Impact of Global Financial Crisis on Low-Income Countries

1. The Impact of the Global Financial Crisis on Low-Income Countries Dominique DesruelleInternational Monetary FundUnited Nations Economic and Social CouncilMarch 9, 2009

2. Key messages • The third wave of the global crisis is hitting low-income countries (LICs) • LICs are more integrated than before: trade, foreign direct investment, and remittances • 22 LICs face acute financial constraints in 2009: additional financing needs of at least US$25 billion • The donor community must act to provide scope for countercyclical policies

3. Higher growth Higher reserves Lower debt More exports More foreign direct investment More remittances Background: A decade of progress in LICs Better policies, global growth, and debt relief resulted in:

4. The global environment is drastically worsening • Net food and fuel importers were weakened by the 2007-08 price shock • Commodities exporters now face increased pressure on external accounts • Abrupt slowdown in advanced and emerging partner countries

5. 2009 global outlook • Lower GDP growth • Higher current account deficits

6. Reduced inflows into domestic markets Hardened terms on foreign borrowing Reduced availability of trade credit Rollover risk (sovereign and private debt) Banking system Parent banks restricting financing Second-round effects: Impact of lower growth on the quality of banks’ credit portfolio Immediate contagion from direct financial channels limited so far, but risks exist…

7. Main transmission channels: Trade, remittances, fdi

8. External crisis is rapidly spilling over into a budgetary crisis… • Drop in revenues—esp. for commodity exporters • Increased spending pressures, including to protect the poor • Tighter financing conditions (domestic, external)

9. …Affecting debt sustainability • Debt indicators are projected to continue improving but less than before • Moreover, new risks have emerged • Exchange rate depreciation • Support to banking sector • Higher borrowing to offset the impact of the crisis could pose serious risks

10. IMF Policy Recommendations • Fiscal stimulus: • Some LICs with strong fiscal positions have space to expand • Most LICs face binding financing constraints: need higher aid to help avoid procyclical policies • Monetary and exchange rate policies: • LICs with falling inflation may have room for monetary easing • Allow exchange rate to absorb shocks • Closely monitor financial sector risks

11. 22 countries face acute financing needs

12. And financing needs could rise well above $25 billion if downsize risks materialize… Billions of U.S. dollars Number of Countries Sources: WEO database, and Fund staff calculations

13. The IMF is responding to its members’ needs • Financial assistance to LICs increased substantially in 2008 • New or scaled-up loan agreements with several LICs are expected to be in place soon • We are stepping up provision of non-financial support (policy advice, technical assistance)

14. Key messages • The third wave of the global crisis is hitting low-income countries (LICs) • LICs are more integrated than before: trade, foreign direct investment, and remittances • 22 LICs face acute financial constraints in 2009: additional financing needs of at least US$25 billion • The donor community must act to provide scope for countercyclical policies

15. Thank you