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Poor Countries Need Extra Help to Get Through Global
Crisis
By Maureen Burke
IMF Survey Online
March 5, 2009
* Low-income countries will be hit hard by global
economic crisis
* More financial support is needed to help countries
preserve priority spending
* Without action, sharp rise in poverty, increased political
instability could result
A new IMF study finds that at least $25 billion in urgent
concessional financing will be needed this year to help
low-income countries affected by the deepening global
economic crisis and prevent millions from falling back into
poverty.
“The majority of low-income countries will find it difficult
to preserve priority expenditures that protect the
vulnerable groups without increased external assistance,”
said Hugh Bredenkamp, one of the study's authors. “For those
countries, it’s particularly important that the donors scale
up aid.” Advanced countries had pledged to double aid to
Africa, which is particularly vulnerable, but so far the
increase has fallen well short of this commitment.
In the following interview, Bredenkamp, Deputy Director of
the IMF’s Strategy, Policy, and Review Department, discusses
why low-income countries were drawn into the crisis, what
risks lie ahead, and how the international community can
help.
IMF Survey online: Low-income countries were not initially
affected much by the financial crisis, given their low level
of integration with the international financial markets. How
did the crisis catch up with them?
Bredenkamp: The initial impact through the financial sector
channels was indeed more limited in low-income countries
than it was elsewhere. But low-income countries have become
much more integrated with the rest of the world through
trade, foreign direct investment, and remittances than they
were at the time of the last major downturn in the early
1990s.
So, as the global recession began in late 2008, we started
to see the impact on low-income economies. Remittances are
declining, export growth is slowing down, foreign direct
investment is expected to shrink this year by 20 percent,
and commodity prices—which are important for many low-income
countries—have slumped, reflecting the slowdown in global
demand. This has actually benefited some net importers of
fuel and food that were previously hit by high commodity
prices, but it’s also hurt the commodity exporters—countries
like Mongolia and Zambia.
IMF Survey online: The crisis is straining budgets in many
low-income countries, with lower revenues and potentially
lower donor support on the one hand and greater social
spending needs on the other. How should policymakers
respond?
Bredenkamp: It depends on the country’s individual
circumstances. During the good times, some low-income
countries were able to build up a buffer—either by
accumulating reserves (especially the big commodity
exporters) or by reducing their debt levels. These countries
now have fiscal space to protect high-priority expenditures
on health, education, and infrastructure. For countries that
have the ability to do it, that’s what we would recommend.
But the majority of low-income countries will find it
difficult to preserve these critical expenditures, including
safety net measure that protect the vulnerable groups,
without increased external assistance. For those countries,
it’s particularly important that the donors scale up aid.
IMF Survey online: How has the crisis affected the so-called
“frontier” emerging markets—countries like Sri Lanka or
Ghana?
Bredenkamp: Ghana and Sri Lanka are good examples of the
relatively few low-income countries that, prior to the
crisis, had begun to get access to international financial
markets to help finance their budgets. They were both hit as
the markets essentially shut down. Ghana had plans to issue
a big euro bond last autumn, but had to put them on hold,
and Sri Lanka has seen the spreads on its international
borrowing rise to essentially prohibitive levels. At the
same time, these countries have seen foreign investors
exiting from their domestic bond markets. So those two
avenues for financing budgets are now drying up.
These frontier emerging market economies have also suffered
from some of the same effects as other, less advanced
low-income countries. Remittances, for example, are a huge
income flow for Ghana, roughly equivalent to 30 percent of
their exports. We’re projecting that Ghana’s remittances
could drop by about 20 percent this year. So the frontier
emerging markets have suffered from a mixture of the more
advanced kinds of shocks and the more traditional forms.
Bredenkamp: low-income countries had no role in the problems
that have tipped the economy into recession, yet they are
the most vulnerable to its effects (photo: IMF)
IMF Survey online: What has been the impact of the crisis so
far on banks and other financial institutions?
Bredenkamp: This is an area where low-income countries are,
relatively speaking, in a fortunate position compared to
more developed economies. They have very limited derivatives
markets and interbank markets, and their banks typically
fund their lending more through local deposits than through
foreign borrowing. Their banks have been relatively
profitable, because banking systems in low-income countries
are less competitive than those in the advanced economies.
That profitability has led to relatively high levels of
liquidity.
So their financial systems have not seen major stresses thus
far, but there are certainly risks. Many low-income
countries have a high share of foreign ownership in their
banking systems. To the extent that parent banks become
capital constrained, there is a risk that they will withdraw
capital from subsidiaries in developing countries.
And we’ll see more and more borrowers from banks in
developing countries get into difficulty servicing their
debts as the recession takes its toll, just as we’ve begun
to see in advanced economies. As those difficulties mount,
the balance sheets of the banks will deteriorate, and this
could also pose a risk.
IMF Survey online: A number of low-income countries,
particularly in Africa, have recently benefited from debt
forgiveness. Is there a high risk of reemergence of debt in
low-income countries?
Bredenkamp: Debt relief has indeed reduced the debt levels
for many low-income countries. The IMF alone has contributed
around $6 billion to debt reduction for 24 low-income
countries to date under the HIPC and the MDRI initiatives.
The global crisis will worsen the debt situation of many
countries—both because of the increased borrowing that the
countries will have to do to get themselves through the
recession, but also because their export and tax revenues
will be reduced. So they’ll get hit on both sides.
The extent of the threat here depends critically on the
response of the donor community. If the additional borrowing
needs that these countries face are matched by highly
concessional aid from donors—either grants or very
low-interest loans—then the impact on the debt situation
could be manageable. But it also depends on how the crisis
evolves. If it turns out to be more severe than we’re
currently projecting, the implications for debt could be
worse. The countries themselves also need to do their part,
of course, by maintaining prudent borrowing policies.
IMF Survey online: Why is the IMF seeking to double the size
of its trust fund for concessional lending?
Bredenkamp: The Fund’s capacity to make concessional
loans—that is, highly subsidized resources—to our
lowest-income members has been dwindling steadily in
relation to the growing size of economies and levels of
trade, just as our overall conventional resources have not
kept pace with the expanding global economy. Our
contribution to low-income countries’ financing needs has
fallen to less than half what it was a decade ago. This did
not surface as a problem in recent years because low-income
countries had been doing relatively well and there was a lot
of liquidity that provided alternative sources of financing.
Now, as we see those alternative sources of financing dry up
and the economic situation deteriorate, it has become clear
that the Fund’s resources are inadequate. We have done
country-by-country projections, and these suggest that the
needs for IMF concessional financing will be roughly double
what our current resources could sustain—not just for the
duration of the recession, but over the medium term.
IMF Survey online: There are signs of increased
protectionism in the advanced economies—as well as in the
low-income countries themselves. How big a threat is this to
low-income countries?
Bredenkamp: Protectionism can hurt all economies, from the
most advanced to the least. So far there have been only
isolated examples of this, but it’s enough to set off alarm
bells. There have been messages from the IMF Managing
Director, the World Trade Organization, and leaders around
the world exhorting each other not to resort to
protectionism. As we all know, beggar-thy-neighbor policies
aggravated the downturn during the Great Depression. That’s
an experience we do not want to repeat.
We will see increased political pressures for protectionism
as job losses mount. Politicians need to remind people why
this is the wrong way to go to deal with the crisis.
IMF Survey online: The paper projects that low-income
countries might need about $25 billion to offset the impact
of the shock on their reserves. But the doubling of aid to
Africa promised by G-8 leaders at Gleneagles in 2005 has yet
to materialize. What can the IMF do to get donors to live up
to their pledges?
Bredenkamp: The Fund staff’s main role is to do the analysis
and present the facts to the international community on the
needs and the outlook. We have done the analysis for
low-income countries in the paper just published, and the
figure that you mention appears in that paper. The IMF
Managing Director has presented the findings of that study,
and we will be looking for opportunities to disseminate
further the messages and the findings of that paper at the
Tanzania conference next week and in the runup to the Spring
Meetings in late April of the IMF and the World Bank.
Equally important is the role that Fund staff play at the
country level, by helping governments make a technically
solid and convincing case to donors.
IMF Survey online: In sum, what’s the main message of the
IMF’s study?
The impact of the crisis on low-income economies will be as
severe, over the medium term, as it is for the advanced and
emerging economies, albeit in different ways. It was not a
crisis of their making; they had no role in the problems
that have tipped the economy into recession. Yet they are
the most vulnerable economies, and they need the support of
the international community to cope with the fallout.
If that support is not forthcoming, our fear is that many
countries will be forced to cut priority expenditures just
as they’re going into a recession, which is precisely the
opposite of what the IMF would like to see. This could tip
more people into poverty and lead to increased political
instability in some of these countries where we’ve seen
political progress over the last few years, hand-in-hand
with economic progress. This outcome would not be in
anyone’s interest, and this is the main case for a concerted
and convincing international response to the crisis.
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