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Development Finance

Finance Canada

October 2009

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I. Impacts of the CrisisII. What has been done?III. Priorities going forward

Outline:

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Part I. Impacts of the Crisis

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1st Wave

Bank failures

2nd Wave

Credit crunch spreads

3rd Wave

Global economy

slows

While the crisis began in advanced economies, it has been transmitted to developing countries via 2nd and 3rd waves

US and other advanced economies

Middle Income Countries (MICs)

Low Income Countries (LICs)

Transmission of the Crisis

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Balance of Payments

Fiscal Balances

Debt Sustainability

Developing countries face the challenge of providing urgently-needed social protection and economic stimulus, at

the same time as dealing with problems with:

Challenges Facing Developing Countries

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Many countries having difficulty generating sufficient foreign currency from exports/borrowing to cover import demand

Balance of Payments Problems

Financial Inflows and Export Earnings, 2007-09 (current US$, Millions)

CountryTotal Inflows

2007Total Inflows

2008% Change

2007-08Predicted

Inflows 2009% Change

2007-09

Brazil 255,005 219,845 -14% 176,816 -31%

Russia 481,195 500,475 4% 338,667 -30%

India 247,932 222,825 -10% 175,344 -29%

China 1,372,763 1,446,750 5% 1,075,844 -22%

SSA 368,373 371,536 1% 319,077 -13%

Mali 2,776 2,782 0% 2,600 -6%

Nigeria 95,900 115,777 21% 71,133 -26%

Ghana 6,748 6,698 -1% 5,260 -22%

Uganda 4,650 4,601 -1% 4,228 -9%

South Africa 118,022 95,203 -19% 62,307 -47%

Jamaica 5,466 5,282 -3% 4,468 -18%

Malaysia 193,857 199,362 3% 161,791 -17%

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Balance of Payments Problems

Quite a number of LICs deemed highly vulnerable to BoP shocks by IMF

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It has been estimated that LICs would need $25B - $138B in BoP financing this year

Early estimates suggested at least 38 LICs would suffer BoP shocks in 2009, totaling $165B. This will lead 35 LICs to draw down $131B of reserves

A financing gap of $25B would remain – equivalent to 80% of annual aid flows to LICs; this financing gap could climb to $138B in a worst-case scenario

Balance of Payments Problems

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US$ billion

Note: Includes 59 countries with financing gap; Source: World Bank (2009a)

External

financing needs

Financing

gap

These financing gaps are expected to remain large through the medium-term

Balance of Payments Problems

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Weaker revenues are also expected to lead fiscal deficits to widen sharply in some countries

Constraining governments’ ability to: Maintain critical expenditures on health, education, infrastructure

Increase spending on social protection and economic stimulus

Deteriorating Fiscal Balances

IMF: WEO 2009, p. 30

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Deteriorating Fiscal Balances

Deterioration in developing country fiscal balances, 2009

-6

-5

-4

-3

-2

-1

0

Middle East & North Africa

South Asia Latin America & Caribbean

East Asia & Pacific

Sub-Saharan

Africa

Europe & Central Asia

Percent of GDP

Source: World Bank

Fiscal positions will weaken on average by more than 2% of GDP

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Increased risk of debt distress jeopardizes recent gains from debt relief

Progress in reducing debt indicators to sustainable levels undermined as exports and government revenues fall, and debt service increases.

Debt indicators may deteriorate even further as governments implement fiscal stimulus packages.

An increasing number of countries in high risk of debt distress.

Risk of Debt Problems

IDA-only Countries current level of debt distress

HIPCs

Note: IDA graph reflects only countries with available DSAs.

Source: World Bank PREM.

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Critical issue is how long the crisis will last

A short crisis will have a small effect on debt sustainability as debt indicators are forward looking over a long period of time (20 years).

A protracted crisis will have a lasting effect on debt sustainability.

Risk of Debt Problems

Source: World Bank PREM.

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OECD

The WB, the IMF, the UN and the OECD have warned …

“The world faces a new hunger crisis as the global economic crisis has reduced the ability of the poor to feed themselves.”

UN, April 16, 2009

“Up to 1 billion people are at risk of undernourishment.”

UN FAO, March 27, 2009

World Bank

IMF UnitedNations

“Of a development emergency this year.”World Bank and IMF, April 24, 2009

Impact on the poor

“The global economic crisis has heightened the risk that tensions could explode in Africa”

OECD and AfDF Report, May 11, 2009

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This risks becoming a severe humanitarian crisis

Significant decline in purchasing power as poor households are hit by:

Employment Income from Lower Commodity Prices Government Services Availability of micro-credit Remittances

Impact on the poor

Coping Mechanisms

Seek new or additional

work

Draw down savings

Seek credit

Sell productive

assets

Cut critical expenditures(food,health,

education)

And risks of a downward spiral as poor households are pushed to more extreme coping mechanisms

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Increase in number of poor (millions)

Source: World Bank

Poverty impact is large and rising, with 89 million more people potentially falling into extreme poverty

Impact on the poor

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Although food prices have come down from last year’s peak levels, the food crisis continues to threaten

The economic crisis is pushing down household incomes

The international downward food price trend has not fully translated into lower food prices in many poor countries

Little margin of safety as many poor families were already spending ~50-70% of household income on basic food items

2008 2009

Food Costs

Income

Impact on the poor

Finance Canada, April 2009

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However, some food prices have remained high or risen

Impact on the poor

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The hoped-for decoupling of advanced and developing countries through the crisis did not come to pass

The crisis has been transmitted through a number of different channels, with mounting evidence of significant impacts

Private Capital Flow reversal will pull $190B out of developing countries

Gov’t Borrowing Issuance of new debt difficult for many since September

FDI Drop of 20% for LICs this year

Exports Unprecedented contraction

Commodity Prices Drop of 38% in non-energy prices in 2008 with prices staying low

Trade Finance Market gap of $100 - $300B

Currency Weakened against USD and heightened volatility

Remittances Drop of $18B for LICs this year

Summary of Impact

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Could become a humanitarian crisis as household incomes fall and government resources are stretched to capacity

At the same time that developing country governments face the challenge of providing urgently-needed social protection and economic stimulus, they are dealing with macro problems related to

Balance of Payments Fiscal Balances Debt Sustainability

The crisis-related financing needs, estimated to be $270 - $700B, far outweigh the available financing from the IFIs and donors

Summary of Impact

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Part II. What has been done?

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The IFIs have been on the front-line in responding to the crisis, mobilizing additional resources and new tools

IFI Responses

• IMF: $500B for NAB and $250B SDR allocation Capacity for LIC lending more than doubled to $8B for 2009-10 New and improved Poverty Reduction & Growth Trust (with

Exogenous Shocks Facility) New Flexible Credit Line ($80B committed so far)

• World Bank: IBRD lending to more than triple to $100B over three years IDA hit record level of $14B in 2009 IBRD and IFC general capital increase discussions underway Various new specialized crisis facilities for trade finance, food crisis

response, infrastructure financing, etc.

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G20 committed to support IFIs with appropriate financing… and Canada has played a leadership role with $22B so far

New Canadian support for IFIs this year:

IMF resources: US$10B

Unique Canadian temporary callable capital initiative:

Doubling for IADB (US$4B)

Tripling for AfDB (US$2.5B) (with more from S. Korea)

AsDB capital increase: US$5.3B

IFC trade finance initiative: US$200M

$600m over 2 years for food security/agriculture

On-going debt relief actions

G20 and Canadian Support

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Part III. Priorities Going Forward

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Pace of recovery is uncertain and risk of second dip in global growth

Will need to get timing right on fiscal stimulus and exit strategies

As recovery takes hold, need to make sure we don’t lose the political momentum for action, especially to help with on-going needs in developing countries

On-going questions about appropriate resources at the IFIs Including recognition that new resources have been mainly for MICs, with support for LICs slower to materialize

Challenges Ahead

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Things to do:

Capital increases at IBRD, IFC, IaDB, AfDB, EBRD and CDB

Replenishments at IDA and ADF

Resources for IMF’s LIC lending

Global Fund, climate investment funds (Copenhagen outcome)

Food security and Agriculture

Debt sustainability, especially MICs

Priorities To Work On