1. The Impact of the Global Financial Crisis on Low-Income Countries Dominique Desruelle International Monetary Fund United Nations Economic and Social Council March 9, 2009

2. Key messages The third wave of the global crisis is hitting low-income countries (LICs) 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 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 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 The donor community must act to provide scope for countercyclical policies

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

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

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

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

7. Main transmission channels: Trade, remittances, fdi

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

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

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

11. 22 countries face acute financing needs

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

13. The IMF is responding to its members’ needs Financial assistance to LICs increased substantially in 2008 Financial assistance to LICs increased substantially in 2008 New or scaled-up loan agreements with several LICs are expected to be in place soon 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) 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) 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 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 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 The donor community must act to provide scope for countercyclical policies

15. Thank you