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Coffee cooperative in Chanchamayo, Peru: Hedging contracts can soften impact of commodity price shocks (photo: Enrique Castro-Mendivil/Reuters)

The IMF and Civil Society

Low-Income Countries Remain Vulnerable in Global Downturns

January 10, 2012

Most low-income countries recovered swiftly from the 2008-09 financial crisis and have posted steady growth since early 2010.

But progress in rebuilding economic buffers has been slow, and these countries are now less prepared to respond to new external shocks, according to an IMF study.

Speaking at a panel discussion at the Center for Global Development (CGD) in Washington, D.C., IMF Deputy Managing Director Min Zhu said that with the world’s attention focused on Europe, it is important not to lose sight of the fact that low-income countries in recent years have been affected by crises caused by other countries.

If another global downturn develops, low-income countries will have more limited budgetary space to respond. A recently conducted vulnerability exercise by the IMF estimates that an additional 23 million people could fall into extreme poverty; poorer countries could need $27 billion in external financing under that scenario.

Protecting against trouble

Poorer countries need access to external assistance from the international community to better protect their economies against external shocks and help them to manage volatility.

“We at the Fund are very much determined to carry out our mission, one important part of which is to maintain economic and financial stability for the low-income countries, to promote sustainable and inclusive growth in those countries,” Zhu said. “We have increased our capacity for concessional loans to $17 billion through 2014 and have made our financial instruments much more flexible to be able to reach out to countries who need our help.”

The December 14 discussion, moderated by CGD vice president Lawrence MacDonald, was based on the key findings of two new IMF reports: a study on how current risks and vulnerabilities, including a sharp downturn in global growth and further commodity price shocks, would affect low-income countries, and a second report in which the IMF and the World Bank explore the role that contingent financial instruments such as commodity hedging, contingent debt, and self-insurance could play to help low-income countries manage global volatility.

Responding to global shocks

Hugh Bredenkamp, Deputy Director of the IMF’s Strategy, Policy, and Review Department, explained in a presentation that with less-diversified economies, low-income countries do not have the necessary cushion to adjust easily to negative shocks. Most poorer countries recovered swiftly from the global crisis and have grown strongly since early 2010, but progress in rebuilding macroeconomic buffers has been slow, and these countries are now less well prepared to deal with external shocks than they were before the crisis.

The IMF study finds that low-income countries are highly vulnerable to the risk of a sharp global downturn, at a time when there are severe downside risks to the global outlook and donor financing is likely to be more constrained. In the event of a global growth downturn, poorer countries with the fiscal capacity should try to maintain spending to soften the economic and social impact.

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