High risks of debt distress, in part due to climate vulnerability: IMF


The high risks of debt distress over the long term, in part due to climate vulnerability, call for gradual fiscal consolidation and spending reallocation toward climate mitigation policies. 

This is according to the International Monetary Fund 2023 ARTICLE IV consultation released yesterday. 

The Debt Sustainability Analysis (DSA) indicates high risks of debt distress, though only at a long-term horizon. 

The importance of building fiscal buffers against shocks, including natural disasters, is highlighted by stress tests that result in breaches of the indicative debt thresholds, though the preponderance of concessional loans in public debt mitigates debt service risks. 

The report says given the risks are flagged mainly in the outer years of the projection horizon, the fiscal consolidation necessary to safeguard sustainability can be gradual. Bringing the deficit below 2 percent of GDP within three years would keep debt below 40 percent of GDP, in line with previous staff recommendations, safeguarding debt dynamics. 

Regarding the utility tariffs, the IMF report says it should be made commensurate with costs, with support to households channeled through the budget. 

Reducing tariffs has buffered the impact of higher commodity prices on households and helped to contain inflation. However, the benefits are not well targeted, and the policy fails to allow higher prices from international commodity markets to pass through into lower demand.

A normalization of tariffs over 2-3 years—especially as household incomes recover and inflationary pressures recede—could strike a balance between buffering the macroeconomic impact of recent shocks and preserving SOE finances.

Supporting households through a direct, per person transfer (as was executed during the pandemic) would be more transparent and more progressive. It would also preserve the financial position and investment capacity of the power company. As an alternative, the utility tariff measures should be funded by annual budgetary appropriations.