Sound debt sustainability framework is crucial:
Poor countries must strike fine balance
Scaling up investment:
Investment in infrastructure can drive growth, raise productivity,
and help reduce poverty - but low-income countries face the challenge of
scaling up investment without taking on excessive debt.
Under the PSIs, the IMF helps low-income countries design
their economic programs |
Speaking ahead of an IMF-sponsored conference on the topic, IMF
Strategy, Policy, and Review Department Deputy Director Hugh Bredenkamp,
discussed in an interview how countries can scale up investment in a
sustainable and growth-maximizing way.
IMF Survey online: Low-income countries face massive financing
needs, particularly in the area of infrastructure. What principles
should guide their policies as they seek to address this problem?
Bredenkamp: The lack of infrastructure is a key obstacle to
getting faster growth for low-income countries. These needs are large:
in sub-Saharan Africa alone, the World Bank has estimated total
financing needs at around $93 billion a year, a third of which is
currently unfunded.
In terms of principles, first, countries need to develop a coherent
strategy for scaling up infrastructure that maximizes the growth
potential, since that's the ultimate objective. Second, once they have
such a strategy, countries need to ensure they follow through on it. For
this, they need a strong institutional framework that keeps
implementation in line with the strategy, ensures that bidding processes
are efficient, and sees that resources are properly budgeted so that
infrastructure projects can be completed and maintained. Third,
countries need to secure affordable financing.
IMF Survey online: How can low-income countries scale up
investment and, at the same time, avoid taking on excessive amounts of
debt?
Bredenkamp: Above all, Governments have to make sure that
their investments pay off. In the past, countries got into debt problems
by borrowing a lot, ostensibly to invest. But the investments were so
inefficient and the resulting infrastructure so poorly maintained that
it often did not meet the key needs of the private sector, which was
driving the country's development. So the country ended up with a lot of
debt - but very little growth to show for it. It's important to avoid
these mistakes of the 1970s and 1980s. The prudent choice of investment
projects and their effective implementation are key.
IMF Strategy, Policy, and Review Department Deputy Director
Hugh Bredenkamp |
Countries also have to be savvy about how they finance the scaling
up. They need to make sure that the fiscal revenue base is strong and
growing - through tax reform and strengthened revenue mobilization - so
that the public sector has a good base for supporting increased debt.
Second, they need a good debt management strategy to ensure that the
overall volume and mix of debt that the country assumes is within its
capacity to service and repay. It's important to see that non -
concessional borrowing, in particular, is reserved for investments that
have a demonstrably high economic return so that the higher costs
associated with such borrowing are covered. These are all principles
that we've been advising for some time now, and I think many countries
are taking them on board, but they bear reiterating.
IMF Survey online: How can the debt sustainability framework
be further improved to help the authorities make the right choices?
Bredenkamp: One aspect we are looking at is how to increase
the focus on total public debt. Traditionally, the debt sustainability
framework has focused primarily on external debt. Because low-income
countries are increasingly able to finance fiscal spending through
domestic borrowing, it's important to have a more comprehensive view of
a country's debt burden and its debt sustainability prospects.
We're also continuing to develop tools that will allow the
authorities and our own country teams to assess better the likely growth
returns from investment. The efficiency of an investment will depend, in
part, on how well money is invested. That depends, in turn, on the
quality of a country's institutional framework - how a project is
planned, how well the plan is adhered to, and how the project is run.
IMF Survey online: How can the multilateral development banks
and donors help low-income countries scale up investment in a
sustainable way?
Bredenkamp: Multilateral institutions and donors can help with the
financing, of course, but I would say their contribution to capacity
building is equally important. Some of the new development partners have
fresh experience in meeting their own infrastructure gaps, so they have
knowledge to pass on.
The Chinese, for instance, have had a lot of success in planning and
ensuring the coherence of their investments. They're constantly
assessing where business is facing infrastructure gaps, and then
reorienting their resources to meet those gaps. They also ensure that
their infrastructure projects are linked up - for example, if they build
a port, they also build roads and railways that lead to the port. Or if
they build industrial parks and road networks serving those parks, they
scale up the area's energy capacity to meet the needs of the businesses
that will locate there. Low-income countries can benefit from this kind
of experience.
IMF Survey online: What is the role of the IMF?
Bredenkamp: One role is to help with macroeconomic planning -
for example, ensuring that budgets are designed in a way that's
consistent with the infrastructure plans. Providing adequately for
operations and maintenance is still a big problem in low-income
countries.
Projects get built, but if the budgetary resources for the
maintenance and operation of the infrastructure have not been factored
in - or if they get squeezed out later, when funds are tight, as often
happens - the infrastructure will fall into disrepair. Our work on debt
sustainability analysis is also a key contribution to helping countries
manage their debt operations.
We also have a role in building countries' capacity to manage budget
resources effectively, including for investment. With the World Bank,
we've been developing an index to measure the quality of countries'
institutional frameworks governing the selection and management of
investment projects. Institutional quality is an important factor
affecting the success of a country's investment program.
We hope this index will show countries where they stand relative to
their peers, and highlight the weak points in their institutional
frameworks so that they can focus on strengthening them. This will also
help us target our own capacity-building efforts - and thereby help
countries get a better outcome from their investment programs.
IMF Survey online: What do you see as the private sector's
role in investment financing?
Bredenkamp: The Government needs to define the strategy and
identify the big gaps, because it's only at the center that you see how
all the pieces should fit together. Some of the gaps will require public
sector action. But there are areas where it is sensible to rely mostly
on the private sector.
In the energy sector, for example, it's quite common in countries for
the public sector to focus on the transmission network, because that's a
kind of public good - it's difficult to privatize that. But you can
certainly have private sector generation capacity. Power stations can be
either public or private, and often private investment in that kind of
activity can be the most efficient. Similarly, in telecoms, you can have
a mixture of public and private sector investment.
Because of the constraints on public sector financing, tapping
private sector equity financing is highly desirable - the more that you
bring in private sector money, the more you can do. But you need to give
private investors confidence that the regime that they're going to be
working under will allow a proper return on their investment and, more
generally, create an enabling environment through a good tax system,
good governance, and a sound legal framework.
IMF Survey online: What do you hope to achieve with the
upcoming conference?
Bredenkamp: The crisis has been a setback for low-income
countries. We need to redouble our efforts to unlock new sources of
growth, and infrastructure is one of them. The emergence of new
development partners has brought fresh perspectives on the issue of
scaling up investment. Some, for example, have different views on the
issue of debt sustainability than the traditional donor community and
the international financial institutions. The conference is a chance to
bring those perspectives together, exchange views, find common ground -
and hopefully set the stage for an ongoing dialogue.
IMF Survey online |