European Commission Response to the Financial Crisis
in Developing Countries
EuropeAid
Liam O’Sullivan
Macroeconomic Support Unit
Europe Aid
8 July2009
1
Commission Response to the Crisis
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• The Commission Communication (8 April), Supporting Developing
Countries in Coping with the Crisis, proposed a set of measures to
cushion the human impact of the crisis and to boost economic growth
in developing countries.
• These measures include
o honouring aid commitments and leveraging new resources;
o improving aid effectiveness;
o sustaining economic activity and employment
Vulnerability
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o
Some countries appear to be better prepared and more robust to
the current crisis, partly due to improved macroeconomic
policies over recent years, including developing sufficient fiscal
space to allow them to mount their own counter cyclical
response.
o
On the other hand, some are considerably more vulnerable to
external shocks, partly because of their high exposure to the
crisis which is linked to their limited room for manoeuvre to
tackle it.
Commission Response
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• To respond to the crisis, the European Commission objective is to
provide targeted, timely, and coordinated counter cyclical support to
the countries most at risk.
• Process aims at better assessing the negative impacts of the crisis on
developing countries and identifying the most vulnerable.
• In order to have a comprehensive and multidimensional
understanding of the needs of our partner countries, the analysis is
based upon and regularly updated drawing on new information as it
becomes available, particularly from the BWI, regional development
banks and from our Delegations on the ground
Supporting counter-cyclical action
– Vulnerability FLEX
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• To respond to the immediate effects of the crisis in developing
countries, the need is to, as the short term response, provide aid
more quickly and focus aid on priority sectors
• Priority spending includes salaries, key investment projects, public
works programmes, safety nets…
• A key mechanism in delivering this response will be the
establishment of a 500 million Euro "Vulnerability FLEX" instrument
to help address the immediate consequences of the crisis in Africa,
the Caribbean and the Pacific.
• Aid is additional and will be provided in the form of 100% grants
Timely
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• On the basis of economic, social and political vulnerability criteria
met by partner countries this instrument will mobilise much needed
short term support during the period 2009 and 2010, thus responding
when the need is greatest.
• The "Vulnerability FLEX" is designed to provide help in the short
run to those hardest hit by the crisis. We know many of the resources
agreed upon by the G-20 will take some time to be mobilised.
Targeted
• It will thus target those countries were Commission support enjoys
the greatest impact and leverage, in other words where a timely
Commission financial response can close a country's fiscal gap.
• Given the significant number of highly vulnerable ACP countries
clear focus is required on those most in need and on those who can
provide assurance of quick and effective use of the support.
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Coordinated and Counter Cyclical
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• To ensure the greatest impact and leverage the Commission is
working closely with the IMF, the World Bank and increasingly the
regional development banks seek to ensure our grants complement
the concessional loan support planned by these Institutions.
• The Vulnerability Flex will thus seek to maintain, to the extent
possible, the pre-crisis level of pro poor public expenditures and
investment. It will do so where the absence of effective action is likely
to undermine macroeconomic, social and political stability in partner
countries
VFLEX Criteria
o
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Macroeconomic vulnerability to the crisis as measured by the
following variables for fiscal years 2009 and 2010 (as forecasted
by the IMF):
• year-on-year deterioration of government revenue, by at
least 1 percentage point of GDP (the pre-crisis fiscal year as
base year); or
• deterioration of foreign reserves to less than two months of
imports as a result of the financial crisis; or
• deterioration of the fiscal deficit, excluding grants, by at
least 2 percentage points of GDP year-on-year (the precrisis fiscal year as base year), while maintaining public
priority expenditures and particularly in the social sectors,
at the level prior to the crisis
VFLEX Criteria
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Residual fiscal financing gaps in 2009 and 2010 not covered by
ongoing or pledged commitments of the donor community or
foreign and domestic borrowing. Where fiscal financing gaps
have been closed by reducing planned priority expenditures,
notably in the social sectors, financing under the Vulnerability
FLEX may compensate for this reduction
o
Critical impact of the short term support provided through the
Vulnerability FLEX, in order to close or reduce by at least 50%
the residual financing gap
Fragile States
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• For ACP countries in situation of fragility, meaning those countries
for which the application of crisis, emergency and post-emergency
procedures has already been decided, or may be decided in the
future, the Commission may consider adjusting the thresholds.
• In addition, ACP countries have to demonstrate sufficient absorptive
capacity
VFLEX Delivery
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Vulnerability FLEX will be delivered using:
(a)
Budget support or
(b)
Alternative aid modalities (already existing projects,
programmes or trust funds) in those ACP countries demonstrating a
commitment to a stability-oriented macro-economic policy
framework, where the VFLEX eligibility criteria are met.
Budget Support
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• Budget support should be the preferred financial
response modality under the Vulnerability FLEX.
• Eligibility for budget support is based on three eligibility
criteria
o a stability-oriented macroeconomic policy framework
o credible and relevant progress in public financial
management reform and
o a well-defined, poverty focused national or sectoral
development strategy.
Timetable
• Member States Committee for approval in principle (July 9)
• Member States Committee for approval of country allocations
package (end-September)
• Financing Decision (October)
• Disbursements 2009 (November/December)
• Preparation of 2010 Package (January-March 2010)
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