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


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


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 weakenedgoing into Financial Crisis (cont’d)

In September, 33 LICs were identified as vulnerable (with reserves falling below 3 months in 2008)


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….


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)

  • 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

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 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 Recession

But at least no stagflation…


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

  • 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

  • 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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