The Impact of Global Financial Crisis on LICs:
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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

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


Overview

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


Background a decade of progress

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:


Food and fuel crisis lics weakened going into financial crisis

Food and Fuel crisis  LICs weakened going into Financial Crisis


Food and fuel crisis lics weakened going into financial crisis cont d

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)


Fall 2008 severe financial crisis

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….


Effects on lics direct financial channels

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


Effects on lics direct financial channels cont d

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


Spillovers from global recession

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


Spillovers from global recession1

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


Spillovers from global recession2

Spillovers from Global Recession

But at least no stagflation…


Fund advice global

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)


Fund advice lics

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


The need for support

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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