Impact of Crises on the Vulnerable

1. Impact of Crises on the Vulnerable Sanjeev Gupta Deputy Director Fiscal Affairs Department International Monetary Fund ODI/UNICEF Conference on “The Global Economic Crisis” London, November 9-10, 2009

2. Channels through which vulnerable are affected • Contraction in output, resulting in job losses (e.g., due to fall in demand for exports and tourism, lower remittances) • Increases in inflation (e.g., due to external factors, weather or exchange rate depreciation) • A cut in public spending on critical programs due to increased fiscal pressures (e.g., arising from falling revenue receipts, lower aid flows) • All these factors cut into real household incomes

3. What was the impact of recent crises? A. Food and fuel crisis, 2007-08 • Increased inflation, especially in emerging market and low-income countries because the share of food and fuel is relatively large in the household basket • Despite fiscal pressures, fiscal policy was accommodative--the median increase in fiscal deficit for 92 non OECD countries was 0.7 percent of GDP in 2008. Public spending increased because of higher fuel subsidies, expansion in transfer programs (e.g., conditional cash transfers, school feeding programs), and higher public sector wages. Revenues fell with lowering of fuel and import taxes

4. What was the impact of recent crises? (cont..) B. Global Financial Crisis, 2008 • World economic activity is projected to fall by 1 percent in 2009—the first such decline since WW II • All countries are affected, although the magnitude of the impact is different across regions. Growth in emerging and developing countries is projected to drop to 1.7 percent in 2009 from 6 percent in 2008

5. What was the impact of recent crises? (cont..) • Inflationary pressures will remain subdued as food and fuel prices have receded from their peaks and large output gaps persists • Once again, budget deficits are projected to increase in 2009 • For LICs and emerging market countries, the increase would range between 3 and 4 percentage points of GDP, respectively • Many countries have implemented fiscal stimulus. Spending (both current and capital) in LICs is projected to increase by about 2 percent of GDP. Revenues are projected to decline by 1 percent of GDP • Most countries have sought to increase or at least preserve social spending (more later)

6. Impact on poverty • The two crises have led to higher poverty: • According to the World Bank • As a result of the food and fuel crisis, an additional 80-100 million people will be trapped in extreme poverty in 2009 • The financial crisis may add another 89 million people to extreme poverty by 2010 • Data on actual spending on social sectors during these crises are not yet available. However, this spending increased in relation to GDP during 2000-2006 • For LICs for which consistent data are available since 2006, 29 countries are budgeting to either protect or increase social spending during the current crisis, including 19 that have Fund-supported programs in 2008-09

7. What is different in these crises • Fiscal policy has been more accommodative • Made possible by fiscal space created by debt relief and adoption of sound policies prior to the crisis. Reflected in falling average debt-to-GDP in LICs prior to the crisis

8. Issues for discussion • Was the policy response appropriate during the last two crises? • Are there any programs that should be strengthened and be part of a counter-cyclical policy response during future crisis? • Are different programs (i.e., cash transfers, generalized subsidies, public works, etc.) equally effective in providing safety net to the poor in different crises?

9. Papers for this session • Three papers: • Two papers analyze the impact of crises on child health, using cross-country data and case studies of five countries in Latin America and the Caribbean • The third paper studies Ghana’s experience in dealing with crisis and adequacy of its social safety nets