Fiscal Challenges in Low-Income Countries: World Bank Report Calls for Global Support to Alleviate Debt and Boost Development

The World Bank’s report on fiscal vulnerabilities in low-income countries highlights urgent challenges in debt, revenue generation, and resilience against economic shocks. It calls for both local reforms and increased international support to help LICs achieve sustainable growth and reduce poverty.

Low-income countries (LICs) face an urgent fiscal dilemma that threatens development progress for millions. The World Bank’s new report, Fiscal Vulnerabilities in Low-Income Countries: Evolution, Drivers, and Policies, sheds light on the complex fiscal issues that LICs face, from deep revenue gaps and rising debt to vulnerability against global economic shifts and natural disasters. With a majority of these countries housing a substantial portion of the world's extreme poor, the report outlines essential strategies to support these economies on a sustainable path to growth.

A Rising Debt Crisis

The World Bank’s analysis reveals a troubling surge in LIC debt, driven primarily by widening fiscal deficits. As debt levels among LICs reach an average of 72 percent of GDP by 2023, these nations grapple with interest costs that crowd out essential development spending, pushing them closer to potential fiscal distress. Compounding this, LICs’ reliance on non-concessional loans and limited access to international markets exacerbates their vulnerability, with many LICs unable to meet debt obligations without external support.

Revenue Shortfalls and Structural Hurdles

LICs’ government revenues are well below those of other developing countries, accounting for only 18 percent of GDP. This is due to underdeveloped financial sectors, high levels of informal economic activity, and the prevalence of tax exemptions, making it challenging to finance essential services and infrastructure projects. The World Bank report suggests that comprehensive reforms to broaden tax bases and improve tax administration could significantly boost revenues. Yet, structural changes are equally crucial—formalizing the economy, expanding financial sector access, and leveraging technology are seen as long-term solutions to close revenue gaps.

Shocks and Vulnerabilities: The Cost of Global and Domestic Disruptions

The report points to a stark reality: LICs are exceptionally vulnerable to external economic shocks, domestic conflicts, and climate-induced disasters. Global recessions can drastically reduce fiscal revenues, especially in commodity-reliant countries, while domestic conflicts disrupt revenue streams and increase defense spending. Climate change adds yet another layer of fiscal risk as natural disasters and adaptation costs strain already scarce resources. The compounded impact of these factors limits LICs’ ability to respond effectively to crises and maintain fiscal stability.

Policy Pathways: Key Recommendations

To address these challenges, the World Bank report outlines several strategic recommendations:

Domestic Resource Mobilization: By enhancing tax policies and administration, LICs can increase their domestic revenue and reduce dependency on external financing. Simplifying tax registration and expanding taxpayer bases through digital tools are effective first steps.

Boosting Spending Efficiency: The report advises LICs to reallocate budgets from non-productive spending, such as excessive subsidies, toward investments in health, education, and infrastructure. This shift could maximize the impact of public spending and drive more sustainable economic growth.

Strengthening Debt Management: Robust debt management practices, backed by international technical and financial support, are critical. Improved monitoring and transparent reporting mechanisms can help reduce fiscal risk and improve LICs’ financial stability.

A Call for Global Support

Acknowledging that LICs’ domestic resources alone are insufficient, the report calls on the global community to amplify financial and technical support. International aid can help LICs stabilize their fiscal positions, making room for essential investments in sustainable development. The World Bank’s International Development Association (IDA) emerges as a key partner, providing concessional financing and grants to LICs, particularly to those most vulnerable to shocks.

Fiscal Vulnerabilities in Low-Income Countries: Evolution, Drivers, and Policies is a clarion call for both LICs and global partners to act decisively. As the report underscores, addressing LICs' fiscal vulnerabilities is essential not just for the countries themselves but for the global economy, as poverty reduction and sustainable development in these regions will contribute to shared economic resilience.