The IMF has a new paper out summarizing the impact of the global crisis on 78 ‘low income countries’ (LICs) – the world’s poorest, many of them in Sub-Saharan Africa. Its findings include:
‘LICs are exposed to the current global downturn more than in previous episodes, as they are more integrated than before with the world economy through trade, FDI, and remittances. Exports now amount to more than a third of GDP in LICs (from just 10 percent in 1990); Foreign Direct Investment (FDI) is close to 5 percent of GDP, a roughly five-fold increase from 1990; and several LICs have gained access to financing on international markets.’ There’s a lovely throw-away line ‘The existence of capital controls in several countries and structural factors have helped to moderate both the direct and the indirect effects of the financial crisis’ which omits to mention the years of sustained opposition to capital controls by the IMF and others.
Even so, ‘current growth projections for 2009 have been revised down since the spring of 2008, from 6.4 percent to 4.3 percent, on average’. Serious (and likely to prove over-optimistic), but not yet a disaster on the scale of previous collapses.
This is partly because ‘LICs’ financial systems have so far not been strongly affected by the global crisis.’ Their banks have little, if any, exposure to the kinds of complex financial instruments that have wiped out banks in the North. ‘However, those LICs that had begun to access international financial markets have seen this access come virtually to an end. Foreign lenders may become more reluctant or unable to roll over debts as they fall due. Domestic banks may be hit by second-round effects’ in a kind of slow-motion credit crunch, as the economic downturn increases the number of borrowers unable to repay their loans.
‘Government revenues are expected to suffer as economic activity slows and commodity prices fall. At the same time, many countries will need to increase spending to protect the poor, and additional spending pressures may arise from currency depreciation and rising interest rates, which could raise debt service costs.’
‘26 countries (see map)appear particularly vulnerable to the unfolding crisis. These include countries heavily dependent on commodity exports, such as oil exporters, as well as fragile states with little room for maneuver. The full list is Albania; Angola; Armenia; Burundi; Central African Rep; Congo; Dem. Rep. of Côte d’Ivoire; Djibouti; Ghana; Haiti; Honduras; Kyrgyz Republic; Lao People’s Dem.Rep; Lesotho; Liberia; Mauritania; Moldova; Mongolia; Nigeria; Papua New Guinea; St. Lucia; St. Vincent & Grenadines; Sudan; Tajikistan; Vietnam; Zambia.’
‘Countries in initially strong budget positions may have some scope to increase spending to cushion the impact of the crisis. In many LICs, however, the ability to offset adverse shocks through spending hinges on higher donor support.’
‘Efforts to strengthen safety net programs to protect the poor will become more urgent. Transfer programs that effectively target the poorest often result in a larger stimulus to aggregate demand, given their higher propensity to consume. The capacity of many LICs to put in place new targeted programs will be limited in the near term. There may be scope, however, to scale up existing spending programs in targeted ways. For example, countries can implement public works programs and/or provide income supplements through existing programs. Additional resources can be channeled to targeted programs, such as targeted food distribution or school meal programs.’
The Fund also suggests that ‘countries with low tax-to-GDP ratios should try to mobilize additional domestic revenue’, either by raising more tax, or spending it more carefully.
But above all, they need more aid: ‘The additional financing needs of LICs resulting from the crisis could amount to about US$25 billion in 2009, and could rise much further.’
All this resonates strongly with what I saw in Zambia (one of the countries on the IMF’s list) a couple of weeks ago – I’m still writing up that report, but it should be finished by the end of the week. However, there are grounds for thinking the IMF is being far too cautious.
1. The Fund puts the total impact on LICs’ Balance of Payments at $165bn, but if the IMF is only calling for additional aid of $25bn, then LICs would be left to pick up the remaining $140bn, through spending cuts and running down reserves.
2. The Fund only advises a fiscal stimulus for the relatively few LICs with the scope to do so, but otherwise urges them to worry about price stability. That sounds excessive – inflation is on the way down everywhere and now is the time when poor countries should be spending to maintain growth and poverty reduction, not worrying about prices.
Instead, the Fund should be arguing even more strongly for a rapid increase in aid flows to LICs to make sure poor people do not bear the brunt of a crisis made in Washington and London. The World Bank has been far more aggressive in this regard (see here). And of course, money – especially if channelled via the Fund – must come without policy conditions spuriously designed to confront enternal shocks over which governments had no control or blame, which slow down the speed of disbursement, and with more fundamental reform of Fund and Bank governance and accountability than is currently being contemplated by the G20.