Demographics, Economic Growth and Political Stability in Sub-Saharan Africa (2025)

Sub-Saharan Africa is the world’s most demographically most dynamic region, which is an important structural factor underpinning the region’s significant, if mostly unrealized economic potential as well as its susceptibility to political instability. Demographically, Sub-Saharan Africa is the most dynamic region in the world, followed by parts of the Middle East and Central Asia. Sub-Saharan Africa continues to experience rapid population growth in the context of high fertility rates and declining mortality. While most advanced countries are stagnating demographically, sub-Saharan Africa is experiencing rapid population growth. Although dependency ratios (or the number of people below the age of 15 and above 59, compared to people of working age) remain high, rapid population growth has broadly supported higher economic growth than in advanced countries, where the population of working age is stagnating and even shrinking.

> The median age of advanced economies is somewhere between 40 and 50. The median age of most sub-Saharan Africa countries is 25 but more typically below 20.

> According to the United Nations, the fertility rate in West and Central Africa is 4.8 and Eastern and Southern Africa 4.1. Niger has by far the highest fertility of 6.6 and Cape Verde the lowest rate with 1.9. In Asia-Pacific and Latin America, it is 1.9 and 1.8, respectively.

> By comparison, the least developed countries have a fertility rate of 3.8, less developed countries 2.4 and developed countries 1.5.

> Of the top 40 countries with the highest fertility rate in the world, 36 are located in sub-Saharn Africa. (The other four are three Pacific Island countries and Afghanistan.)

The demographic trends in sub-Saharan Africa, where the population of working (labor force) will expand significantly, stands in sharp contrast with those in advanced and emering economies. The working-age population has already peaked in countries such as China and Japan. In many Western European countries, the working-age population is stagnating, broadly speaking, and only net immigration helps prevent decline. In Eastern Europe and East Asia, working-age population are shrinking and will continue to shrink. In sub-Saharan Africa, working-age population will expand rapidly over the next few decades if current demograhic projections are correct. Historically, demographic projections have tended to underestimate the rapid decline in fertility, particularly in lower and upper middle income countries. It is therefore quite possible that fertility will also decline more rapidly in sub-Saharan than currently anticipate, particularly in countries experiencing rapid economic development (lessens economic needs to have a large number of children), improving education levels (makes women postpone childbirth and have fewer children) and where the population has broad-based access to the internet (information about “alternative” lifestyles). Should fertility decline faster, translating into improving dependency ratios, the economic outlook would improve further. To the extent that demographic factors support or represent a drag on economic growth, the region is well positioned.

> In Africa, the population is expected to grow by 1.7% per year between 2025 and 2050. In Asia, Europe and the Americas, population change will be minimal, ranging from -0.3% per year in Europe to 0.2% in Asia, including India. Africa's population will make up 23% of the world's population by 2050, up from 16% in 2023.

> Sub-Saharan Africa's dependency ratio is very high, but has begun to decline very slowly. Dependency ratios have long bottomed out in most demographically advanced economies, and they will do so in most emerging economies 2030-40. By comparison, sub-Saharan African dependency ratio are projected to bottom out in 2070-80, again if current projections are correct. 

 

Demographic growth and a rapidly expanding population of working age bodes well for the region’s economic growth potential, but for this potential to be fully realized countries need to maintain political stability and pursue sound economic policies conducive to the exploitation of the so-called democratic dividend. Sub-Saharan Africanica has significant potential in terms of a young and growing workforce. It will also benefit from declining dependency ratio because this, all other things equal, allows countries to save more due to the relatively lower share of economically inactive dependents. Unlike in East and South-East, sub-Saharan Africa will find it more difficul to pursue an export-oriented, manufacturing-foscused development strategy, supported by foreign investment, due to constraints in terms of infrastructur as well as political and economic stability. Moreover, emerging technologies, such as robotics and 3D printing, may also reduce the demand for low-cost labor. But none of this mean that an economic development strategy aimed at imporvind infrastructure, raising education levels and leveraging an economy’s compara, as countries like Ethiopia, Rwanda and Tanzania have demostrated.

> Four African countries are among the 15 fastest-growing economies in the world, namely Ethiopia, the Maldives, Rwanda and Tanzania, with all four countries registering real GDP growth of more than 6% per year. Almost half of the top 20 countries were located in sub-Saharan Africa.

> While Saharan Africa represents a large share among the world’s fastest growing economies, it also ranked prominently among the ten worst-performing economies over the past decade. Sudan, the Central African Republic, the Republic of Congo, Equatoria Guinea registered negative real economic growth, which in the contet of demograhpic grwoth means signifcantly shrinking per capita income. These countries’ poor performance was mostly due to political instability and civil strife, or a sharp collapse of the natural resource sector.

· Of the 50 countries in sub-Saharan Africa, 44 have a per capita income of less than $10,000 on a purchasing-power parity basis, The Seychelles ($30,000) and Mauritius ($22,000) are the richest (sub-Saharan) African countries. By comparison, all North African countries have per capita incomes exceeding $10,000.

Demographic change is slow and is only indirectly linked to phenomena such as econonomic growth or domestic and international political instability. Economically, a favorably demographic momentum enhanced a country’s economic potential. But there are many other factors that affect economic outcomes, such as sensible economic policy, increasing education, political instability and so on. Similarly, rapid population growth need to lead to political instability. Factors such as the degree of government control, socio-economic or socio-ethnic cleavages and so on affect the degree of politcal stability. Nonetheless, rapid population growth and particularly a rapid increase in the youn adult population will create both econmic and political challenges. The economy needs to provide jobs for a rapidly expanding labor force. Large amounts of infrastructure investments are needed to so. Sub-Saharan countries that manage to implement far-sighted policies will do well in the coming years. Countries already inflicted by signifciant domestic and civil strife will find it difficul to exploit the favorable demographics characterizing the region. 

> Average population growth rate in African countries ranges from 2-3% per year. A growth rate of 3% leads a doubling of the population every 25 years.

> According to current trends and projections, Nigeria (360m), Ethiopia (225m), the Democratic Republic of Congo (200m) and Tanzania (130m) will all have populations exceeding. Populations in these four countries alone will nearl double between today and 2050 .

Germany Reforms Constitutionally-Mandated Debt Brake (2025)

The impending approval of a historic reform to Germany's debt rules will allow for increased investment and higher defense spending, which will help raise medium-term economic growth in both Germany and the euro area. On March 18, the lower house of Germany's parliament, the Bundestag, approved a constitutional amendment to reform the country's so-called ''debt brake,'' a constitutional rule introduced in 2009 that restricts government borrowing, limits the structural deficit to 0.35% of GDP and requires states to run a balanced budget. The reform exempts defense expenditures exceeding 1% of GDP from the debt brake, thereby removing legal limits to German military spending. It also allows the next parliament to establish a EUR 500 billion special purpose fund to finance spending for civil protection, intelligence services and military aid for Ukraine, as well as infrastructure and climate-related investments. Additionally, the reform allows German states to run a deficit of 0.35% of GDP (up from the current zero deficit cap), but many states would need to reform their own legislation to take advantage of the loosened borrowing limits. The constitutional amendment will now go to a vote in the Bundesrat (the upper house of parliament) on March 21, where it is widely expected to pass.

> The debt brake reform passed in the Bundestag with 512 votes to 206, thanks to the backing of incoming Chancellor Fredrich Merz's conservative Christian Democratic Union (CDU) and its prospective coalition partner, the center-left Social Democratic Party, along with the environmentalist Greens. In the Bundesrat, these parties only control 41 of the chamber's 69 seats, leaving them six votes shy of the two-thirds majority needed to pass constitutional amendments. However, the CDU's Bavarian sister party, the Christian Social Union (CSU), which controls six votes in the Bundesrat, has signaled its firm intent to support the debt brake reform when it goes to a vote in the upper house, despite the fact that the CSU's coalition partner in Bavaria, the Free Voters, remain skeptical about the reform.

> The debt brake has significantly constrained German government borrowing over the past 16 years, which has, in turn, prevented necessary infrastructure investment and a more proactive fiscal policy to support Germany's economic growth. Through its proposed reform, Merz's incoming government is also seeking to increase defense spending in response to U.S. President Donald Trump's March 4 decision to suspend all military aid to Ukraine and the broader uncertainty regarding future U.S. support for German (and European) security. 

A sharp increase in government spending will help boost Germany's medium-term economic growth, upgrade its defense-industrial base, lift asset prices and support the rotation out of the U.S. into European stocks in the context of an increasingly uncertain U.S. economic outlook and unpredictable U.S. policymaking. Germany's economic performance has been very disappointing following the energy price shock in the wake of the 2022 Russian-Ukrainian war and in the context of chronic underinvestment. A large-scale, investment-focused fiscal stimulus could boost economic growth over the medium term, though the precise growth effect will hinge on how well the money is spent and on what. That said, even if the money is spent poorly, it will help boost economic growth and revive economic confidence. Higher German economic growth will also help support eurozone growth, particularly in countries that supply the German market (like France and Poland) or are deeply integrated into German supply chains (like the Czech Republic, Hungary and Slovakia). Additionally, a stronger German economy will make Europe a more attractive investment location, continued regulatory impediments notwithstanding.

> The International Monetary Fund has repeatedly highlighted the need for Germany to raise public and infrastructure investment. German real GDP growth is estimated to have averaged a mere 0.2% annually in 2020-24. High energy prices and increasing competition have hit Germany's chemicals and auto sectors particularly hard.

> Since the beginning of the year, European and German asset prices have increased as markets became convinced the debt brake reform will happen. Over the medium term, European asset prices and especially German and European defense sector stocks will continue to benefit from a successful reform of the debt brake. Banking stocks will also benefit from higher growth and higher interest rates. This will support a rotation of investors from the United States into European equities, not least due to U.S. political and economic uncertainty under the Trump administration.

Due to significantly higher German borrowing, euro-area interest rates will increase over the medium term, which will increase nominal debt servicing costs for all euro-area sovereigns, even as other economies stand to benefit from higher German economic growth. German debt is set to increase significantly from around 62% to 90% of GDP over the next ten years, according to some private-sector estimates, though any projections depend on how rapidly defense expenditure can and will be ramped up following the debt brake reform. This will not represent a financial problem for Germany due to its history of fiscal discipline, which has characterized policymaking since the establishment of the Federal Republic in 1949. However, higher European interest rates, combined with a larger fiscal deficit in other eurozone countries, will still further increase German debt levels. These developments could also renew concerns about fiscal sustainability in some of the more highly indebted euro area countries in the coming years, particularly those planning to increase defense spending in the context of more accommodating euro area fiscal rules.

Argentina’s Milei Signs Decree To Clear the Way for a New IMF Deal (2025)

A new IMF deal would improve Argentina’s short- and medium-term economic and financial outlook in the face of limited international financial market access and negative foreign exchange reserves, and open the door to the lifting of capital controls. On March 11, the Argentinian government issued a presidential decree allowing it to enter an agreement with the International Monetary Fund, or IMF, on a new adjustment program to replace the one that expired in December 2024. The Argentinian government and the IMF have been working on a new stand-by agreement to support Argentina’s economic and financial reform in the past few months, following the expiry of the previous arrangement. In 2021, Argentina passed a law that requires the government to put any IMF program to a vote for approval in the legislature. Concerned that opposition lawmakers might vote against a new program, the administration of Argentine President Javier Milei instead decided to issue an executive order, which can only be overruled by a two-thirds majority in Congress -- thereby minimizing the risk of any IMF deal being held up by the legislature. 

> Argentina’s previous IMF program, which was approved by the legislature, was signed in 2022 and expired at the end of 2024. The program provided $44 billion in gross financing, but it failed to help Argentina overcome its chronic macroeconomic imbalances.

Argentina is seeking to secure a new IMF deal as it faces significant external financing requirements and limited access to international capital markets. Argentina has large external debt repayments coming due starting in 2025, as well as substantial repayments of dollar-denominated domestic debt. Its central bank’s usable foreign currency reserves are also much smaller than the $28 billion foreign currency assets it has sitting on its balance sheet. The IMF estimates Argentina’s total external debt service stands at $12.8 billion, but this does not include the servicing of domestic dollar-denominated or -indexed debt, such as the liabilities of the central government vis-a-vis the central bank. Foreign currency bond repayments, meaning debt service excluding bilateral and multilateral creditors, will amount to $9 billion in 2025, in addition to another $5 billion in payments by Argentina’s provinces and the central bank. At the same time, the IMF wants to ensure that Buenos Aires can repay the large debts it owes to the institution. The Fund also wants to support the Milei government’s significant efforts to stabilize and reform the Argentinian economy, including a massive fiscal adjustment that has helped reduce inflation. However, the government’s exchange rate policy, which is aimed at limiting and reducing inflation until Argentina’s October legislative elections, has likely become a point of contention in negotiations on a new IMF program. A combination of continued elevated inflation and slow currency depreciation has translated into an overvalued exchange rate that limits Argentina’s ability to earn the foreign currency necessary to service its external debt. The IMF is skeptical that this approach is sustainable and will be reluctant to provide financing in the context of significant external financing requirements and significant concerns about the sustainability of the current exchange rate policy and large external financing needs without Argentina firmly committing to devaluing its currency and shifting toward more flexible exchange rate management. But the government remains reluctant to adjust the exchange rate for fear of increasing inflation before the elections. Nonetheless, Buenos Aires and the IMF will likely ultimately reach a compromise on the issue, as both sides are keen to reach an agreement.

> President Milei came to office in December 2023 and has since implemented a forceful fiscal adjustment and broader structural reforms. As a result of these policies, Argentina’s inflation rate fell from 26% month-on-month in December 2023 to 2.2% in January 2025. However, the government has allowed the real exchange rate to appreciate in the context of still-rising consumer prices (albeit at a much slower rate) and a slowly depreciating nominal exchange rate, as Buenos Aires tries to limit domestic price pressure and increase economic confidence ahead of the October elections.

> As of January 2025, the central bank’s gross foreign reserves stood at $23 billion, down from $38 billion in January 2023. However, net usable reserves were much lower, which is what puts the current exchange rate policy regime at risk, as a weak central bank balance sheet would lead to a substantial depreciation and reignite concerns about inflation, at least in the short term, while maintaining the current policy that translates into an overvalued exchange rate will not be sustainable in the longer term.

An agreement would greatly improve Argentina’s near- and medium-term external financing outlook and make it easier for Buenos Aires to lift capital controls. Milei’s decision to issue the decree indicates his administration may be close to reaching a new agreement with the Fund, which would make Argentina’s near- and medium-term financial risks much more manageable, even if the risk of a significant currency adjustment before the end of the year will remain high. While neither the exact loan amount nor the IMF’s demands regarding Argentina’s exchange rate policy are currently known, Reuters reported that the financing modalities of the new program involve a repayment period for IMF loans of 10 years, including a grace period of 4.5 years. This grace period would help Argentina reduce short-term external financing needs. Argentina’s treasury would then use any IMF disbursements before the end of the grace period to repay its dollar liabilities with the central bank, thus helping to strengthen the bank’s international liquidity position, which is highly desirable in case the IMF insists on exchange rate flexibility. A new IMF program would likely also unlock further funding from other international financial institutions, and would improve the prospect of Argentina tapping international bond markets or receiving more favorable conditions from international banks willing to refinance parts of Argentina’s external debt. Moreover, an IMF deal would open the door to the lifting of capital controls. The Milei administration remains keen on lifting these controls to attract moreforeign investment, but it is also mindful of the subsequent risk of greater capital outflows and theimpact this would have on the peso’s value andArgentina's confidence in the currency, thereby heightening inflationary pressures. A new IMF program would help mitigate these risks by shoring up investor confidence in the peso and ensuring Argentina’s central bank can prevent an overshooting of the exchange rate to the downside.

> Removing capital controls will require the Milei administration to devalue the Argentine peso; otherwise, an overvalued exchange would lead to massive foreign exchange losses and a sharp depreciation of the exchange rate once residents can freely sell pesos for U.S. dollars.

> Argentina owes the IMF $44 billion, which adds to the country’s external financing requirements in the context of limited international financial market access and low levels of central bank foreign exchange rate reserves. The grace period in the new program would help push out IMF loan amortization and, in turn, improve the country’s short- and medium-term external financial outlook.

> Any IMF loans that Argentina receives over the next 4.5 years will help improve Argentina’s international liquidity position and the central bank’s foreign exchange position. Refinancing IMF loans is also key to further adjusting Argentina’s foreign exchange and capital control policies.

Global Minimum Tax, Digital Service Taxes and America First Foreign Economic Policy (2025)

The new U.S. administration pulled out of a landmark 2021 OECD international tax agreement and ordered the Treasury and the United States Trade Representative to investigate whether other countries impose extra-territorial or discriminatory taxes on U.S. companies, which could open the door to trade retaliation and punitive tax measures targeting foreign companies and individuals located in the United States as well as lead to broader conflict over the taxation of U.S. tech companies. On January 20, the new U.S. administration notified the OECD that any commitments made by the Biden administration will have no force within the United States. Under the OECD agreement, 140 countries committed to imposing a global minimum tax on large multi-national companies (MNCs). The administration also directed the Treasury and the United States Trade Representative to investigate the tax policies of other countries in view of extraterritoriality and discrimination and to present the president with a list of options of how to respond within 60 days. The Treasury and the USTR are to publish its findings within 60 days. If they find countries to be discriminating U.S. companies, the administration will be able to put raise taxes on them or take retaliatory trade measures. 

> The 2021 OECD-sponsored international tax agreement comprises 140 countries and aims among other things to limit inter-jurisdictional tax competition and the erosion of national tax bases by limiting the ability of multi-national companies (MNCs) to shift profits to low tax jurisdictions. 

> The agreement consists of two pillars. Pillar 1, applying to about 100 of the world’s largest MNCs, aims to reallocate a share of MNC-related taxes between jurisdictions. Pillar 1 negotiation have proven contentious and have not been finalized. The Joint Committee on Taxation estimates that if Pillar 1 were implemented the US would lose $ 1.5 billion in revenue per year and that 70% of reallocated taxes would come from US MNCs. Pillar 2 establishes a global minimum tax of 15 percent. The minimum tax allows for the imposition of top-up taxes in case the tax of the jurisdiction where the MNC is headquartered has a corporate tax of less than 15 percent. The o implementation of Pillar 2 was estimated to raise more than $ 200 billion in additional revenue.

> Existing domestic legislation (Section 891 of the Internal Revenue Code) allows the Trump administration to double taxes on companies and citizens of countries that are found to impose discriminatory taxes on companies. The legislation has never been invoked, no regulation pertaining to it has been promulgated, and it is not clear how the provision would apply in practice. 

If Treasury finds a country to be imposing discriminatory or extra-territorial taxes on U.S. persons, the executive will be able to double the tax rates for affected foreign companies and individuals without requiring congressional approval, and the Treasury and USTR may find provisions pertaining to the 15% global minimum tax as well as national digital services to discriminate against U.S companies. The OECD agreement was meant to resolve the conflict national digital services taxes. The conflict is a straightforward distributional conflict between the United States and other countries. The failure to finalize the tax agreement, especially Pillar 1, will also lead countries to introduce digital services taxes, which are strongly opposed by the U.S. But failure of Pillar 1 may lead more countries to introduce digital services taxes and lead to increased tensions with United States. Faced with the prospect of much higher U.S. taxes, most countries may find the costs of U.S. unfriendly measures outweigh the benefit of maintaining “discriminatory” taxes, including global minimum and digital services taxes. Smaller countries will find it difficult not to make substantial compromises. Even larger economies, like the EU, have already signaled their willingness to start talks with Washington. There may be room for compromise given that current US corporate tax regime in terms of rates is not way out of line with the 15 percent minimum tax, even if a different U.S. approach to the treatment of R&D and the grouping of international income into a blended rate might force U.S. MNCs to pay a top-up levy under the so-called undertaxed profit rule.

> In December 2022, the European Union unanimously moved forward to implement this country- by-country minimum tax by issuing a Council Directive (Pillar 2). Most EU countries with 12 or more MNCs enacted the Pillar 2 related income inclusion provision in 2024 and the undertaxed profit rule in 2025. Smaller EU countries were allowed to defer their implementation by up to 6 years. 

> In 2019 and 2020, USTRA Section 301 investigations found that digital taxes imposed by Austria, France, India, Italy, Spain and Turkey and US were discriminatory, but both the Trump and Biden administration suspended retaliatory trade measures following their commitment to remove the taxes following the successful conclusion of Pillar 1 negotiations.

> Another 140 countries agreed to a moratorium of new digital services taxes. This agreement has now lapsed. Relatedly, the WTO moratorium on customs duty on electronic transmissions was extended in March 2024 for another two years.

The investigation into the discriminatory tax treatment of U.S. companies overseas will further increase economic uncertainty and has the potential to lead the U.S. to introduce punitive tax rates on foreign companies located in the United States as well as retaliatory tariffs on countries found to impose a 15% percent minimum tax and/ or national digital services taxes. As many MNCs and especially tech MNCs are American, the introduction of a global 15 percent tax would make it more difficult for MNCs to shift their profits to low-tax jurisdiction. The minimum tax also imposes a higher tax burden if the corporate tax rate in the home country is lower than 15 percent. Under Pillar 2, large companies pay more taxes in countries where they have customers and less in countries where headquartered if the corporate minimum tax in their home country is lower than 15 percent. From an U.S. perspective, higher foreign taxes mean less income for shareholder of US companies. It may also lead to lower taxes to the extent that higher foreign taxes translate into domestic tax credits. 

> The tax agreement risks increasing taxes on U.S. multi-nationals and to reallocate tax revenue away from the United States. Conflict over digital services taxes are a long-standing source of tensions between the United States and the rest of the world and will be revived with force if Treasury or USTRA find them to be discriminatory. Targeted countries could then be faced with tax and tariff threats, which could prove highly disruptive to their economic relationship with the United States.

> Previous U.S. administrations opposed the introduction of national digital taxes. About half of EU members have announced, proposed or enacted digital services taxes. Trump administration launched Section 301 investigations. The first Trump administration launched a Section 301 investigation and threatened tariffs in response, which led to a moratorium pending the conclusion of Pillar 1 talks. The USTR threatened to impose a 25% tariff on $1.3 billion worth of goods. 

> The U.S. Global Intangible Low-Taxed Income (GILTI) tax imposes a minimum rate of 10.5 percent on a globally blended basis. However, because this tax rate is lower than the Pillar 2 minimum tax, it does not conform to the Pillar 2 rules and would subject many US MNCs to the so-called UTPRs abroad, forcing US multinationals to pay higher taxes in foreign jurisdictions under Pillar 2. 

The change of the U.S. stance on international taxation mirrors the greater reliance of unilateral measures to exploit economic dependence of other countries on the United States, and creates an additional source of economic friction. First, the U.S. exiting the OECD agreement and threatening to impose discriminatory taxes on selected countries will further undermine multilateralism and reflects a broader shift toward greater unilateralism under the Trump administration aimed at leveraging U.S. bargaining power. Second, by abandoning the global minimum corporate tax and, depending on the outcome of the Treasury investigations, economically weaker countries may be forced to abandon or scale back national digital taxes as well as a 15 percent minimum corporate tax, which will lead to a further erosion of their tax or lead them to forego revenue they would have received under the OECD agreement. This is particularly painful at time when both borrowing, and debt are high across advanced, emerging and developing economies. 

> The OECD estimates that the implementation of Pillar 2 would raise global tax revenue by $ 200 billion. The bulk of the additional taxes would go to advanced economies. But emerging and developing would nevertheless have received additional government income in the form. If these countries decide to abandon the 15% minimum tax and/ or digital taxes in response to U.S. pressure, they will forego much needed revenue in the face of continued and increasing fiscal and debt challenges. Every dollar counts.

Global Macro Outlook and Emerging and Developing Economies (2025)

The global macro cycle and especially the U.S. policy mix will prove to be a drag on emerging and developing economies, while the latter will remain at risk of experiencing further financial distress in the medium term, which, broadly speaking, will also raise the risk of domestic political instability. After more than a decade of ultra-low global interest rates and quantitative easing in the wake of the 2008 global financial crisis, significant flows of capital to emerging and developing economies. Low-income and lower-middle income economies have historically relied on official bilateral and multilateral financing, leading to Paris Club led restructuring. The tightening cycle was cut short by COVID-19, which lead for interest rates to effectively fall to zero and advanced (and even some non-advanced) central engaging in renewed quantitative easing, which effectively contributed to lowering long-term interest rates and support capital flows. The most recent tightening began in the wake of post-COVID-19 recovery, supply chain disruption, Ukraine energy shock and pent-up demand leading to most dramatic spike in inflation in more than forty years in advanced economies. As a consequence of economic shocks and higher borrowing costs, many especially developing economies experienced financial distress and several defaulted on their debt and/ or were forced to apply for IMF support. Sovereign distress, default and restructuring is only one variety of financial distress an economy can experience. Banking crises are another important source of financial instability. The past five years saw significant financial distress, particularly in low income countries, including several sovereign defaults. The economic shock related to COVID-19, higher U.S. interest rates and a stronger dollar led to financial distress in many developing economies, particularly in so-called frontier markets.

> In the past five years, the following countries have defaulted on and/ or were forced to restructure their sovereign international debt: Belize, Zambia, Ecuador, Argentina, Lebanon and Suriname. Argentina pre-emptively restructured its debt in 2020.

> According to the Bank of England default database, ten sovereigns accounted for 75% of the US-dollar value of debt currently in default globally (mainly Russia and Venezuela). the level of global public debt in default has averaged between 0.3% and 0.6% over the past decade, and currently stands at 0.5%.

The shift in U.S. economic policy will prove challenging for highly-indebted, low-income countries, as global interest rates will remain comparatively high, the dollar strong, the economic outlook (outside the United States) uncertain and the political-economic outlook fraught with risk. Adverse global economic and financial conditions, particularly in context of potentially inflationary and expansionary U.S. macroeconomic and trade policies, higher U.S. interest, rates, a stronger dollar, and lower dollar commodity prices could make things worse and lead to renewed financial, economic and domestic political distress in emerging and developing economies. An uncertain economic outlook in China due to structural and cyclical challenges as well as risks related to a conflictual U.S. economic policy toward Beijing has the potential to negatively impact low-income economies. Lower Chinese demand for commodities due to a move away from real-state and infrastructure-intensive growth and a reduced willingness to provide financing to low-income countries will negatively affect the economic and financial outlook. Emerging economies have generally solid economic fundamentals and sufficiently flexible policy regimes to limit the risk of a systemic financial crisis, including external debt defaults. Low-income countries have far greater financial vulnerabilities. Among emerging markets, Argentina, Ecuador as well as Pakistan face more significant financial challenges. But they also stand to benefit from IMF support, which means that if they follow IMF-prescribed policies in the context of an IMF program, they should be able to avoid another round of severe financial distress.

> The U.S. dollar on a trade-weighted basis. U.S. interest rate outlook has been revised upward in recent months in light of slow disinflation and risk of inflationary U.S. macroeconomic and trade policies. U.S. interest rates will decline only very modestly if all this year. Some market analysts even predict that the Federal Reserve may be forced to raise interest rates.

> Argentina, Ukraine, Egypt, Ecuador and Pakistan are the largest recipients of IMF loans, largely on account of their economic size. However, the bulk of countries receiving IMF support in the context of balance of payments problems is located sub-Saharan.

> Low-income, developing countries, including frontier markets, are most at risk of financial distress in light of significant bilateral and private external borrowing. Ghana and Zambia have just emerged from sovereign default. 

A significant number of mostly low-income countries (developing economies), as opposed to higher-middle income countries (or emerging economies) face various degrees of financial distress, including balance-of-payments problems, and are undergoing IMF-supervised economic adjustment. Short of a detailed economic, political and financial analysis of individual cases, sovereign credit ratings are an acceptable, if imperfect indicator of economic and financial risk in a country. However, they can and do sometimes miss risks, including non-sovereign financial risks. But broadly speaking, sovereign credit ratings (see table) seem strongly correlated with economic development and per capita income. Low-risk countries (rated A or higher) are largely advanced economies; the medium-risk category (rated BB or BBB) is dominated by emerging economies; the high-risk category consists mostly of low-income countries. A more fundamental reason why medium-term risk countries are less at risk than high-risk countries is their lower level of dollar-denominated risks, more independent central banks and more flexible exchange rates, which makes balance-of-payments more manageable. Often, they also benefit from a larger domestic investor base and stronger institutions. THis is not to suggest that countries like Brazil, Mexico, South Africa or Turkey will not face more challenging financial conditions, but they are unlikely to experience sovereign distress or external payments defaults in the next few years. 

> As of 2023, IMF estimated that share of developing economies in distress. It estimated that 25 percent of emerging and developing economies were at high risk and faced “default-like” spreads on their sovereign debt, meaning their ability to raise (or refinance) international debt was severely curtailed. About 15 percent of low-income countries were in debt distress, and an additional 45 percent are at high risk of debt distress. While some of these low-income countries are undergoing IMF-supervised definition and/ or have emerged from a debt restructuring, risks remain elevated, particularly in view of a worsening global macro environment. 

> A consequence of U.S. financial sanctions, Russia’s sovereign default (2022) was involuntary, while Ukraine’s default was largely the consequence of the war. Ukraine has successfully restructured (part?) of its private external debt, but not its official debt. 

> Ghana, Sri Lanka, Zambia have restructured their debt and continue to make progress on broader economic adjustment with fair prospect of regaining market access at the end of the IMF program. Argentina needs to secure an IMF agreement and move towards greater exchange rate flexibility to sustainably reestablish the equilibrium of its balance of payments. Lebanon and Venezuela (Republic and PDVSA) remain in default

An adverse macro environment and significant economic and financial vulnerabilities in low-income countries will keep the risk of political instability high, regardless of whether countries default and restructure their or avoid a debt restructuring but undergo significant policy adjustment. Domestic political instability often accompanies IMF programs, as policy adjustment and conditionality in the form of a tighter monetary policy, currency devaluation and fiscal adjustment, whether tax increases or expenditure, including subsidies cuts, prove deeply unpopular against the backdrop of initially often weak economic growth and high inflation. Opposition parties and where applicable coalition parties often have an incentive to criticize adjustment policies in view of the next elections, further fueling opposition to adjustment and their short-term economic costs. To the extent that IMF programs contain structural conditionality it may also require politically painful structural reform, such as the privatization of state assets and opposition from concentrated, well-organized and often politically influential domestic political interests. However, an external debt default is typically even more destabilizing, economically and politically, as it sharply limits a country’s access to external financing and forces a precipitous contraction of imports on the country as well as a lack of access to long-term financing of investment. Often, but not always, a default is accompanied by banking crises or domestic government debt crises. Governments tend to not to survive the economic turmoil in the wake of a disorderly default, but debtor governments and their creditors often kick the proverbial can down the road for too long and then get forced into an even more disruptive disorderly financial default rather than a pre-emptive debt restructuring against the backdrop of IMF support. This dynamic will also contribute to further financial distress, including sovereign debt crises and possibly defaults, in low-income countries in the next few years. But even if outright sovereign defaults can be avoided, increased financial distress will put increasing stress on many countries in the high-risk category.

> The potential for (very) adverse spill-over effects from financial distress in emerging and developing economies is very limited, particularly compared to the 1980s and 1990s, when defaults threatened to bring down the U.S. banking system or destabilize U.S. financial markets (e.g. Long-Term Capital Management). Today, the financial importance of non-advanced countries in financial distress is very limited. The systemic financial importance of the countries in the high-risk category is negligible (see table). 

> It took Zambia (2020-24) four years to restructure its debt. Ghana (2022-24) and Sri Lanka managed to do in in two years. While three countries hardly makes a large enough sample, it is possible that future debt restructuring will be completed less slowly, though much will in practice depend on how messy a default is and how willing debtors are to While the G20 Common Framework and Global Debt Roundtable have not delivered, debt restructurings seem to be completed less slowly in the context of non-Paris Club creditors like China 

Political Economy of Fiscal Reform in Brazil (2025)

Brazil’s economic growth has outperformed expectations post-COVID-19, but this improved economic performance is unlikely to be sustained over the medium term due to continued low savings and investment After years of economic underperformance following the car wash scandal, economic growth has outperformed market economists’ expectations. Brazil’s economic fundamentals are relatively sound in terms of its international financial position, commitment to a floating exchange rate regime and the government’s net foreign currency creditor position, all of which mitigate the risks of a balance-of-payments or sovereign external debt crisis. However, domestic government debt is high and fiscal deficits are high, raising concerns about the medium- and long-term outlook for debt sustainability, and hence economic growth.

> According to the IMF, real GDP grew by 3% annually in 2022 and 2023, and it is expected to expand another 3% in 2024, supported by strong domestic consumption, increased agricultural and hydrocarbon output and a less than anti-cyclical fiscal policy. Real GDP growth averaged 0.5% a year over the past decade. According to the World Bank, real GDP per capita growth averaged a negative 1.6% annually.

> The Brazilian public sector is net foreign-currency creditor. Less than 5% of Brazilian public debt is foreign-currency-linked. Brazil’s international financing requirements are low and the central bank sits on $350 billion of foreign-currency reserves, while the current account deficit is more than fully financed by net foreign direct investment flows.

> Compared to the other two large Latin American economies, Argentina and Mexico, Brazil compares favorably in terms of long-term economic growth. In the past thirty years, both Argentina and Mexico registered real GDP growth of 2%, compared to Brazil 2.4%. Over the past decade, Brazil grew 0.5% annually, compared to Mexico’s 1.5%, while Argentinian real GDP did not grow at all.

While Brazil’s international financial position is very manageable, a modest medium-term growth outlook and adverse fiscal dynamics represent will sooner or later force the government to pursue a much more restrictive fiscal policy. While such an adjustment is necessary to ensure medium- to long-term debt sustainability, if would also, if implemented forcefully, help free up resources to be invested in the economy to raise medium-term growth. But this is unlikely to happen on a meaningful scale, as the Lula government is struggling to implement more decisive short- and medium-term fiscal adjustment, particularly in view of the 2026 presidential elections. The government has reformed the fiscal framework, but is struggling to take more decisive actions aimed at a fiscal adjustment in the short term to help stabilize the debt-to-GDP ratio. The government has also failed to address longer-term fiscal concerns related to high levels of education, health and pension spending, which will sooner or later prove unsustainable. Significant reform remains unlikely in the next two years.

> In 2023, congress approved a constitutional amendment replacing the zero cap on growth in real federal spending, which had been in force since 2016, with a corridor for real spending growth tied to both revenues and the difference between projected and targeted primary fiscal balances. The amendment re-established floors for mandatory education and health as well as investment spending. While the reform committed the government to improving the primary balance from -0.5% of GDP in 2023 to 1% of GDP by 2026, these are indicative targets only and can be changed with a simple majority vote in congress. Mandatory spending increases mean that the government is constantly struggling to mobilize greater revenues, while it limits the amount of money that can be spent on investment.

> Absent reform, public pension spending is projected to increase from 12% of GDP in 2016t to 16% in 2025 to 26% in 2050. This is not sustainable. Pension reform in 1998, 2003 and 2012 were insufficient to significantly impact the path of future spending. Adjusted for age, Brazil has the largest pension expenditure in the world, according to the IMF.

> The IMF projects gross government debt to increase from 85% of GDP in 2023 to 95% of GDP by 2027, which represents a substantial increase. The IMF also forecasts the structural primary balance to improve by 0.5 percentage points of GDP annually, which will likely prove way too optimistic. It also forecast real economic growth of 2.4% annually, which is way above the ten- and twenty year average of 0.5% and 2.3%.

Structural economic reform necessary to accelerate medium- to long-term economic growth is always difficult, particularly so in Brazil. Brazilian presidents typically face an unwieldly congress in several ways. First, the president’s own party generally controls an often miniscule share of seats in the chamber and the senate, forcing the formation of often disparate “presidential coalitions”. Second, the number of congressional political parties and hence congressional fragmentation is high, which further weakens the cohesion of presidential coalitions. Third, party discipline in Brazil is very low, largely due to an electoral regime that weaken party-political control of candidates and favor personalistic policies. More recently, changes to the way budget policy is implemented further has further weakened the president’s ability to win congressional support for a cohesive, long-term economic reform agenda. Finally, many important economic reforms require amendments to the constitution and this require super-majorities to pass them. This is not impossible, but does make it more difficult to pass reform legislation than in other countries. If Brazil fails to implement major spending reform, particularly pension and social spending, it will sooner or later fail to comply with its new fiscal framework and government debt will inevitably become unsustainable. It also means that the government will fail to mobilize the fiscal space required to increase investment and support medium- to -long-term economic growth.

> Consisting of 82 members, the Senate has 11 different political parties and groups. The high degree of fragmentation tends to limit the size of presidential coalitions. The government coalition consists of 42 senators. Consisting of 513 member, the chamber of deputies has 16 different parties and political groups. The government coalition consists of 225 deputies, falling short of an absolute majority, hence requiring wide-ranging compromise with independents or the opposition to pass legislation.

> Members of the chamber of deputies are elected on the basis of open list proportional representation, which gives voters extensive influence over who they elect and weakens party political control over candidates, leading to personalistic and clientelist politics. The centrao, the broadly centrist group of members of congress that lack ideological conviction or cohesion and engage in clientelist politics, is a reflection of the open list proportional representation. Senators are elected on the basis of a plurality regime, but due to weak national political parties and the senatorial candidates’ need to maintain close ties with and rely on state governments and governors (and their political machines) to be elected, they are similarly independent from the parties they represent.

> The Brazilian constitution established extensive social and economic rights, which require constitutional majorities to be amended. This is possible, particularly as far as it concerns minor issues, but it is generally politically challenging due to 4/5 super-majorities in both chambers.

Despite a surprisingly strong growth performance, the medium-term outlook remains challenging, not least because sooner or later Brazil will need to overhaul public finances. Over the medium term, the government will need to implement a more forceful fiscal adjustment to prevent a further increase in government debt, not least given the large social and pension obligations. A future government will implement reform only gradually in terms of the politics and economics. Politically, radical reform is politically very unpopular as it affected “acquired rights”, which often are grandfathered in. Economically and financially, the effects of reform are limited in the sense that they typically seek to prevent a further rise of pension spending rather than a decline in a context where spending is set to increase due demographic dynamics. This will also mean that Brazil will continue to be characterized by a low, perhaps even falling savings rate, which will constrain domestic investment, particularly in public infrastructure, and future economic growth. Other structural reform, such as greater trade integration, may support higher medium-term growth, but progress will be slow, while the international trade environment is set to worsen in the next few years in the context of the U.S. presidential elections. With major structural reform unlikely before the 2026 elections, Brazil’s economic performance is likely peaking and will deteriorate as 2026 approaches and beyond.

> According to IBGE, Brazil’s population currently at 216 million is projected to peak at 220 million in 2041 in the context of a rapidly falling fertility rate (falling from 2.3 in 2000 to 1.6 in 2023, and projected to reach 1.4 by 2040). The old-age dependence ratio increased from 10 in 2010 to 15 in 2023 and is projected to 36% by 2050. Brazil’s working-age population is estimated to have peaked in 2021 as share of the total population.

> Trade integration, defined as exports and imports of goods and services, Brazil ranks 184 out of 195 countries. Agricultural product and fuels and mining account for 75% of total exports, only 25% manufacturing. China accounts for 26% of exports, followed by 15% for the EU and 11% for the U.S. China accounts for 23% of all imports, followed by the U.S. with 19% and the EU with 16%.

> Federal capital expenditure typically amounts to less than 1% of GDP and the public sector is net dis-saver, meaning most public sector net borrowing finances non-investment expenditure. Public sector dissaving is the major cause of a low domestic savings ratio of less than 15% of GDP, and hence low investment.