Implication of the financial crisis and food price risks on low-income countries

Speech by Hugh Bredenkamp

Deputy Director, Strategy Policy and Review Department, IMF

At the World Bank-Civil Society Roundtable on the Global Food and Financial Crises
September 10, 2009

Good morning ladies and gentlemen.

At the outset, I would like to thank the Bank for organizing this fifth roundtable with civil society, and for inviting the Fund to participate.

The topic is certainly timely and I am particularly looking forward to listening to the views and perspectives of civil society.

A. The Twin Crises

Low-Income Countries (LICs) have been hit hard by the twin crises.

The impact of the sharply higher food and fuel prices in 2007-08 on inflation, current account deficits and budgets was substantial.

The burden of higher food prices, in particular, fell most heavily on the poor and led to civil unrest in a number of countries.

The price surges were followed closely by a wave of shocks associated with the global financial crisis. Specifically, demand for LIC exports has been falling sharply; remittance flows have slowed and are expected to fall in most LICs in 2009; and FDI and other capital flows have declined.

We now expect economic growth in LICs to slow this year to only about half the pre-crisis rate.

• In Sub-Saharan Africa, per capita income could decline for the first time in a decade.
• Some of the progress developing countries were making in reducing poverty is now being rolled back.
• There are signs of global recovery taking hold, and we expect growth in LICs to pick up next year, but there are significant downside risks to the outlook.

B. The IMF’s Response

The extent of this “double blow” hitting LICs has been unprecedented, and calls for a commensurate response from the international community.

The IMF has moved quickly on several fronts to help LICs address the macroeconomic impact of the crises:

First, we have stepped up our financial assistance dramatically.

• We tripled our concessional support in 2008, and are on track to more than double it again, to around US$4 billion, in 2009 and 2010.
• This goes well beyond what the G20 leaders called on us to do last April.
• Since the fallout from the crisis could continue for some years to come, we are also doubling our medium-term concessional lending capacity, to provide up to US$17 billion through 2014.
• And, as part of the general SDR allocation, we provided LICs last month with more than US$18 billion in unconditional resources to bolster their foreign exchange reserves and ease financing constraints.

Second, we have made our financing more concessional. No interest at all will be charged on concessional lending through end-2011, and we will provide permanently higher concessionality thereafter.

Third, we have revamped our lending facilities. Increased Fund lending will be channeled through a new and more flexible set of instruments, better attuned to countries’ diverse needs, and with streamlined conditionality.

Finally, we have helped countries adapt their programs to create more policy space to address the crisis. This includes:

• Accommodating larger budget deficits, which in turn provide room to increase or preserve spending. About two-thirds of program countries have been able to increase government spending despite declining revenues.
• We have also actively encouraged countries to safeguard or expand social spending and include safety net measures in their programs, and almost all have done so.

All of this adds up to a response which is more aggressive and far-reaching than any I have seen in my 20+ year Fund career.

Countries’ efforts to mount countercyclical policies come at a price, however, and donor support has not kept pace with the rising financing needs.

Many countries have had to borrow domestically and draw down reserves, when what they need is more highly concessional donor support.

Unless donors scale up aid at least in line with Gleneagles commitments, we see a risk that countries will be forced either to cut spending, even while their economies are still in recession, or to take on unsustainable debts.

These are outcomes we have to avoid.

C. Food Price Risks

Looking beyond the present crisis, we can expect other challenges to emerge, one of which is a possible resurgence in food and other commodity prices:

• We forecast food prices to rise gradually as global demand recovers, but there are risks of sharper increases.
• Not enough has been done to correct the underlying structural causes of food price pressures, globally and in LICs.
• Concerted international efforts are needed to address these structural problems, including scaled-up investment in agriculture (as the G8 has promised) and a host of policy reforms covering trade, bio-fuels, and climate change.
• Finally, there is the ever-present danger of climatic shocks to food security, which can inflict a devastating human toll. The current drought in East Africa is a stark example.
• This is another area where an effective donor response is critical. So far, the Fund has extended financial support to Ethiopia and Kenya to help meet food import needs, and we stand ready to help other countries that could face similar problems.

Thank you very much.