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Overview

The Impact of Global Financial Crisis on LICs: Preliminary Assessment Hugh Bredenkamp Strategy, Policy, and Review Department International Monetary Fund December 2008. Overview.

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Overview

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  1. The Impact of Global Financial Crisis on LICs:Preliminary Assessment Hugh BredenkampStrategy, Policy, and Review DepartmentInternational Monetary FundDecember 2008

  2. Overview • LICs are facing a “double blow”: already weakened from the past year’s high food and oil prices, they may be hit hard by the financial crisis and global slowdown • Transmission channels and vulnerabilities will vary across countries • Need for global stimulus, applied selectively • Case for scaling up aid even stronger than before

  3. Growth (8½%, on avg., in ’07) Inflation (6½%) Fiscal deficits (5¼%) Reserves (5¾ months of imports) Debt (30% of GDP) Background: A Decade of Progress For LICs, better policies, global growth, and debt relief had resulted in:

  4. Food and Fuel crisis  LICs weakened going into Financial Crisis

  5. Food and Fuel crisis  LICs weakenedgoing into Financial Crisis (cont’d) In September, 33 LICs were identified as vulnerable (with reserves falling below 3 months in 2008)

  6. Global growth to 3% Oil price to $68 Nonfuel commodity prices Food prices Recovery begins late 2009 Fall 2008: Severe Financial Crisis October 2008 WEO scenario for 2009….

  7. Immediate contagion has been limited: few linkages illiquid markets capital controls Reduced inflows into domestic markets Uganda, South Africa Parent banks restricting financing, capital withdrawal Kyrgyz Republic Effects on LICs: Direct Financial Channels

  8. Effects on LICs: Direct Financial Channels (cont’d) • Hardened terms on foreign borrowing • New issues postponed by Kenya, Ghana • Reduced availability of trade credit • Adverse effects on confidence • Stock markets down: Kenya, Mauritius, Nigeria, South Africa • Exchange rate pressures depreciation against USD: Kenya, Mauritius, South Africa, Uganda, Zambia

  9. Spillovers from Global Recession Global growth  LIC growth : 1 % global growth  0.3 % to 0.5 % in SSA growth Trade Slowdown in advanced and middle-income countries, plus contraction of trade credit  lower export volumes for LICs Reduced export prices for oil and commodity exporters

  10. Spillovers from Global Recession Remittances Workers remittances have grown rapidly …. Especially important in some countries: more than 25% of GDP for Lesotho; 12% for Cape Verde

  11. Spillovers from Global Recession But at least no stagflation…

  12. Fund Advice: Global • Stabilize financial markets • Continue liquidity support • Further capital injections • Global fiscal stimulus: • On the order of 2% of world GDP (growth ↑ 2%) • Onus is on countries with space to expand without jeopardizing medium-term sustainability • Monetary easing • Avoid beggar-thy-neighbor policies (especially protectionism)

  13. Fund Advice: LICs • LICs should leave stimulus task to larger economies • Some may have scope for countercyclical policy, depending on: • debt situation • availability of financing • Continue strengthening social safety nets • Restore inflation control • Allow exchange rates to adjust

  14. The Need for Support • New financing needs will vary widely but could be large (fin crisis+food/fuel+MDGs) • Vital that delivery of assistance is accelerated to avoid forced procyclical measures in LICs • IMF support: PRGF (incl. augmentations) and the Modified Exogenous Shock Facility (ESF): • Rapid Access component • Higher access • Fewer requirements

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