Marcelino and Hakobyan 2014). The primary balance of most LICs has been negative since the mid-2000s, and all but five (of 31 with available data) LICs had primary deficits in 2017, with a third carrying a primary deficit exceeding 3 percent of GDP.

**Uses of borrowed funds.** A rising debt burden is typically less of a reason for concern if it is used to finance investment that raises a country’s potential output, and therefore its ability to repay loans in the future (World Bank 2017). In some LICs, growing deficits reflected a push to finance public investment, as suggested by the doubling of median LIC public investment as a share of GDP from 3 percent in 2000 to 6 percent in 2015. This was the experience of Guinea-Bissau, Madagascar, Mali, and Nepal, where wider fiscal deficits were matched by higher public investment (IMF 2018a). These countries form a minority, however, as a substantial part of LIC borrowing has been used to finance a rise in current consumption. In resource-intensive countries in Sub-Saharan Africa, for example, the bulk of increased spending enabled by a rise in commodity prices went to public sector wages (World Bank 2018a). Some borrowing may also have been redirected toward the accumulation of private assets stored abroad.<sup>4</sup>

**Dependence on external debt** . Given their typically small local creditor base, a significant share of LIC borrowing comes from abroad and is denominated in foreign currencies. The resulting currency mismatch poses a challenge to LICs, as a depreciating currency can lead to a rise in the domestic value of the country’s debt burden and interest payments. This challenge is more severe in countries with a significant share of external debt priced at market rates, and less so for countries benefiting from the low interest rates on concessional debt.

The median LIC carries external debt, including both public and private debt, equivalent to 28 percent of GDP and almost half of total debt. Median external debt as a share of GDP has risen about 3 percentage points since 2012, with several important outliers. Commercial debt issuances have contributed to especially sharp rises in external debt burdens in Mozambique and Tajikistan. In Uganda, external debt as a share of GDP has more than doubled since 2012, to more than 40 percent of GDP in 2017. The maturity composition of LIC external debt has remained broadly stable—short-term debt remained moderate at 5 percent of total external debt in 2016.

**Shift toward non-traditional creditors.** The composition of public debt has shifted over the last decade, becoming increasingly non-concessional as LICs have increased their reliance on financing from non-traditional sources (Figure 2). The median share of non-concessional debt in public debt rose to 55 percent in 2016 (the latest year for which data are available), an increase of nearly 8 percentage points since 2013, and 15 percentage points compared with a decade earlier. Commercial creditors have become an important source of credit for some countries (World Bank and IMF 2018a). Ethiopia, Mozambique, Rwanda, Senegal, Tajikistan, and Tanzania have all

> 4 Ndikumana and Boyce (2011) find that for every dollar in external loans to Sub-Saharan Africa, capital outflows increased by roughly 60 cents in the same year.

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