Transcript Key messages

International Monetary Fund
The Impact of the Global Crisis on LICs,
Policy Responses, and IMF Support
Hugh Bredenkamp
IMF
Strategy, Policy, and Review Department
April 23, 2009
Key messages

The impact of the crisis is spreading beyond advanced and
emerging markets to LICs (“third wave”).

The crisis will create large-scale additional financing needs to
maintain adequate reserves and support budgets.

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 has worsened drastically…

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Commodities exporters now face increased pressure on
external accounts, as prices have declined.
Reduced export volumes due to weakened external demand.
500
450
Selected Commodity Price Indices
January 2003=100
World Trade Volume
(Annual Percent Change)
Energy
5
400
350
10
Metals
0
300
250
-5
200
150
100
Food
-10
World trade volume (goods and services)
50
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan03
04
05
06
07
08
09
10
Source: IMF staff. Latest projections correspond to April 2009.
-15
2007
2008
2009 Projection
Main impact through spillovers from global
recession, involving real channels more than
direct financial channels …
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Trade channel (openness has increased)
Remittances (World Bank estimates decline of 58 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
(In percent)
WEO Spring 2008
8
Current Account Deficit
(In percent of GDP)
18
16
Latest projections
14
6
WEO Spring 2008
Latest projections
12
10
4
8
6
2
4
2
0
0
All LICs
SubSaharan
Africa
Asia
Middle East
and Europe
Latin
America
Source: IMF Staff. Latest projections correspond to April 2009.
All LICs
SubSaharan
Africa
Asia
Middle East
and Europe
Latin
America
The global crisis is spilling over into a
domestic budgetary crisis…..
Drop in revenues
(esp. commodity exporters)

Increased spending pressures,
including to protect the poor

Commodity Revenues to Total Revenue, 2008
(Ratio, in percent of total revenue)
Congo, Republic of
Chad
Nigeria
Angola
Yemen, Republic
Azerbaijan
Sudan
Papua New Guinea
Mauritania
Mongolia
Guinea
Vietnam
0
Source: IMF staff estimates.

20
40
60
80
Higher borrowing to offset these effects could pose
debt sustainability risks
100
…while financial risks are emerging

Reduced inflows into domestic markets, inducing
exchange rate pressures:
Borrowing terms have hardened
 Reduced availability of trade credit


Banking system problems:
Borrowers from local banks may have difficulty
servicing their loans
 Governments may have to provide support to banks

IMF Policy Recommendations

Fiscal Policy:
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Goal is to preserve spending, despite the downturn in revenues
IMF programs for LICs are building this in: budget deficit targets
were relaxed in 2008, and further in 2009, allowing additional
spending
But, for most, expenditure-smoothing possible only with
increased concessional assistance due to:
 binding financing constraints
 debt sustainability considerations
Monetary and Exchange Rate:
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LICs with falling inflation may have room for monetary easing
Allow exchange rate to absorb shocks
Closely monitor financial sector risks
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 200910, to $3 billion per year

Adapting our LIC lending facilities to make them
more responsive to country’s needs:
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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
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Donors should, at a minimum, fulfill Gleneagles
commitments
Thank you