IMF Study Shows Debt Risks Vary Widely Across Low-Income Economies Today

The IMF study finds that rising debt in low-income countries is not inherently risky if it follows historically stable patterns and is supported by growth and sound policies. However, the most indebted countries are beginning to diverge from these stable paths, signalling increasing vulnerability.

A new study from the International Monetary Fund, supported by data and analytical inputs from institutions like the World Bank and global databases such as the Penn World Table, is changing how we look at public debt in low-income countries. At a time when rising debt levels have raised serious concerns, the research offers a more balanced view. It argues that debt is not automatically a problem. What matters more is how that debt evolves over time and whether countries are managing it wisely.

Over the past 30 years, low-income countries have gone through major shifts in debt. In the 1990s, many were heavily indebted. Debt relief programmes and stronger economic growth in the 2000s helped reduce these burdens. But since around 2010, borrowing has increased again due to infrastructure spending, global shocks, and the COVID-19 pandemic. While debt levels have recently stabilised, they remain high, raising questions about sustainability.

Why Rising Debt Isn’t Always Bad

The study introduces an important idea called “dynamically stable” debt. Instead of focusing only on how large the debt is, it looks at whether the debt is growing in a manageable way. In simple terms, a country can carry higher debt if its economy is growing and if the government is handling its finances responsibly.

This means that rising debt is not always a warning sign. In fact, for developing countries, borrowing can help finance growth, build infrastructure, and improve living standards. The key is whether the debt follows a path similar to countries that have successfully avoided financial crises in the past.

Learning from Other Countries’ Experiences

To understand what a stable debt path looks like, the researchers compared low-income countries with more advanced economies that were once at a similar stage of development. Instead of comparing them by calendar year, they matched countries based on income levels. This approach, called “development time,” allows a fairer comparison of how debt evolves as countries grow.

They also used an advanced method known as the synthetic control technique. This creates a “model country” by combining data from several stable economies. This model shows what a safe debt path should look like. By comparing real countries with this model, researchers can see whether a country is on track or moving into risky territory.

What Keeps Debt Under Control

The study highlights a few key factors that determine whether debt remains sustainable. Economic growth is one of the most important. When a country’s economy grows faster than its debt, managing that debt becomes easier. Government policies also matter. Countries that increase revenues, manage spending carefully, and respond to rising debt are more likely to stay on a stable path.

External factors also play a role. Rising global interest rates, exchange rate changes, and dependence on natural resources can affect how easily a country can manage its debt. Countries with strong institutions and better financial systems tend to handle these challenges more effectively.

A Mixed Picture for Low-Income Countries

The findings are both reassuring and cautionary. On average, most low-income countries are still following debt paths similar to those of countries that avoided crises in the past. This suggests that, despite higher borrowing, many are still on relatively stable ground.

However, the study also finds that the most indebted countries are starting to diverge from these stable patterns. Their debt has grown faster and is moving beyond the range seen in historically stable economies. This signals rising risks and the need for closer monitoring.

The key takeaway is clear. Debt itself is not the enemy. What matters is how countries manage it. With the right policies and strong economic growth, borrowing can support development. But without careful management, it can quickly become a serious problem.