The IMF released a new paper summarizing the effects of the global economic crisis on the world's 78 low income countries - many of them in sub-Saharan Africa. Among its key findings:
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” scenario.[...] 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.
[HT: Duncan Green]