IMF warns crisis has shifted to poor countries

The International Monetary Fund on Tuesday warned that the global financial crisis had shifted to the world’s poorest nations and 22 countries may need as much as $25 billion in additional funding in 2009 to cope with the downturn.
The IMF said, based on its projections, the 22 countries could need up to $140 billion if global conditions were to deteriorate sharply.
“I foresee mounting problems for developing countries,” IMF Managing Director Dominique Strauss-Kahn said, calling it the “third wave” of the crisis, which has spread from financial and credit markets into the consumer economy.

He said he expected more countries to turn to the fund for financing and those with IMF aid packages to increase their borrowing, Reuters reports. 

“I’m expecting a number of new or scaled-up loan agreements will appear very soon,” Strauss-Kahn told the Brookings Institution, a Washington-based think tank. He made the comment during a discussion of the launch of a new IMF report, which looks at the impact of the crisis on low-income countries.

Under current IMF projections, a total balance-of-payments shock in 38 developing countries could amount to around $165 billion, and increase to as much as $216 billion under a worst case scenario.

The IMF said reserves in the 22 countries are expected to fall below three months of imports with losses amounting to $25 billion — equivalent to about 80 percent of annual aid to poor countries over the past five years.

Developing countries have been affected by falling demand for exports and a dramatic slowing in remittances from overseas workers as the economies of the United States and Europe have contracted. A sharp drop in foreign direct investment is expected in about half of all low-income countries.

Strauss-Kahn said the decline in food and fuel prices should provide some relief to countries as inflation declines.

‘Vulnerable’ commodity exporters

In addition, the IMF has identified 26 countries that are “highly vulnerable” to the crisis but may not immediately need additional financing.

Among the 26 countries are: Zambia; Vietnam; Angola; Ghana; Burundi; Ivory Coast; Haiti; Honduras; Liberia; Nigeria; Mongolia; Moldova; Papua New Guinea; Sudan; Albania and Kyrgyzstan.

The overall fiscal balance of developing countries is likely to deteriorate on average by 2.5 percentage points of GDP in 2009, the IMF said. Commodity exporters will be hardest hit, with a decline in fiscal positions of about 5 percentage points of GDP on average.

The Fund said it did not expect commodity prices to recover while global activity is still slowing, adding that production cuts in the Organization of the Petroleum Exporting Countries, or OPEC, members could eventually help support oil prices “if implemented close to target.”

Strauss-Kahn called on donor countries to step up their assistance to poor countries and to adhere to their 2005 commitments to double aid to Africa by 2010.

However, the IMF is concerned that aid could shrink by as much as 30 percent this year relative to their 2008 value, amid increased budgetary strains in advanced economies.

Strauss-Kahn said he was worried about the possibility of a humanitarian crisis if social programs are affected by budget constraints.

World Bank research has shown that weaker growth will push an estimated 46 million more people in developing countries below the poverty line, more than was expected before the crisis emerged in 2007.

The Fund said while the banking systems in developing countries had little exposure to problematic financial instruments, the performance of banks could be affected by an increase in the number of borrowers unable to repay their loans.

It said many developing countries have little room for counter-cyclical policies to address the crisis. The Fund said domestic policy responses should include spending on social programs to protect the poor, exchange-rate flexibility to facilitate the adjustment and vigilant financial supervision.