The Implications of the Global Financial Crisis for Low-Income Countries

The global economy is in the midst of a deep downturn, affecting the real and financial
sectors, that is taking its toll both in advanced and in emerging and developing countries. All
major advanced economies are in recession, while activity in emerging and developing
economies is slowing abruptly.
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.
The crisis significantly impacts these countries through reduced demand for their exports.
Since many are commodity exporters, they will be hard hit by the sharp decline in demand
for commodities and in their prices. Many LICs are also hit by lower remittances and foreign
direct investment (FDI) while aid flows are under threat. Growth of remittances was flat in
the second half of 2008, and is expected to be negative in 2009. A sharp slowdown in FDI is
expected in about half of all LICs. Prospects for higher aid to offset these effects are
particularly uncertain, given budgetary pressures faced by many donor countries.
LICs’ financial systems have so far not been strongly affected by the global crisis. Their
banks have little, if any, exposure to complex financial instruments. 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 sovereign and
private debt falling due. Domestic banks may be hit by second-round effects, as the economic
downturn increases the number of borrowers unable to repay their loans.
The global financial crisis will worsen the budgetary position of many LIC governments.
Government revenues are expected to suffer as economic activity slows and commodity
prices fall. Potential declines in donor support and tighter financing conditions will likely
impose further pressures on LICs’ budgets. 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.
There is a risk that the impact on LICs could be more serious—26 countries 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. Baseline projections for 2009 foresee a total balance of payments shock of
US$165 billion. They also suggest that LICs may need at least US$25 billion to offset the
impact of the shock on their international reserves; given the heavy downside risks to the
forecast, the needs could be much larger—approaching US$140 billion in a “bad case”
Countries in initially strong budget positions may have some scope to accommodate the
cyclical fiscal deterioration and, in some cases, to increase spending to cushion the impact of
the crisis. These are countries without public debt sustainability and financing constraints
that have achieved macroeconomic stability. Commodity producers that built up financial
cushions during the boom may be able to maintain spending or adjust gradually.
In many LICs, however, the ability to offset adverse shocks through spending hinges on
higher donor support. With many countries facing binding fiscal constraints, and the outlook
for significantly increased bilateral aid flows unlikely, many countries will need to
rationalize spending and increase its efficiency to create fiscal space for protecting social and
MDG-related spending. Efforts will also be required to strengthen revenue mobilization.
Given the economic downturn, efforts to strengthen safety net programs to protect the poor
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.
Countries should focus on macroeconomic stability. In some countries with falling inflation
there may be scope for monetary easing; others, however, still experience continued or
renewed price pressures. Those with flexible exchange rates should allow them to move, so
that they function as shock absorbers. Fixed exchange rate regimes may come under
particular pressure owing to the adverse direct impact of the crisis. Steps are also needed to
prevent the global financial crisis from spreading to their domestic financial sectors.
The Fund is assisting members in their crisis planning and response efforts and will continue
to adapt its financial toolkit and policies to better serve its low-income members. The Fund
will provide financial support to LICs that responds to their economic circumstances, the
nature of the balance of payments problem, and their existing program relationship, if any,
with the Fund. LICs’ demand for Fund financing has already increased in 2008 and will
likely increase further, as will technical assistance needs.

Scritto da: International Monetary Fund