TheImpactofGlobalCrisisonLICsandPolicyResponses IMFHughBredenkamp by bjdpkx

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									    International Monetary Fund




The Impact of the Global Crisis on LICs,
       Policy Responses, and
         Financing Options

                 Hugh Bredenkamp

                   IMF
Strategy, Policy, and Review Department
               April 22, 2009
                      Key messages
   The impact of the crisis is spreading beyond advanced and
    emerging markets to LICs (“third wave”).

   Additional financing need of at least US$25 bn in 2009 to
    maintain adequate reserves.

   IMF is stepping up financial support, while maintaining close
    policy dialogue and expanding technical assistance.

   Increased aid on highly-concessional terms will be critical to
    provide scope for countercyclical fiscal policies, while
    minimizing debt vulnerabilities.
The global environment is drastically worsening…
   Commodities exporters now face increased pressure on
    external accounts, as prices have declined.
   Reduced export volumes due to weakened external demand.
    500                                                                10
             Selected Commodity Price Indices                                               World Trade Volume
    450        January 2003=100             Energy                                        (Annual Percent Change)


    400                                                                 5

    350                    Metals

                                                                        0
    300

    250
                                                                        -5
    200

    150
                                     Food                              -10
    100
                                                                              World trade volume (goods and services)
     50
       Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-                         -15
        03   04   05   06   07   08   09   10                                2007            2008         2009 Projection
     Source: IMF staff. Latest projections correspond to April 2009.
Main impact through spillovers from global
recession, involving real channels more than
direct financial channels …

    Trade channel (openness has increased)
    Remittances (World Bank estimates decline of 5-
     8 percent in 2009)
    FDI inflows (tripled in past 5 years: could drop
     this year by at least 20 percent)
    Aid flows (possibly)
     As a result, the outlook for LICs in 2009
             has deteriorated sharply
     Lower growth and higher current account deficits

10                                                                 20
                           GDP Growth                                                Current Account Deficit
                           (In percent)                            18                  (In percent of GDP)

 8               WEO Spring 2008                                   16       WEO Spring 2008
                 Latest projections                                         Latest projections
                                                                   14

 6                                                                 12

                                                                   10

 4                                                                 8

                                                                   6

 2                                                                 4

                                                                   2

 0                                                                 0
      All LICs        Sub-        Asia    Middle East    Latin          All LICs    Sub-         Asia   Middle East    Latin
                     Saharan              and Europe    America                    Saharan              and Europe    America
                      Africa                                                        Africa
 Source: IMF Staff. Latest projections correspond to April 2009.
The global crisis is spilling over into a
domestic budgetary crisis…..
 Drop in revenues                        Commodity Revenues to Total Revenue, 2008

(esp. commodity exporters)        Congo, Republic of
                                                    (Ratio, in percent of total revenue)

                                              Chad
                                            Nigeria
                                            Angola
                                    Yemen, Republic

 Increased spending pressures,          Azerbaijan
                                             Sudan
                                  Papua New Guinea
                                          Mauritania
including to protect the poor              Mongolia
                                            Guinea
                                           Vietnam

                                                       0         20     40         60      80   100
                                  Source: IMF staff estimates.




   Higher borrowing to offset these effects could pose
    debt sustainability risks
…while exchange rate and financial risks
are emerging from second-round effects
    Reduced inflows into domestic markets, inducing exchange
     rate pressures:
        Rollover risk (sovereign and private debt) and hardened terms on
         foreign borrowing
        Reduced availability of trade credit


    Banking system problems, including contingent liabilities:
        Liquidity pressures (parent banks restricting financing; capital
         withdrawal)
        Deterioration in the quality of credit portfolio


    These risks, if realized, could affect debt sustainability.
    IMF Policy Recommendations
   Fiscal Policy:
       Countries with room to do so should preserve spending, allow
        automatic stabilizers to work
       Some with strong budget positions have space for fiscal stimulus
       For most, expenditure-smoothing possible only with increased
        concessional assistance due to:
          binding financing constraints
          debt sustainability considerations


   Monetary and Exchange Rate:
       LICs with falling inflation may have room for monetary easing
       Allow exchange rate to absorb shocks
       Closely monitor financial sector risks
Financing needs could rise well above
$25 billion if downside risks materialize
                                  (in billions of US$, unless otherwise noted)
 Billions of U.S. dollars                                                        Number of Countries




 Sources: WEO database, and Fund staff calculations
                     IMF Response
   Stepping up financial assistance to LICs while maintaining
    close policy dialogue and expanding technical assistance
    More IMF resources in the pipeline
   Expect to triple our concessional lending in 2009-
    10, to $3 billion per year

   Adapting our LIC lending facilities to make them
    more responsive to country’s needs:
        Doubled access limits on concessional borrowing
        Reformed structural conditionality
        Working on new short-term concessional facility and
         streamlined emergency support
        Revisiting debt limits to make them more flexible


   Proposal for general allocation of SDRs (would
    provide $19 billion in additional reserves to LICs)
A call for a coordinated response by
   the international community
   Scaled-up assistance on highly concessional
    terms will be critical to help LICs:
     offset the adverse shocks
     avoid procyclical spending cuts
     help minimize new debt vulnerabilities
     support progress toward MDGs


   Donors should, at a minimum, fulfill Gleneagles
    commitments
Thank you

								
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