Low-income countries are facing a widening gap in economic performance and increasing financing constraints, despite signs of macroeconomic stabilisation, the International Monetary Fund (IMF) has warned.
The Fund’s Executive Board, which reviewed developments on March 18, 2026, said growth across the 70 countries eligible for its Poverty Reduction and Growth Trust averaged 4.8 percent in 2025. However, that headline figure masks sharp differences, with some economies expanding rapidly while others, particularly those affected by conflict and fragility struggle to achieve meaningful income growth.
Uneven recovery amid global uncertainty
The IMF noted that low-income countries are operating in a highly uncertain global environment, shaped by shifting policies in major economies, evolving trade and migration rules, and geopolitical tensions, including the ongoing conflict in the Middle East.
While inflation is easing and both internal and external imbalances have narrowed, the recovery remains uneven. Countries with more diversified economies, particularly in manufacturing and services are performing better, while others continue to lag.
The Fund warned that this divergence is likely to persist over the medium term, with elevated risks from global shocks and domestic vulnerabilities.
Rising debt risks and domestic borrowing pressures
Although fiscal consolidation has helped reduce public debt levels modestly, debt vulnerabilities remain high. The IMF noted that rising debt service costs are limiting governments’ ability to fund development priorities.
At the same time, tighter external financing conditions have pushed many countries toward domestic borrowing, often at higher interest rates and shorter maturities. This shift is raising concerns about financial stability, particularly the growing exposure of domestic banks to government debt.
Countries with weak foreign exchange reserves remain especially vulnerable to commodity price swings, global interest rate movements, and potential disruptions to external inflows.
External financing shifts and declining aid
The report underscores a significant shift in external financing patterns. Net financial inflows to low-income countries have declined by about one-third from their peak between 2010 and 2014, driven by reduced foreign direct investment and lower external borrowing.
Official development assistance has also fallen to 4.3 percent of GDP, down from an average of 5 percent during the earlier period, and is projected to decline further. In addition, the nature of aid is changing, with fewer grants, more loans, and a shift from budget support to project-based financing.
Although remittances have remained relatively strong, the IMF cautioned that tightening immigration policies globally could pose risks to this key source of external income.
Fiscal discipline key to attracting investment
The IMF emphasised that stronger domestic policies and institutions are critical to reversing these trends and attracting investment.
Countries with robust fiscal discipline, particularly in revenue administration and public financial management tend to attract higher levels of foreign direct investment. These inflows are also of better quality, often linked to higher levels of research and development.
However, the Fund cautioned that fiscal incentives such as tax cuts and special economic zones are only effective where strong fiscal governance already exists. In weaker institutional environments, such incentives have limited impact.
Reform agenda and global support critical
Looking ahead, the IMF called for resolute domestic reforms to strengthen macroeconomic stability, improve governance, and support private sector-led growth.
Directors stressed the need to mobilise domestic revenue, protect priority spending, and enhance transparency, while also strengthening debt management practices.
They also pointed out the importance of targeting scarce concessional financing toward the poorest and most fragile countries, alongside improved coordination between governments, the IMF, the World Bank, and other development partners.
The Fund reaffirmed its commitment to supporting low-income countries through policy advice, capacity building, and financial assistance.
As global uncertainties persist and financing conditions tighten, the IMF warned that the ability of low-income countries to sustain growth and build resilience will depend heavily on the strength of their domestic policies and institutions.
