Low-income Countries (LICs) are navigating a fluid global environment marked by high uncertainty and shifting policies in major economies spanning trade, migration, digital finance, and spending priorities, including national security and foreign aid, says an International Monetary Fund (IMF) staff paper.
The spillovers of the ongoing conflict in the Middle East adds to the pressures, although the actual impact will depend on the duration of the conflict and breadth of disruptions, the paper on Macroeconomic Developments and Prospects in Low-income Countries (LICs) says. The paper defines LICs as the 70 countries eligible for the Poverty Reduction and Growth Trust facilities.
While internal and external imbalances have been narrowing in recent years, macroeconomic outcomes remain highly divergent across LICs. GDP growth averaged 4.8 percent in 2025, but remained highly heterogenous across LICs.
Some LICs are among the world’s fastest growing economies, while others grow insufficiently to boost per capita income. Inflation continues to ease but hotspots remain. Fiscal consolidation has supported modest reductions in public debt, yet debt vulnerabilities remain high, and the significant increase in domestic borrowing is raising new concerns.
Foreign exchange reserves remain vulnerable
Many LICs with thin foreign exchange reserves remain vulnerable to changes in commodity prices, global interest rates, and further aid cuts. Divergence across LICs is expected to persist over the medium term amid elevated global and domestic risks.
External financing to LICs is undergoing major shifts. After peaking during 2010-14, net financial inflows to LICs have fallen by about one third amid declines in FDI equity flows and external debt. New public sector borrowing from the private sector has been contracted at higher interest rates and shorter maturities, while official creditors have adjusted terms more gradually, preserving grant element for the poorest LICs. Official Development Assistance flows have declined in recent years to 4.3 percent of LIC GDP, from an average of 5 percent during 2010-14, and are projected to continue falling, alongside shifts from grants to loans and from budget support to project financing. While remittance inflows to LICs have been increasing, ongoing changes in immigration policies globally pose risks to remittance flows.
The report also highlights that stronger fiscal discipline and fiscal institutions, particularly revenue administration and public financial management, are associated with higher Foreign Direct Investment (FDI) inflows in LICs, with the effects that are stronger in LICs than in emerging markets and amplified in high-uncertainty settings. Stronger fiscal institutions are also linked to higher quality FDI, proxied by R&D intensity. When fiscal discipline, fiscal institutions, and broader institutional settings are considered jointly, fiscal institutions emerge as a more important institutional correlate of FDI to LICs. Meanwhile, commonly used fiscal incentives such as tax reductions or special economic zones appear to attract FDI only where fiscal discipline and institutions are strong.
Navigating global uncertainties and external financing shifts calls for resolute domestic policies and reforms and adequate support from international partners. Domestic policy and reform efforts will be critical to increase returns on capital and attract stronger FDI inflows. Given their scarcity, concessional resources should be more strongly prioritized toward poorer and fragile LICs. Targeted capacity development and enhanced coordination between LIC authorities and development partners would boost reform implementation and help reduce borrowing costs. The IMF has a strong role to play in supporting these efforts through its policy advice, capacity development, and lending where needed.
Executive Board Assessment
The Executive Board of the International Monetary Fund (IMF) discussed the paper and directors welcomed the opportunity to discuss recent macroeconomic developments and prospects in low‑income countries (LICs). They broadly supported staff’s assessment and the identified policy priorities, in particular the need to support macroeconomic and financial stability, reinvigorate growth, and reduce high debt burdens.
Directors acknowledged that LICs are navigating a highly uncertain global environment, amid conflicts and geopolitical tensions, including the ongoing conflict in the Middle East, and policy shifts in major economies. They welcomed the narrowing of internal and external imbalances and easing inflation across LICs and that growth is expected to remain resilient. Directors, nonetheless, recognised the significant divergence in macroeconomic outcomes, particularly the strong and steady growth achieved by LICs with diversified manufacturing and services exports, and the weaker economic performance in many LICs experiencing conflicts and fragility, where growth remains insufficient to generate meaningful gains in per capita income. While welcoming the modest decrease in LICs’ public debt levels, Directors expressed concerns that elevated debt service burdens continue to limit space for development spending in many countries. They highlighted that tighter external conditions have accelerated a shift toward domestic borrowing, raising concerns about sovereign‑bank linkages and related financial stability risks.
Looking forward, directors considered that divergence across LICs would persist over the medium term. They expressed concerns about substantial downside risks, amid continued global uncertainty and potential domestic shocks that could disrupt economic activity and set back development gains in LICs. Against this background, they underlined that continued contributions from, and coordination between, the World Bank and Fund to support economic diversification and transformation, including through enhanced focus of their existing toolkit on this agenda, will be key to achieving strong and inclusive growth, while strengthening resilience.
Directors highlighted the importance of remittances and official development assistance (ODA), particularly in the poorest LICs. They expressed concern about declining ODA, changes in aid composition, and the impact of shifting immigration policies on remittances. Directors agreed that the channeling of scarce concessional resources should prioritize the poorest countries and fragile LICs with limited market access. Noting the ongoing shift in ODA from budget support to project financing and from grants to loans, Directors emphasized the importance of strong public financial management (PFM), coordination with donors, and country ownership.
Directors noted the major shifts in the level and composition of external financing to LICs and expressed concern about weaker FDI equity inflows and external debt flows. They agreed that subdued capital flows to LICs may be linked to a widening marginal product of capital gap relative to advanced economies.
Directors agreed that stronger domestic policies and reforms are critical to increase returns on capital and attract stronger FDI inflows. This includes policies to enhance macro‑financial stability and maintain price stability, as well as accelerated structural reforms to enhance resilience, policy credibility, and private sector‑led growth and job creation.
Directors recommended that fiscal structural reforms be focused on mobilising domestic revenue, safeguarding priority development spending, and enhancing transparency and governance. They also emphasised the importance of the Fund and World Bank's 3‑pillar approach to help LICs with a strong reform agenda and sustainable debt, faced with short‑term financing challenges, and underscored the need to strengthen PFM and debt management practices. - TradeArabia News Service
