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The Impact of the Global Financial Crisis on Low-Income Countries: Preliminary Assessment

This preliminary assessment by the IMF evaluates the significant impact of the global financial crisis on Low-Income Countries (LICs), which were already struggling with high food and oil prices. The report discusses the vulnerabilities and transmission channels affecting LICs, highlights the urgent need for targeted global stimulus, and emphasizes the necessity to scale up aid. Key findings reveal that growth, inflation, and trade have been severely affected, and immediate financial challenges require focus on maintaining financial market stability and increasing support for social safety nets.

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The Impact of the Global Financial Crisis on Low-Income Countries: Preliminary Assessment

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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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