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KNOWLEDGE FOR POLICY

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Publication | 2024

Fiscal vulnerabilities in low-income countries: evolution, drivers, and policies

Key Findings:

  • Low-income countries (LICs) face significant development challenges, with 40% of the world's extreme poor living in these countries.
  • LICs' fiscal positions have weakened significantly, with government debt increasing by 36 percentage points of GDP between 2011 and 2023, to 72%.
  • Primary deficits have driven the debt buildup, with LICs running primary deficits every year during 2011-23, averaging 2.3% of GDP.
  • Revenue weakness constrains government spending, with LICs collecting less than two-thirds of their potential tax revenue over the past decade.
  • Spending efficiency is lower in LICs, with a larger share of spending going to interest payments, subsidies, and the government wage bill.

Recommendations:

  • Strengthen domestic revenue mobilization through tax policy reforms, improved tax administration, and reduced informality.
  • Improve spending efficiency by reallocating spending to growth-enhancing categories, such as education, health, and infrastructure.
  • Enhance debt management practices, including improved debt transparency, monitoring, and reporting.
  • Foster stronger economic growth through policies that encourage broad reforms to ease structural constraints on investment growth, reduce informality, address market failures, and strengthen institutions.
  • The international community should provide additional support to LICs, including concessional financing, debt relief, and technical assistance to help them address their development challenges and improve their fiscal positions.

[Disclaimer: Text generated by GPT@JRC using Generative AI technology and assessed by the KC-FNS Secretariat - For comprehensive information and context, please refer to the full document.]