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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… 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 … 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: 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: 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: 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