Maintaining macroeconomic stability is critical for sustained and inclusive development. Large swings in economic activity, high inflation, deteriorating fiscal positions, unsustainable debt levels and volatile exchange rates are detrimental to the living standards of the most vulnerable. They also endanger progress towards achieving the Sustainable Development Goals.

Managing public spending in a manner that does not weaken macroeconomic stability is a challenge, especially in capacity constrained countries with weak institutions. Politicians typically face stronger incentives to increase spending as opposed to reducing it, but this can lead to unsustainable debt burdens when adequate domestic revenues cannot be raised. In these situations, spending more on debt servicing means spending less on education, health or critical infrastructure.

To avoid debt distress in developing countries, the debt situation needs to be better monitored and more effective early-warning systems and feedback mechanisms developed. There is also an urgent need to control government expenditure, foster efficient use of existing resources to limit recourse to additional debt, and strengthen countries’ capability to manage their public debt.

Key aims:

• Supporting policy-makers in prioritising and improving the composition of their spending on quality investments and poverty reduction.
• Examining how countries can borrow to finance their national development plans while avoiding unsustainable debt burdens.
• Supporting national governments to strengthen institutions critical for improving the monitoring, accountability, and transparency of spending, as well as for building resilience to shocks.

See some of our work in this area below.