The Impact of Global Financial Crisis on LICs: Preliminary Assessment Hugh Bredenkamp Strategy, Policy, and Review Department International Monetary Fund December 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

Background: A Decade of Progress Growth (8½%, on avg., in ’07) Growth (8½%, on avg., in ’07) Inflation (6½%) Inflation (6½%) Fiscal deficits (5¼%) Fiscal deficits (5¼%) Reserves Reserves (5¾ months of imports) (5¾ months of imports) Debt (30% of GDP) Debt (30% of GDP) 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 weakened going into Financial Crisis (cont’d) In September, 33 LICs were identified as vulnerable (with reserves falling below 3 months in 2008)

Fall 2008: Severe Financial Crisis Global growth to 3% Oil price to $68 Nonfuel commodity prices Food prices Recovery begins late 2009 October 2008 WEO scenario for 2009….

Effects on LICs: Direct Financial Channels 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

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 Effects on LICs: Direct Financial Channels (cont’d)

Global growth  LIC growth : 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 –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