TheImpactofGlobalCrisisonLICsandPolicyResponses IMFHughBredenkamp by bjdpkx


									    International Monetary Fund

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

                 Hugh Bredenkamp

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



                                     Food                              -10
                                                                              World trade volume (goods and services)
       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

 6                                                                 12


 4                                                                 8


 2                                                                 4


 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)

                                    Yemen, Republic

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

                                                       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
        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
Thank you

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