Development Finance

1. October 2009 Development Finance Finance Canada

2. Outline: • Impacts of the Crisis • What has been done? • Priorities going forward

3. Part I. Impacts of the Crisis

4. Transmission of the Crisis While the crisis began in advanced economies, it has been transmitted to developing countries via 2nd and 3rd waves 1st Wave Bank failures 2nd Wave Credit crunch spreads 3rd Wave Global economy slows US and other advanced economies Middle Income Countries (MICs) Low Income Countries (LICs)

5. Challenges Facing Developing Countries Developing countries face the challenge of providing urgently-needed social protection and economic stimulus, at the same time as dealing with problems with: • Balance of Payments • Fiscal Balances • Debt Sustainability

6. Balance of Payments Problems Many countries having difficulty generating sufficient foreign currency from exports/borrowing to cover import demand

7. Balance of Payments Problems Quite a number of LICs deemed highly vulnerable to BoP shocks by IMF

8. Balance of Payments Problems It has been estimated that LICs would need $25B - $138B in BoP financing this year • Early estimates suggested at least 38 LICs would suffer BoP shocks in 2009, totaling $165B. This will lead 35 LICs to draw down $131B of reserves • A financing gap of $25B would remain – equivalent to 80% of annual aid flows to LICs; this financing gap could climb to $138B in a worst-case scenario

9. Balance of Payments Problems These financing gaps are expected to remain large through the medium-term US$ billion External financing needs Financing gap Note: Includes 59 countries with financing gap; Source: World Bank (2009a)

10. Deteriorating Fiscal Balances Weaker revenues are also expected to lead fiscal deficits to widen sharply in some countries Constraining governments’ ability to: • Maintain critical expenditures on health, education, infrastructure • Increase spending on social protection and economic stimulus IMF: WEO 2009, p. 30

11. Deteriorating Fiscal Balances Fiscal positions will weaken on average by more than 2% of GDP Deterioration in developing country fiscal balances, 2009 Source: World Bank

12. Risk of Debt Problems Increased risk of debt distress jeopardizes recent gains from debt relief IDA-only Countries current level of debt distress • Progress in reducing debt indicators to sustainable levels undermined as exports and government revenues fall, and debt service increases. • Debt indicators may deteriorate even further as governments implement fiscal stimulus packages. • An increasing number of countries in high risk of debt distress. HIPCs Note: IDA graph reflects only countries with available DSAs. Source: World Bank PREM.

13. Risk of Debt Problems Critical issue is how long the crisis will last • A short crisis will have a small effect on debt sustainability as debt indicators are forward looking over a long period of time (20 years). • A protracted crisis will have a lasting effect on debt sustainability. Source: World Bank PREM.

14. Impact on the poor The WB, the IMF, the UN and the OECD have warned … “Of a development emergency this year.” World Bank and IMF, April 24, 2009 “The world faces a new hunger crisis as the global economic crisis has reduced the ability of the poor to feed themselves.” UN, April 16, 2009 “Up to 1 billion people are at risk of undernourishment.” UN FAO, March 27, 2009 “The global economic crisis has heightened the risk that tensions could explode in Africa” OECD and AfDF Report, May 11, 2009 IMF United Nations World Bank OECD

15. Cut critical expenditures (food,health, education) Draw down savings Seek credit Sell productive assets Seek new or additional work Impact on the poor This risks becoming a severe humanitarian crisis • Significant decline in purchasing power as poor households are hit by: •  Employment •  Income from Lower Commodity Prices •  Government Services •  Availability of micro-credit •  Remittances • And risks of a downward spiral as poor households are pushed to more extreme coping mechanisms Coping Mechanisms

16. Impact on the poor Poverty impact is large and rising, with 89 million more people potentially falling into extreme poverty Increase in number of poor (millions) Source: World Bank

17. Impact on the poor Although food prices have come down from last year’s peak levels, the food crisis continues to threaten • The economic crisis is pushing down household incomes • The international downward food price trend has not fully translated into lower food prices in many poor countries • Little margin of safety as many poor families were already spending ~50-70% of household income on basic food items Income Food Costs 2009 2008 Finance Canada, April 2009

18. Impact on the poor However, some food prices have remained high or risen

19. Summary of Impact • The hoped-for decoupling of advanced and developing countries through the crisis did not come to pass • The crisis has been transmitted through a number of different channels, with mounting evidence of significant impacts

20. Summary of Impact • Could become a humanitarian crisis as household incomes fall and government resources are stretched to capacity • At the same time that developing country governments face the challenge of providing urgently-needed social protection and economic stimulus, they are dealing with macro problems related to • Balance of Payments • Fiscal Balances • Debt Sustainability • The crisis-related financing needs, estimated to be $270 - $700B, far outweigh the available financing from the IFIs and donors

21. Part II. What has been done?

22. IFI Responses The IFIs have been on the front-line in responding to the crisis, mobilizing additional resources and new tools • IMF: • $500B for NAB and $250B SDR allocation • Capacity for LIC lending more than doubled to $8B for 2009-10 • New and improved Poverty Reduction & Growth Trust (with Exogenous Shocks Facility) • New Flexible Credit Line ($80B committed so far) • World Bank: • IBRD lending to more than triple to $100B over three years • IDA hit record level of $14B in 2009 • IBRD and IFC general capital increase discussions underway • Various new specialized crisis facilities for trade finance, food crisis response, infrastructure financing, etc.

23. G20 and Canadian Support G20 committed to support IFIs with appropriate financing… and Canada has played a leadership role with $22B so far • New Canadian support for IFIs this year: • IMF resources: US$10B • Unique Canadian temporary callable capital initiative: • Doubling for IADB (US$4B) • Tripling for AfDB (US$2.5B) (with more from S. Korea) • AsDB capital increase: US$5.3B • IFC trade finance initiative: US$200M • $600m over 2 years for food security/agriculture • On-going debt relief actions

24. Part III. Priorities Going Forward

25. Challenges Ahead • Pace of recovery is uncertain and risk of second dip in global growth • Will need to get timing right on fiscal stimulus and exit strategies • As recovery takes hold, need to make sure we don’t lose the political momentum for action, especially to help with on-going needs in developing countries • On-going questions about appropriate resources at the IFIs • Including recognition that new resources have been mainly for MICs, with support for LICs slower to materialize

26. Priorities To Work On Things to do: • Capital increases at IBRD, IFC, IaDB, AfDB, EBRD and CDB • Replenishments at IDA and ADF • Resources for IMF’s LIC lending • Global Fund, climate investment funds (Copenhagen outcome) • Food security and Agriculture • Debt sustainability, especially MICs