One of the great tragedies of the present crisis is that it nipped in the bud the longest and most broadly based economic expansion that low-income countries have seen in modern history. These countries were finally reaping the rewards of difficult reforms that go back to the 1980s and 1990s, helped by debt relief and other support. The results were plain to see. During 2000-07, low-income country growth was twice as high as in the previous decade, and inflation fell to single digits. As a result, these countries were finally starting to make inroads in raising living standards and reducing endemic poverty. There was great cause for optimism.
And then came the crisis. Or crises, I should say. For in fact, the low-income countries were besieged by two crises in rapid succession, as the global financial tsunami came hard on the heels of the food and fuel price shock of 2007-08. All of the hard-won gains were suddenly in jeopardy. And the stakes in this part of the world are particularly high, given the potential for human suffering on a wide scale. The effects of lower export volumes, remittances, investment flows, and prices for key export commodities could push hundreds of millions of desperately poor people back (or further) into poverty.
Victims of the crisis
We should remember also that the low-income countries were innocent victims of the crisis. They didn’t make the mistakes of some of the advanced countries, the mistakes that triggered this crisis. Instead, they did many of the right things on the policy front—fiscal positions were strengthened, debt burdens reduced, and comfortable reserve cushions built up in many countries. This makes it all the more important now for the world community to do whatever it can to help.
Of course, the top priority is to get the developed economies moving again, since these provide export markets, and are a vital source of investment capital. There are glimmers of hope on this score. But low-income countries also need extraordinary levels of financial support to cushion the downturn and give them some breathing space to take their own countercyclical policy measures. We need to ensure that they are in a position to share in the global recovery as it takes hold.
This is where the Fund comes in. “The IMF is back” has been a fairly common refrain over the past year or so. And it has some truth. But this mantra doesn’t really apply to the low-income countries, because we never really left. Over the past two decades, four-fifths of the countries eligible for concessional (highly subsidized) assistance have received financing from the IMF. We have always taken our mandate to help low-income countries seriously.
Changing nuts and bolts of lending
Of course, this does not mean we were doing everything right, or that there was no room for improvement. It is a bit of a cliché to say that every crisis presents an opportunity, but there is a grain of truth to it in this context. For this crisis has prompted us to change the way we respond to the needs of low-income countries. We are changing not only how much we lend, but also how we lend—and by that I mean both the windows through which we provide assistance and the nuts and bolts of program design.
Our immediate goal is to help countries adopt policies that will limit the damage to their economies from the crisis, to support those policies with expanded financial assistance, and to make that assistance quicker and easier to access than in the past. But we also believe that the “new Fund” will be better able to meet the diverse needs of these countries long after this crisis subsides.
There is a lot of ground to cover here. So, in this first post, I will focus on the scaling-up of concessional lending, and leave the other issues to later posts.
When the crisis hit, it was clear that our first and most urgent priority would be to provide the financing low-income countries need, on the scale they need. And so we are ramping up our concessional lending to low-income countries by up to $17 billion between now and 2014, and are front-loading this support so that almost half ($8 billion) will be available for 2009-10, when the needs will be greatest. To allow individual countries to benefit from this, the annual limit on borrowing amounts for each country has also been roughly doubled.
Putting this in perspective: these figures imply a doubling of our medium-term lending capacity, with support in 2009-10 at more than triple the pre-crisis levels. This is an unprecedented scaling up of assistance—and goes beyond what the G-20 leaders called on us to do last April. The circumstances demanded nothing less.
On a parallel front, the Fund’s membership backed a $250 billion allocation of Special Drawing Rights (SDRs), to be given to all members in proportion to their IMF quotas. SDRs are reserve assets issued by the IMF, which can be tapped on demand, with no strings attached—although interest charges apply if the SDRs are drawn down. The new SDRs were “delivered” to members last Friday, with low-income countries receiving about $18 billion in funds that can help bolster or rebuild reserves in the wake of the crisis.
Taken together, these steps will help relieve the financial constraints facing many low-income countries. But keep in mind that IMF financing serves a very specific purpose. Our lending provides low-income countries with shorter-term financing at affordable interest rates, so that they can preserve priority spending, like health and education, in the face of temporary shortfalls in tax revenues that are a symptom of the global recession.
Crucial as such support is, these countries have much broader and longer-term needs for development financing, going well beyond what the IMF has the mandate or capacity to provide. Other institutions—multilateral development banks and bilateral donors—are best suited to these purposes. They too have a role to play, including during the crisis, which is why the IMF has called on the rich-country governments to meet their commitments to scale up aid to the poorest, without delay.
In my next post, I will discuss the recent changes to the array of facilities or “lending windows” through which countries can access IMF resources, and what these mean in concrete terms for the low-income countries these reforms are intended to help.