Managing Director of the IMF, Dominique Strauss-Kahn, gave a speech at a CGD event on Sept 17. He talked about how the IMF is becoming flexible in helping developing countries cope with severe shortage of funds after the global financial crisis.
He argued that low-income countries have been hit harder than what was expected in March 2009 and now they remain highly vulnerable and face severe financing problems. These countries have been battered by multiple shocks--food and fuel price shock, global financial crisis, and drought and famine. The IMF estimates that low-income countries’ exports of goods and services could drop this year by 16 percent. A decline in remittances, by up to 10 percent, would further aggravate the plight of poor countries. Additionally, FDI flows to low-income countries might fall by 25 percent in 2009. Almost 17 million people are facing severe food shortages and may need emergency food aid, he said. Moreover, due to the global financial crisis an additional 90 million people will be pushed into extreme poverty.
Strauss-Kahn expects a recovery in 2010 and the developing countries would be able to “ride the wave of rising world demand”. [But, at a time when almost all the countries are aiming to increase exports, it is unclear how much the developing countries would benefit even if the world economy rebounds in 2010.]
He argues that there is something new about domestic policy responses in the developing countries this time-- most of them are “home grown”.
Some of this good news is home grown—always the best kind. Since many of these countries ran good policies, they built foundations to ward off the storm. This is something new. In the past, many low-income countries facing such a financial squeeze would have been forced to slash government spending, put administrative constraints on imports, or simply not pay their bills—making the crisis worse.
But this time is different. Debt positions had improved substantially, creating the breathing space for countercyclical policy. In fact, we estimate that almost two-thirds of low-income countries are at low or moderate risk of debt distress—this flows from better policies, and also from more aid and debt relief.
More than three quarters of low-income countries let budget deficits get bigger as revenue fell. One third also introduced a discretionary fiscal stimulus.Of 27 low-income countries with available data, 26 have preserved or increased social spending—no mean feat in the current environment.
The IMF is increasing funding and making the process much more flexible. He also spoke something about conditionality (apparently, admitting that some conditionalities were in fact counter productive):
It’s no secret that our lending programs attracted some criticism over the years. People said our conditions were too harsh, too intrusive, or even misguided. I accept some of that criticism. We made mistakes, but we always try to learn from our mistakes. Overall, I think the PRGF was a success. Countries with sustained program engagement over the past two decades saw bigger boosts to growth than those without such involvement.
Still, we need to make sure that the medicine does not harm the patient. Over the past few years, we have been streamlining our conditionality, focusing on core policy measures that are critical for macroeconomic stability, poverty reduction, and growth. Too many conditions in too many different areas can reduce effectiveness and lead to a loss of legitimacy. Across low-income country programs, the number of conditions has fallen by one third compared with the beginning of the decade. About 40 percent of these conditions are now focused on improving public resource management and accountability—such as expenditure control and tax administration.
Recent reforms have gone even further. From now on, our loans no longer include binding conditions on specific measures. Instead, programs will focus on meeting the overall objectives of the reforms, giving governments more leeway in reaching their goals.