Transcript of a Press Conference Call by the International Monetary Fund on "Lending for Africa"
June 1, 2009Washington, D.C., Monday, June 1, 2009
Roger Nord, Tanzania Mission Chief and Senior Advisor, African Department
Michael Atingi Ego, Kenya Mission chief and Senior Advisor, African Department
MR. NORD: This is Roger Nord, I am the Mission Chief for Tanzania. And in a few minutes given to me, I’m going to give you just a very brief summary of what we did in the case of Tanzania, and then I’ll turn it over to Michael Atingi Ego who will talk about Kenya.
Tanzania, over the past two and half years, has had what is known as a policy support instrument relationship with the IMF. That means we’ve had a dialogue, six monthly reviews, but no financing since Tanzania was doing very well and did not need any financing from the IMF. Policies were strong and were endorsed every six months by our Executive Board. The global economic and financial crisis is now having a significant impact on the Tanzanian economy. Falling traditional exports and tourist arrivals and the contraction of foreign direct investment are projected to lead to a slowdown in the real economy, from about seven and a half, eight percent in recent years to four to five percent this year.
That slowdown is having an effect also on Tanzania’s balance of payments, obviously, and we project reserve levels to fall both this year and in 2010. And against that background, Tanzania requested from the IMF support under the exogenous shock facility, conceived precisely for such an event where an exogenous shock such as the global economic crisis has an impact on Tanzania’s balance of payments and on its reserves.
And I’m happy to say that our Board, on Friday, approved Tanzania’s request for 110 percent of Tanzania’s quota in the IMF; and to put a more real number on that, approximately $330 million, the bulk of which was disbursed or will be disbursed upon Board approval, i.e., in the coming days. This will allow Tanzania to respond in what we consider the appropriate fashion to this shock, which is to allow the budget deficit to widen both this year and next year in the face of falling or stagnant revenue, and continued high spending needs, including for infrastructure, which is essential for medium term growth.
We also support a modest loosening of monetary policies in the face of falling inflation and low inflationary expectations. So the IMF supports the fiscal and monetary stimulus in Tanzania; it supports it also with our financing, which will provide Tanzania with what we consider to be a comfortable cushion of foreign exchange reserves, remaining somewhat above four months of imports of goods and services.
And we hope that with this support and continued strong policies in Tanzania, that they will be able to weather this storm without any further damage.
With those few words, let me turn it over to Michael Atingi Ego, who will give you some background on the Board’s decision on Friday regarding Kenya; Michael.
MR. ATINGI EGO: Thank you very much, Roger. In the case of Kenya, Kenya had an arrangement with the IMF, which expired in November, 2007. This was the PRGF. For the period of 2004 to 2007, the performance of the Kenyan economy was very strong. However, last year Kenya was buffeted by a number of shocks, including high food prices, fuel prices, fertilizer prices, and then towards the close of the year, with the onset of the global financial crisis, they had some issues to deal with the balance of payments which have affected the economy’s performance.
As the result of that, the Kenyan authorities took swift action in terms of monetary and fiscal policies. They eased monetary policy; and also made fiscal policy more accommodative to deal with the impact of the slowing economy. They have also undertaken structural measures including in governance to support the medium term growth and also to minimize the impact of the adverse consequences of the global financial crisis.
Now, in support of the policies that the government of Kenya has taken, the IMF Board, on Friday, approved a rapid access component of the exogenous shocks facility, amounting to SDR 135.7 million, equivalent to about $209 million U.S. dollars, and this is expected to help the government of Kenya meet part of the financing gap in the balance of payments associated with the slowdown in the economy and the impact of the global financial crisis. This will also help them rebuild some of the reserves that they have lost over the last eight or so months, and this will help them get their reserves back to about three months of import cover up from about 2.8 or so had this facility not been available. So going forward, we think that this is going to put Kenya into a position where they are going to weather some of the shocks that might be associated with the impact of this continuing crisis, and also raise their confidence in their financial markets. So briefly that’s about what I have to share with you on Kenya. Thank you.
QUESTION: I just have a couple of questions here. The one issue is that more of these countries are coming to the IMF for help, and one of the main things that the IMF is doing differently here is saying that they’re allowing the deficits to widen more as the crisis goes on, so that these countries can continue to spend, as you said, in the case of Tanzania, on infrastructure. The question is, how wide is the IMF comfortable that these deficits can widen so as not to go out of whack completely and so that these countries can recover quickly afterwards?
My second question is, a lot of this financing is shorter term than it used to be under the old old term, the PRGF. How quickly would you think that these countries can recover once there is this global recovery?
MR. NORD: Okay. Well, let me take those two questions. On the deficit, I think this is very much a case by case evaluation. Where there is room, the IMF has supported allowing fiscal deficits to widen. And by our count, that has been the case, or will be the case in close to 80 percent of our programs in Africa. But where there is no room, clearly, this is not going to be possible.
Now, what do I mean by room? I think there are essentially two questions that you have to answer when you’re talking about fiscal deficits; one is, can it be financed in the short term, i.e., this year, how do you finance that deficit?
In the case of Tanzania, the deficit is being financed domestically by issuing treasury bills, and the treasury bill market in Tanzania is relatively liquid, and we don’t foresee any difficulty in financing the widening deficit domestically in Tanzania, and Michael can add something on Kenya in the moment. So that’s question number one.
And there’s certainly some countries that would have difficulty financing a widening deficit, and therefore, would not be able to allow the deficit to widen. But a second consideration, equally important, is what does this mean for debt sustainability in the medium term.
Many of these countries, including Tanzania, enjoyed significant debt relief; in the case of Tanzania, debt to GDP ratio has come down significantly. And one important objective of economic policy is not to allow a reaccumulation of unsustainable debt. So those are really the two important considerations.
In the case of Tanzania, for example, in our assessment, a debt sustainability analysis, which will be released with the staff report in the coming days or weeks, shows that the risk of debt distress in Tanzania remains very low. The external debt as a percent of GDP is around 25 percent, and that is a sustainable level of debt.
And allowing the deficit to widen by between one and two percentage points of GDP is going to be all right. But then, of course, other countries come to mind with very high levels of debt where this would be a problem. So that’s the yardstick that we would apply to how much can you allow a deficit to widen.
QUESTION: The follow-up was about how quickly these countries—I mean obviously, in their minds, they obviously feel that they can come back from this crisis quite quickly once there is a rebound.
MR. NORD: Well, it’s fair to say that the IMF financing is shorter term than that from other institutions. But the ESF, exogenous shocks facility, does carry the same terms as the PRGF, which is five years grace and a ten year repayment period and an interest rate of 0.5 percent. So in that sense, the ESF is not less concessional or shorter-term than our standard lending to low income countries.
Let me ask Michael to say a few words on Kenya, the level of the deficit, and how you judge that widening of the fiscal deficit to be consistent in Kenya.
MR. ATINGI EGO: Thank you, Roger. In the case of Kenya, the deficit will be not be widened, per se, but what happened was that the authorities had targeted a deficit of 5.3 percent in the budget of 2008/09, but because of the shortfalls in revenue that are linked with the weakening of the economy, the revenue targets were not met, and yet there was a need to expand in their spending to meet some of the drought mitigation measures and as a result, the spending envelope had to increase a bit. But then finally, because they did not have sufficient financing to meet all the shortfall in the tax revenues, and also the increased expenditures, the overall deficit had to be narrowed down from 5.3 to 5.1 percent. So in the case of Kenya, because they didn’t have sufficient financing for the deficit, it had to be cut down by .2 percentage points of GDP, so that’s the difference in the case of Kenya.
However, in terms of the composition of the financing of the deficit, initially it was intended that part of this would have been financed through the placing of a sovereign bond in the international capital markets, but as we are all aware, the conditions in the international capital market did not warrant the placing of the sovereign bond. So the government of Kenya had to increase the amount of domestic financing from what they had projected, which is about 2.3 percent of GDP, to nearly 4.0 percent of GDP as the domestic financing, that is through the issuance of government securities to finance the deficit.
Now, of course a question might arise as to how this is going to be possible, whether it will not be denying other sectors of the economy credit. Now, in the case of Kenya, because of the slowing economy, the demand for private sector credit is also slowing down, and then the developments in the stock market are now causing most of the investors to fly to safety and that’s why now they are purchasing more of the government securities, enabling government to meet the target of 4.0 percent of GDP, so that’s what’s happening in the case of Kenya.
The Government desire is to preserve infrastructure spending, which is important for medium term growth, while also reprioritizing other expenditures in the light of the ongoing global financial crisis.
Now, in terms of the debt levels, I think Kenya is still a bit comfortable in that the debt to GDP ratio are quite low, they are in their 40’s, and to deal with the current global crisis, they have increased by two percentage points to about 42 percent of GDP. And over the medium term, this is expected to come down as the economy recovers. Thank you.
QUESTION: I just wondered if you could just talk more generally. You specifically mentioned Kenya and Tanzania, and I guess these were countries that were not needing IMF funding. I mean are there others out there that are going to be in the same category soon or are already sort of in the pipeline, I mean as opposed to the countries that have the PRGF program? And is this more of a trend or were you just identifying these two countries in particular?
MR. NORD: Well, let me give you some numbers on the IMF lending so far. In the first five months of 2009, we have committed about $1.6 billion to Africa. Now, that compares to $1.1 [billion] for the whole of 2008, and $0.2 billion in 2007, so I think the trend is relatively clear. And if we look ahead, the remainder of 2009, we expect it to be likely that the stock of our lending in Africa will double in 2009 relative to where it stood at the end of 2008.
This is clearly a reflection of what’s happening in the world economy, but it’s also a reflection of the IMF’s conscious policy to scale up our assistance to Africa. As you probably know, our Executive Board decided in April to double access limits, that is to say our credit limits for low income countries. And we have also, through the exogenous shocks facility, made access to our resources much more flexible, and in many cases, much quicker. I’ll give you three examples.
One was the ESF, the Exogenous Shocks Facility arrangement with Ethiopia earlier this year. Ethiopia did not have a program with the IMF previously, and it was able to negotiate and obtain financing from us very, very quickly.
The second example, maybe more classic, is Zambia. Zambia was very heavily hit by the fall in international commodity prices, and notably copper. Zambia did have a program with us previously. And we negotiated and in the case of Zambia, we provided a so called augmentation of the existing PRGF, and that augmentation of close to $300 million was certainly very, very welcome and also sorely needed in the case of Zambia.
And the third example is the one we’ve discussed right now, which is the case of Tanzania, of which I expect there to be others, countries where policies are very much on track, nevertheless, hit by the shock, countries that have a so called PSI arrangement with us, a non-financial arrangement, that can very quickly be complemented by a financial arrangement. I think with those instruments put together, you can expect significantly additional lending by the IMF in 2009, and particularly an ability to respond very, very quickly to the needs of our members.
QUESTION: Thank you. Could you repeat the number for 2007?
MR. NORD: In 2007, we committed approximately 0.2 billion U.S. dollars, so a very small amount of about $200 million. This increased to $1.1 billion in 2008, a year in which a number of African countries were already heavily hit by the food and fuel price shock, as you can recall. And we have now committed in the first five months of 2009 approximately 1.6 billion U.S. dollars.
QUESTION: Mr. Nord, I was wondering if you could talk a little bit about how these countries are being affected by the slow down in foreign direct investment, including what are countries doing, the pull-back in some of the private sector financing for projects, you know, how that’s affecting it, and if you’re seeing some little let up at the moment or if the trend is continuing to worsen as far as global credits apply. Number two, I was wondering, the new lending instruments that the IMF is talking about for Africa, including a new precautionary program, how would this fit in with the current programs that you’re negotiating with these countries? Would they be adaptive when these new instruments come in or is that a little too far out?
MR. NORD: Well, on FDI, I think it’s fair to say that hard numbers are always difficult to come by and not just in Africa on FDI. Evidence often remains relatively anecdotal. But what we hear from country teams across all of Sub-Saharan Africa is that foreign direct investment flows are contracting, that investors are postponing or putting projects on hold, and that certainly reflects the global credit crunch.
It’s difficult to put an overall number on it, but I think the latest overall projections of our financing gaps in Africa, I think published in April, we made an assumption at that point that FDI could contract by about 15 to 20 percent is my recollection. And I think we probably haven’t changed that, but as I said, it remains very much guesswork at this stage. Now, in terms of the link with the new lending architecture, and as I’m sure you know, this is very much in flux since that debate is ongoing. I think we’ve committed to having this discussion at our Executive Board before the annual meetings, which means between now and September. There have been some preliminary discussions that you are aware of.
Your question was, does this call into question what we’re doing now, I don’t think so. In fact, I think—we are hoping that a new architecture will allow for an even more flexible response. And one example I think that we’re trying to address is the exogenous shocks facility, which has proved to be extremely useful in the current context, by its very nature addresses only exogenous shocks. But there can, of course, be domestic shocks that can be equally difficult for a country.
You can think of droughts or a shock to the banking system, for example, that you would also want to address through a short term instrument rather than through our traditional longer term three year PRGF, and that is certainly one issue that is on the agenda. Let me ask Michael whether he wants to add anything on foreign direct investment from the countries that you follow in Africa. Michael?
MR. ATINGI EGO: Thank you, Roger. I think it’s basically the same story, that we are receiving indications from the various teams that foreign investment is either being put on hold or is slowing down, particularly as most of this investment is coming into finance, the extraction of natural resources, whose prices in the international market have been coming down, and the demand also is weakening so as a result of that, most of the investors are just putting on hold their investments, so it’s just the same story as Roger mentioned. Thank you.
QUESTION: I’m interested in how Africa is going to cope in the next couple of years, how much are these countries relying on… I mean obviously they’ve got the IMF aid now, but how much are they relying on donor aid in their budgets coming up, or are many of these countries actually seeing … a bit of a slowdown or a backing off of aid commitments, so that’s why they’re turning to the IMF for increased access?
MR. NORD: There is currently, as far as we can see, in 2009, there’s no indication that donors are pulling back. There is, however, a need for more financing, since most African countries are facing larger financing gaps. There are some donors who can respond in the short term by scaling up, but most do not have that flexibility, nor presumably the budgetary room for maneuver at home, that’s a different discussion.
But they also often do not have the flexibility to quickly change. Those institutions that do have that flexibility include the IMF and the World Bank. In the case of the World Bank, they are, in many countries, trying to bring forward some of their already available IDA 15 resources into 2009 and 2010.
So the multilaterals are somewhat more flexible. I understand from the European Union that they have also a little bit of flexibility, some additional resources, relatively small I think compared to the IMF and the World Bank.
But to go back to your question, we do not see any indications that donors are pulling back. But we do see additional financing needs, and I think the multilaterals are playing a valuable role in the short term in terms of addressing those financing gaps. Looking further ahead, of course there remain large financing needs in Africa, and we certainly remind development partners that the commitments made in Gleneagles to scale up, not maintain, but scale up assistance to Africa, that those commitments remain very important, and this is certainly not the moment to go back on this.
QUESTION: Hello. According to a press release last week, Dominique Strauss-Kahn, the Managing Director, called for a $6 billion request basically for increase in concessional IMF resources. Is this part of a growing trend? I mean is this a short-time request or do you see this pattern continuing for a couple years?
And my second question is, is there a concern in this pattern of increased lending? I mean in 2007, it was 0.2 billion, and now there’s this call for 6 billion more.
MR. NORD: Okay. On the 6 billion, this is the objective that the IMF and its principal shareholders have set themselves in terms of raising additional concessional resources. I mean for your background, the IMF, in its traditional role, does not provide concessional lending. The IMF provides market-based lending to its members. It has created some 20 years ago a concessional window, where, to our low income countries, we do provide concessional lending, at the moment at half a percent interest and with repayment over ten years.
Now, that concessional lending needs to be financed through special resources that are provided to us by our shareholders. And I should add, not only our richest shareholders, since the PRGF trust, as it is known, has over 50 participants that include both advanced economies and emerging markets.
So what Dominique Strauss-Kahn is talking about is raising additional funds to allow us to continue to respond to the increased needs that low income countries are facing. And the target that he has set, a target that was, indeed, articulated by the G-20 when they met in London in April, is to raise an additional $6 billion. Now, that would allow us to continue to lend at about the pace that I now have quoted of about $1 to $2 billion a year for the next couple of years. You asked if this is a trend; well, it’s a trend only in the sense that it responds to a need.
The IMF is, in many ways, a counter-cyclical lender. We are not a development finance institution. We respond to balance of payments needs when they arise, and now is certainly a time in which they arise. If you look two years back, as you saw from the number that I quoted, when the world economy was doing significantly better, all countries, including low income countries, were receiving resources from many other sources, including private capital, foreign direct investment, portfolio investment, and had far less need to seek resources from the IMF. So the IMF does not provide a constant high flow of concessional lending, but it responds to situations when they arise and this is certainly a time when low income countries need financing from the IMF.
QUESTION: I just wanted to clarify or see if you could provide a figure. Roger you said if you look at the remainder of 2009, you expect the stock of our lending to Africa would double relative to where it was in 2008. So I was just hoping that you could provide the figure for 2008, are you talking about the $1.1 billion?
MR. NORD: I’m talking about the total stock of our lending commitments at the end of 2008, which you could get from out website. [$2.1 billion] That’s approximately the outstanding stock of lending, disbursed and undisbursed, to our low income countries in Africa. And broadly, we would expect that based on current trends that is likely to double in the course of 2009.
QUESTION: How many countries would you broadly say that doubling would involve? Because currently you have, what, 20 active programs? So is there any figure or indication that you can give of how many countries you expect would be involved in that increase?
MR. NORD: I don’t have a number that I feel comfortable quoting on the record since many of these discussions are ongoing. But I think in many cases these are countries with which we have programs that will augment them and then there are some well known cases where discussions are ongoing. The one that I think you are surely aware of is the DRC which drew on an ESF here a few months ago, and where we have discussions for PRGF, which is an important prerequisite in the case of the DRC to be able to go through debt relief. And those discussions have been ongoing and as you will have seen from the press, Dominique Strauss Kahn was in the DRC last week and I think on all sides we are making efforts to try get that PRGF started as soon as possible.
QUESTION: Thank you. Last, I think on the 19th, Strauss Kahn was meeting with African diplomats and in addition to the concessional loans he talked about streamlining IMF conditionalities. What does that mean? What is the streamlining of conditionalities?
MR. NORD: I think we are making a very conscious effort to try to make the access to our resources more flexible.
Now in concrete terms one step that we’ve taken in April is to eliminate so-called structural performance criteria, which in IMF jargon means conditions that are not quantitative, So not attached say to the size of the budget deficit or the growth of any monetary aggregate, but are of a structural nature; i.e., a reform of the banking system or reform of public enterprises.
Our programs in the past used to contain some of those structural performance criteria and we now no longer have any of those in our programs. Instead we, of course, do discuss structural issues since these are often important for medium-term growth. And during a board discussion of a review or a request for access to our resources, we present those to our board and the board then takes a holistic view of the structural reform program. But we no longer have specific conditions.
More generally, I think there is a trend to try to reduce the number of conditions that we have attached to programs and I think that is often a case-by-case decision since a country that is performing well typically has very few conditions attached to it’s loan or if it has a long-standing program. For example, in the case Tanzania we have somewhere usually between three and five benchmarks attached to a particular [review] every six months or so. Our new programs tend to have somewhat more, but there is a desire to reduce those.
So the streamlining in short contains two components. One is an elimination of structural performance criteria, which we already decided to do and we’ve implemented. The second is a desire to reduce the number of conditions which we hope to be able to do over time.
QUESTION: What kind of conditions do you have outside of these structural performance criteria?
MR. NORD: Well, a typical IMF program, the core of it has quantitative performance criteria. For example, it will specify the domestic financing of the budget deficit. It will say that the financing of the deficit should not exceed X. If a country can raise more concessional donor resources, fine, it can run a slightly bigger deficit, but if it cannot then there is a limit on how much can be financed domestically.
That would be one example. Other examples in the case of Tanzania for example, we have a ceiling on the growth of reserve money, a narrow monetary aggregate, which is consistent with the inflationary program of the Central Bank.
Those are examples of quantitative performance criteria. I should note, however, that these are also subject to revision; should there be a good reason to change them, we do. And in fact, that is not at all unusual. In the case of Tanzania, again, for example, the performance criterion on the financing of the budget deficit for December was exceeded, but we said to our board there was a good reason to do so since we believe that allowing the deficit to widen is the correct response to the global economic crisis.