IMF's Response To Needs Of Low-Income Countries — In A Time Of Global Crisis

As the global financial crisis has swept from developed to developing countries, the hard-won economic gains of many low-income countries over the past decade have been threatened.

Many countries have been hit hard despite strong fundamentals and an aggressive policy response to dampen the impact. In response, the International Monetary Fund (IMF) has undertaken unprecedented reforms aimed at supporting those countries.

The reforms culminated in July with the announcement of billions of dollars of new resources to assist low-income countries; interest rate relief on all concessional IMF loans through 2011; permanently more affordable terms on IMF financing thereafter; and new lending instruments designed to better meet the diverse needs of low-income countries.

This was not a crisis of low-income countries’ making. Indeed, many African countries were doing the right things prior to the downturn by strengthening fiscal positions, reducing debt burdens, and building comfortable cushions of foreign exchange reserves.

Then they were hit by a “double blow”. First, the food and fuel price shocks in 2007/2008, then the global recession.

With economic activity retreating everywhere, the demand for exports from developing countries has dropped rapidly, commodity prices have fallen sharply, and foreign direct investment (FDI) and remittance flows have declined.

We expect growth in Africa to pick up next year. A global recovery in 2010 and the legacy of good economic policies and an aggressive response in many countries to address the global slowdown, provides some hope that Africa can recover quickly.

But this is by no means assured; the poorer countries may feel the after-effects for years to come. Therefore, extraordinary measures are required.

In March 2009, the President of Tanzania, Mr Jakaya Kikwete, and IMF Managing Director, Mr Dominique Strauss-Kahn, convened a conference in Dar-es-Salaam, Tanzania, to reinforce the partnership of the IMF and Africa.

The IMF committed itself at the meeting to increase its support for Africa with more financing, greater flexibility, enhanced policy dialogue, and a further strengthening of Africa’s voice in the fund.

Since then the IMF has moved quickly to provide more tools to help its low-income members to overcome the impact of the crisis, and particularly to help ensure that the poorest do not bear the burden of economic adjustment.

The measures taken include:
• Significantly increasing financial assistance to low-income countries, including resources obtained from IMF gold sales. This should double the fund’s concessional lending capacity to around US$17 billion through 2014.

This scaling up is already evident. In the first eight months of 2009, the IMF committed new concessional lending of about US$3 billion to countries in Sub-Saharan Africa compared with US$1.2 billion for all of 2008.

• And, lending in 2009 and 2010 alone is expected to reach up to US$8 billion, four times the historical level and exceeding the Group of 20’s (G-20) call for additional lending of US$6 billion over the next two to three years.

• The distribution of about US$250 billion of Special Drawing Rights (SDRs) to all member countries according to their quotas in the IMF, of which over US$10 billion have gone to sub-Saharan Africa, bolstering foreign exchange reserves and alleviating financing constraints.

• The creation of a new architecture for our concessional financing facilities. The new instruments will be more flexible and tailored to the increasing diversity of low-income countries.

The Extended Credit Facility provides flexible medium-term support; the Standby Credit Facility addresses short-term and precautionary needs; and the Rapid Credit Facility offers emergency support with limited conditionality.

• Additionally, the doubling of access to financing under the new facilities will help to meet the needs of countries that have been hardest hit by the crisis.

• Finally, low-income countries will receive relief on all interest payments due to the IMF through end-2011 on all concessional lending instruments.

Future Fund financial support will include permanently higher concessionality, with a mechanism for limiting fluctuations in concessional interest rates as global interest rates change.

For many countries, increased IMF financial assistance has helped to make it possible to maintain or even increase spending during the downturn.

This, in turn, has created room for higher levels of pro-poor spending. We have also streamlined the conditions attached to IMF loans, to focus on core objectives.

And, have recently adopted a more flexible approach to setting debt limits in Fund-supported programmes to better reflect the considerable diversity among low income countries.

Africa has been the central focus of the IMF’s scaled-up financial assistance to low-income countries. For example, Ghana secured a new arrangement under the Poverty Reduction and Growth Facility (PRGF) in July for an amount equivalent to SDR387.45 million (about US$602.6 million) in support of its economic adjustment programme to re-establish macroeconomic stability.

In the wake of higher import prices and plummeting copper exports, Zambia’s arrangement under the PRGF was augmented, enabling it to protect priority social spending while safeguarding macroeconomic stability.

Kenya, Mozambique and Tanzania accessed the Exogenous Shocks Facility, providing them with a valuable foreign exchange cushion in support of their fiscal stimulus programmes.

Despite our best efforts, the IMF alone cannot meet the needs of low-income countries. It is essential that the advanced economies follow through on their aid commitments — including the 2005 G-7 promise at Gleneagles to increase aid to Africa by US$50 billion by 2010.

Donors must act now so that this scaled-up assistance is reflected in their 2010 aid budgets. Share Your Thoughts on this article Name Email Location Comments Graphic Ghana may edit your comments and not all comments will be published