Debt as an obstacle to achieving the Sustainable Development Goals
The problem is this: As IMF Deputy Managing Director Tao Zhang recently pointed out, 40% of low-income countries face a high risk of over-indebtedness or are unable to fully service their debt compared to 21% from just five years ago.
In addition, several developing countries are lagging behind in terms of per capita income due to factors such as fragility and conflict, including vulnerable countries such as Haiti, the Democratic Republic of the Congo and Chad.
Faced with low tax collection, weak international support
A key difficulty is that many of these countries cannot collect enough tax revenue. There are many reasons for this: reduced tax bases, excessive and prolonged dependence on the extractive industries, and a weak tax administration. But tax evasion also contributes to the problem. The low tax collection in developing and low-income countries —in which the median tax revenue represents only 13.3% of GDP— is due, in part, to informality and tax evasion.
In view of the foregoing, the first measure of any reform strategy must undoubtedly be to increase internal collection. But in a world where business activity is increasingly tending towards globalization, internal efforts alone will not suffice. We will also need to strengthen international collaboration in tax matters. It is encouraging that governments are developing new international rules for the exchange of tax information: we have to make sure that developing countries also benefit from them.
Furthermore, official development assistance (ODA) plays a fundamental role. According to recent data, ODA rose to USD 146.6 billion in 2017, but this represents less than half the target of 0.7% of internationally agreed gross national income. In addition, much of that ODA is being used in emergencies, such as internal costs for refugee aid and humanitarian aid.
While such assistance is essential, it leaves fewer resources available for long-term public investment in sustainable development. ODA inflows to the poorest and most vulnerable countries have stagnated and remain concentrated in some of them. Donor countries must intensify their assistance in this area.
Private investment to support the SDGs
In view of the large investment needs, it will be crucial to attracting more private investment. However, least developed countries continue to struggle to do so at the required scale, particularly in sectors outside the extractive industries. The report urges developing countries to continue creating competitive business conditions, among other ways, by improving institutional and regulatory frameworks and preparing reserves for projects and projects in which they can invest, especially in infrastructure.
More recently, economic authorities have also focused on risk-sharing with private investors, through instruments such as guarantees and public-private partnerships. If carried out properly, these combined activities can generate additional investments that help achieve the SDGs. At the moment, these activities are not being carried out mainly in the countries that need it most. Only 7% of the private financing mobilized so far has been channeled to projects in the least developed countries.
There is also a risk that these activities will increase the debt burden, for example through off-balance-sheet contingent liabilities. These risks must be carefully managed.
Increasing debt-related risks
However, the recent increase in debt is not bad in all respects. In recent years, increased access to international financial markets and obtaining loans from new creditors like China has released much-needed financing for infrastructure investments. In addition, investment in productive capacity, if done properly, can generate higher incomes that offset debt service. The report recommends that debt sustainability assessments take this important channel into account.
But the problems arise when the debt is already high, when resources are not properly spent (such as when there is corruption and deficiencies in government management), or when a country is hit by natural disasters or economic shocks, such as a reversal. sudden of capital flows. Another issue is that the new wave of private credit in many cases brings with it higher interest rates and shorter maturities.