Emerging from the Global Crisis—Macroeconomic Challenges Facing Low-Income CountriesPublic Information Notice (PIN) No. 10/148
November 10, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On November 1, 2010, the Executive Board of the International Monetary Fund met to discuss macroeconomic challenges facing low-income countries as they exit from the global crisis.
Low-income countries (LICs) were more resilient during the global crisis than in past downturns. The impact of the crisis was severe, but economic growth stayed positive in two-thirds of LICs, in contrast to richer countries. Growth was supported by a robust countercyclical domestic policy response—a first for LICs and in contrast to past crises when the fiscal stance was typically tightened. Pre-crisis macroeconomic policy buffers, built mainly over the past decade, had created space in many countries for this countercyclical response. To help low-income countries navigate the crisis, the IMF sharply scaled up its liquidity support, reformed its concessional instruments, and endorsed adaptations in program design to accommodate the countercyclical responses, including continued real growth in expenditures.
LICs’ economic recovery is expected to be faster and more aligned with the rest of the world than in previous crises, reflecting greater trade and financial integration and more robust domestic policies. A key downside risk is a slower-than-expected recovery in the rest of the world. Another risk could be a spike in world food and fuel prices. Most LICs are expected to realign their fiscal and current account positions as the recovery proceeds, partly through the cyclical rebound in exports and revenues, although some will continue to face fiscal and/or external vulnerabilities that would limit their ability to respond to another large shock.
Executive Board Assessment
Executive Directors welcomed the discussion of macroeconomic challenges facing low-income countries (LICs) as they emerge from the global crisis. They noted that the crisis had triggered the sharpest economic slowdown in four decades, pushing additional 64 million people into extreme poverty by end-2010. Nevertheless, in two-thirds of these countries, per capita GDP growth remained positive during the crisis, in contrast to previous crises and to the situation in most advanced economies.
Directors attributed the resilience of LICs to the generally stronger macroeconomic positions prior to this crisis, including smaller fiscal and current account deficits, lower debt and inflation, and higher levels of international reserves. This, in turn, allowed for a robust counter-cyclical response in many LICs, which had not been possible in previous crisis episodes. Most LICs, in particular those with IMF-supported programs, were able to maintain real primary spending growth throughout the crisis, and the composition of expenditure also improved in favor of priority sectors, including health, education, and infrastructure.
Directors recognized the important role of the Fund in supporting LICs through the crisis—in terms of unprecedented financing and policy advice. The reform of its lending facilities for LICs, the strengthening of the concessional financing framework, and the general SDR (Special Drawing Rights) allocation were instrumental in cushioning the effects of the global crisis, catalyzing donor support, and facilitating an early rebound.
Looking ahead, Directors noted that the pace of economic recovery in LICs, though varying across regions, is expected to be faster and more closely aligned with the rest of the world than in previous crises, reflecting greater trade and financial integration and more robust domestic policies. However, they cautioned against complacency given the downside risks to the global economy as a whole and the reduced policy space in most countries. Directors observed that a large number of LICs would be highly vulnerable to another sizeable shock, for example a slower-than-expected recovery in advanced economies, and would have little or no room to react. This requires that the Fund remain alert to any eventuality and ready to provide assistance as needed. For the most vulnerable countries, additional donor support, including from new donors, will also prove critical.
Directors underscored the importance of rebuilding macroeconomic policy buffers, restoring fiscal and debt sustainability while also being attentive to the still fragile growth prospects. The appropriate policy mix should be determined by the nature of each country’s circumstances, including its exposure to potential volatility and the pace of recovery. For many LICs, the policy priorities during the recovery phase would include: (i) strengthening domestic revenues beyond the cyclical rebound, to help create fiscal space for priority spending; (ii) pursuing cautious external and domestic borrowing strategies, supported by measures to boost domestic savings, develop domestic financial sectors, and improve debt management frameworks; and (iii) advancing structural reforms to boost growth and manage volatility. For countries benefitting from debt relief, it will be particularly important to safeguard against a re-accumulation of debt beyond sustainable levels. Directors also urged prudent use of the recently-allocated SDRs, with regard to the macroeconomic impact and associated risks.
The crisis experience has called for an increased focus on monitoring vulnerabilities in LICs and the overall health of their economies. Directors encouraged further refinement of the composite policy buffer index, and looked forward to forthcoming proposals on a new vulnerability exercise for LICs. The Fund’s role continues to be vital—through the provision of country-specific policy advice and capacity-building assistance, as well as communication to external stakeholders. Directors also stressed the need for the Fund to ensure that it has the suitable instruments and adequate concessional resources to meet the potential needs of its low-income members, drawing on the experience during the crisis, and to provide for an in-depth analysis of the impact of the new LIC lending framework.