicted that the global economy is finally emerging from the worst phases of the COVID-19 pandemic, although with diverging prospects across regions and countries.
The Director of the Monetary and Capital Markets Department at the International Monetary Fund, Tobias Adrian, said extra-ordinary policy measures have eased financial conditions and supported the economies, helping to contain financial stability risks. But those rescue efforts may have unintended consequences and sow the seeds of future financial market instability.
He said, “Addressing corporate-sector weaknesses and repairing balance sheets is a priority,” saying “advanced economies should tighten selected macro-prudential tools to safeguard financial stability, while avoiding a broad tightening of financial conditions. Emerging markets should rebuild buffers, to prepare for a potential repricing of risk and a reversal of capital flows,” he stated.
Adrian said the IMF, along with other international institutions, is ready to support troubled economies in the uncertain times ahead.
In his opinion, continuing policy support was necessary — but targeted macro-prudential measures should pre-empt a legacy of vulnerabilities.