The Impact of Global Financial
Crisis on LICs:
Preliminary Assessment
Hugh Bredenkamp
Strategy, Policy, and Review Department
International Monetary Fund
December 2008
Overview
LICs are facing a “double blow”: already weakened
from the past year’s high food and oil prices, they may
be hit hard by the financial crisis and global slowdown
Transmission channels and vulnerabilities will vary
across countries
Need for global stimulus, applied selectively
Case for scaling up aid even stronger than before
Background: A Decade of Progress
For LICs, better policies, global growth, and debt relief
had resulted in:
Growth (8½%, on avg., in ’07)
Inflation (6½%)
Fiscal deficits (5¼%)
10.0
Reserves
(5¾ months of imports)
Debt (30% of GDP)
60
Debt-to-GDP (in percent, right axis)
9.0
Real GDP growth
(in percent, left axis)
50
8.0
International reserves
in months of imports
(left axis)
7.0
6.0
40
5.0
30
4.0
3.0
20
1997
2002
2007
Food and Fuel crisis  LICs weakened
going into Financial Crisis
400
350
Despite the recent ease, fuel prices remain historically high...
Energy (deflated by world CPI)
Food (deflated by world CPI)
Series5
Series2
October
2008 WEO
September
2008 WEO
300
250
200
150
100
September
2008 WEO
50
October
2008 WEO
0
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Sep-08
Food and Fuel crisis  LICs weakened
going into Financial Crisis (cont’d)
The impact of prices on the BOP of net food- and fuel-importing
LICs has continued to mount, though only marginally recently...
4.0
3.5
Jan 07-Apr 08
BoP Shock
Jan 07-Jul 08
3.4
(In percent of GDP)
3.0
3.5
Jan 07-Sept 08
2.5
2.2
2.0
1.5
1.1
1.0
0.9
0.5
0.5
0.0
Food
Fuel
In September, 33 LICs were identified as vulnerable
(with reserves falling below 3 months in 2008)
Fall 2008: Severe Financial Crisis
October 2008 WEO scenario for 2009….
Global growth to 3%
Oil price to $68
Nonfuel commodity
prices
6.0
5.0
Food prices
Recovery begins late
2009
World Real GDP Growth 1980-2009
5.0
(In percent)
4.5
4.0
Quarterly World Real GDP Growth
(In percent)
4.0
3.5
3.0
3.0
2.0
2.5
2.0
1.5
1.0
0.0
0.5
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
1.0
0.0
2008Q1 2008Q2
2008Q3
2008Q4 2009Q1
2009Q2
2009Q3 2009Q4
Effects on LICs: Direct Financial Channels
Immediate contagion has been limited:
– few linkages
– illiquid markets
– capital controls
Reduced inflows into domestic markets
– Uganda, South Africa
Parent banks restricting financing, capital withdrawal
– Kyrgyz Republic
Effects on LICs: Direct Financial Channels
(cont’d)
Hardened terms on foreign borrowing
– New issues postponed by Kenya, Ghana
Reduced availability of trade credit
Adverse effects on confidence
– Stock markets down: Kenya, Mauritius, Nigeria,
South Africa
– Exchange rate pressures depreciation against
USD: Kenya, Mauritius, South Africa, Uganda,
Zambia
Spillovers from Global Recession
Global growth 
LIC growth :
1 % global growth  0.3 % to 0.5 % in SSA growth
Trade
Slowdown in advanced and middle-income countries,
plus contraction of trade credit
 lower export volumes for LICs
Reduced export prices for oil and commodity
exporters
Spillovers from Global Recession
Remittances
Workers remittances have grown rapidly ….
120
Remittance Flows to Developing Countries
(in billions of USD)
100
80
60
Latin
America
South and
East Asia
Sub-Saharan
Africa
Europe and
Central Asia
40
20
0
2000
2007
Especially important in some countries: more than 25%
of GDP for Lesotho; 12% for Cape Verde
Spillovers from Global Recession
But at least no stagflation…
Inflation is expected to recede….
Low-Income Countries
13
11
13
September
2008 WEO
9
Middle-Income
Countries
Advanced Countries
13
11
11
9
9
September
2008 WEO
October
2008 WEO
7
7
5
5
3
3
7
October
2008 WEO
5
September
2008 WEO
3
October
2008 WEO
1
1
2006
2007
2008
2009
1
2006
2007
2008
2009
2006
2007
2008
2009
Fund Advice: Global
Stabilize financial markets
– Continue liquidity support
– Further capital injections
Global fiscal stimulus:
– On the order of 2% of world GDP (growth ↑ 2%)
– Onus is on countries with space to expand without
jeopardizing medium-term sustainability
Monetary easing
Avoid beggar-thy-neighbor policies (especially
protectionism)
Fund Advice: LICs
LICs should leave stimulus task to larger economies
Some may have scope for countercyclical policy,
depending on:
– debt situation
– availability of financing
Continue strengthening social safety nets
Restore inflation control
Allow exchange rates to adjust
The Need for Support
New financing needs will vary widely but could
be large (fin crisis+food/fuel+MDGs)
Vital that delivery of assistance is accelerated to
avoid forced procyclical measures in LICs
IMF support: PRGF (incl. augmentations) and
the Modified Exogenous Shock Facility (ESF):
– Rapid Access component
– Higher access
– Fewer requirements