IMF-Backed Programs Widen Policy Options to Counter Crises

• Author: International Monetary Fund

The global economic crisis is hitting low-income countries harder than anticipated, increasing their need for donor aid. However, past gains from macroeconomic stabilization and debt reduction, together with some increase in aid, have created space in many countries for countercyclical policies, and IMF-supported programs have accommodated such policies to address the impact of the global food, fuel and financial crises, according to two IMF studies published October 1.

The IMF announced an unprecedented increase in its aid to low-income countries in July, including an increase in concessional lending of up to $17 billion through 2014, new lending instruments, and zero interest on concessional loans through end-2011. But the donor community needs to do more.

"Low-income countries need further increases in concessional financial support to help their smooth adjustment in 2009-10 without further aggravating risks to debt sustainability." said Hugh Bredenkamp, Deputy Director of the IMF's Strategy, Policy, and Review Department. "Aid shortfalls could force countries either to adjust before the recovery is under way or to take on nonconcessional debt that they cannot afford," Bredenkamp added.

Crisis hits harder

Projections from the latest IMF World Economic Outlook show the economic crisis is hitting low-income countries harder than forecast six months ago. According to one of the reports, covering implications of the global crisis:

* Low-income countries are facing a sharp contraction in export growth, foreign investment inflows and remittances, and lower-than-committed aid. As a result, low-income countries' 2009 growth is now projected at 2.4 percent, down from precrisis rates in the 5-7 percent range. Growth is expected to recover to 4.2 percent in 2010, helped by rising world demand and supported by short-term domestic policies.

* Countries are using fiscal and monetary policies to respond to the crisis. Fiscal deficits are increasing in three-quarters of the countries. While the composition of the stimulus packages have varied, many countries have chosen to increase current spending. Inflation risks have remained subdued, allowing some countries to ease monetary policy, while the use of the exchange rate as a shock absorber appears to have been limited.

* While LICs have sought to preserve or increase social spending, the ability of many to expand social...