Economic crisis to hit poorest countries

After first striking the advanced economies and then emerging markets, a third wave of the global financial crisis has begun to hit the world’s poorest and most vulnerable countries, threatening to undermine recent economic gains and to create a humanitarian crisis, IMF Managing Director Dominique Strauss-Kahn said in Washington.

Speaking at a Brookings Institution seminar on the impact of the global crisis on low-income countries, Strauss-Kahn said that global economic conditions are worsening and that the IMF’s already gloomy January forecast that world growth would grind to a virtual halt this year might have been too optimistic. He said a global recovery will be “delayed into 2010,” even if countries adopt the right policies to fight recession. Although countries are by and large getting fiscal stimulus right, there has been less progress on financial restructuring, he said.

Strauss-Kahn’s address focused on key messages from an IMF study released March 3, The Implications of the Global Financial Crisis for Low-Income Countries.

Per capita incomes

Most low-income countries escaped the early phases of the global crisis, which began in the financial sectors of advanced economies. But it is now starting to hit them hard, mainly through trade, as financial problems in advanced countries trigger recessions that dampen demand for imports from low-income countries. Of 71 countries classified as eligible for concessional IMF lending, many will at best see per capita incomes stagnate this year. And in some cases, per capita incomes could shrink. Commodity exporters will be hit hard, facing both lower export volumes and lower prices, Strauss-Kahn said.

Financing concerns

But financing problems are also beginning to affect developing countries, Strauss-Kahn said. Foreign direct investment is expected to fall by 20 perm cent this year. The cost of borrowing has risen significantly, and in some cases may be unavailable. Remittances from citizens working abroad are likely to fall. And aid flows are potentially threatened by budget pressures in donor countries. These two shocks, trade and finance, will hurt the external finances of the world’s poorest countries, Strauss-Kahn said. Although the decline in food and fuel prices will help some, others will see their balance of payments decline. Moreover, he said, those external shocks are creating domestic budgetary crises, which have the potential to force poor countries to reduce social spending.

Humanitarian costs

Strauss-Kahn told the Brookings panel that he was deeply worried about the humanitarian costs of the crisis, especially its impact on children. He cited World Bank estimates that an additional 1.4-2.8 million children would die between now and 2015 if the crisis continues.

He said the potentially high social costs could trigger political unrest and even conflicts. Social safety nets Strauss-Kahn stressed that low-income countries must safeguard vital spending on health, education, and infrastructure, while boosting social safety nets for the most vulnerable.