Development Finance
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Transcript of Development Finance
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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