Not much on offer for poor countries to counter the crisis

17 April 2009

The world’s poor are being hard hit by a crisis for which they are not responsible. Low income countries will face a financing gap of hundreds of billions of dollars this year. More than $2 trillion have been found to boost Northern economies and emerging markets. Yet richer countries have committed just over five percent of the additional development finance required to compensate low-income countries for the shock they face resulting from this crisis.

Effects of the crisis

Economic prospects for 2009 have been repeatedly revised downwards and it is increasingly clear that the world’s poor are being hardest hit by a crisis for which they are not responsible. According to the World Bank, 53 million people will fall into extreme poverty in 2009. World Bank president Robert Zoellick reported in a speech in London before the G20 summit that “200,000 to 400,000 babies will die this year because of the drop in growth.”

An early March paper from the IMF said that low-income countries would require $216 billion to cover the impact on their balance of payments during 2009. The World Bank presented a much higher figure on 8 March, estimating that developing countries may face a financing gap of $270-$700 billion. According to UN estimates, the funding needed to counter the effects of the crisis may be as much as $1 trillion.

A recent ActionAid report suggests that African countries alone will face a real drop in income of $49 billion between the start of the crisis in 2007 and the end of 2009. Christian Aid said “Already hard-hit by soaring food and energy prices that pushed up inflation, caused food shortages and widespread hunger, poor countries can only look on helplessly as demand for their exports drops and vital remittances sent back by family members working in the industrialised world rapidly dwindle.”

What is on offer?

Most low-income countries have very limited fiscal space to react to the crisis, and thus need external support. So far, rich countries have not made commitments to provide new finance to cope with developing countries’ needs. Leaders at the London Summit simply restated their past aid commitments; and suggested enabling “multilateral development banks (MDBs) to help counter the effects of the crisis in developing countries.”

According to Eurodad calculations released before the G20 summit, the World Bank and the IMF were only planning to provide $12 billion to the world’s poorest countries in 2009. Preliminary calculations on the $1.1 trillion for the IMF and MDBs announced in London (see Update 65) show that the IFIs could eventually channel up to $50 billion for low-income countries. However, almost none of these funds are additional to those already promised by multilateral institutions and rich governments before the crisis. This still falls short of poor countries needs. Moreover, disbursement could be spread over several years and substantially lower the amount available for 2009.

The G20 leaders also committed to make “available resources for social protection for the poorest countries [through] the World Bank’s Vulnerability Framework”. The framework consists of three main initiatives, including the Vulnerability Financing Framework (VFF), an Infrastructure Recovery Assets Platform (INFRA plus energy) and a Private Sector Platform (PSP). In its turn, the VFF comprises resources from the existing Global Food Crisis Response (focused on agriculture); the International Development Association (IDA) Fast-Track Facility (resourced with existing IDA money for low-income countries); and the newly created Rapid Social Response Programme (providing employment through public works programs, plus short term social safety nets).

The World Bank estimates that IDA, its concessional arm for low-income countries, will this year spend $1 billion more than in 2008. This increase is the result of a historically high replenishment of IDA which concluded in 2008, rather than an intended increase in response to the crisis. Also, a share of these packages is just “frontloaded” money – expenditures brought forward that will therefore not be available in future years. The World Bank is planning to fast-track $2 billion of their IDA resources in this way.

This is not additional money and will certainly create a financing gap in the coming years unless governments come up with a solution, such as bringing forward the next IDA replenishment by a year. Whether some of the $100 billion G20 leaders urged MDBs to fund may be used to fill this gap is still up in the air. According to Bank sources, some low-income countries are reluctant to apply for frontloaded money because of the threat of future gaps.

Another share of the funds was already budgeted as development aid before the crisis broke and has recently been re-labelled as crisis response. This is the case for Bank funds that were earmarked in 2008 to respond to the food crisis, and have now been re-labelled as crisis response under the newly created Vulnerability Fund.

Over half of the $12 billion for the poorest countries this year, is funding channelled by the IMF. A good share of it will be used to cover the impact on low-income countries’ reserve positions and therefore won’t be pumped into the real economy to boost growth and employment creation, or to support safety nets for the most vulnerable.

In a joint statement on emergency financing issued at the end of March, UK NGOs stated that “simply repackaging aid budgets into new funds and programmes is not going to be enough to help countries bridge these giant financing gaps, let alone undertake the policies needed to stimulate their economies. Developing countries must be given the emergency funds necessary to pursue the kinds of counter-cyclical policies currently being used by rich countries.”

What is needed?

Whatever quantity of money is available, international financial institutions need to take immediate measures to ensure that the money they will channel contributes to poverty reduction.

The Eurodad Responsible Finance Charter outlines the kind of principles that civil society organisations think are important to ensure that development finance will effectively contribute to poverty reduction, including “respect for human rights; respect for internationally recognised social, labour and environmental standards; parliamentary and citizen participation in the loan contraction process; and public disclosure of information.”

In the very short-term, the exceptional circumstances require a speedy and flexible response from the World Bank, the IMF and other MDBs. As the crisis is a consequence of structural flaws in Northern rather than Southern economies, emergency finance should not be delayed by negotiating cumbersome policy conditions or structural reforms. The situation requires a ‘crisis waiver’ which ensures that: funds are quickly disbursed; are provided as grants or on highly concessional terms; no extra policy conditions are added; that they respect the highest social and environmental standards; and the highest transparency standards.

Two directions

A consensus is also emerging that the vast capital outflows from developing countries need to be tackled through measures on tax havens and transnational company reporting practices. The latest report by Global Financial Integrity estimates that “illicit financial flows out of developing countries are $850 billion to $1 trillion a year.” The volumes are staggering and they dwarf the $100 billion of aid flowing every year from Northern to Southern countries. Several measures could be taken to avoid the leakage of these illicit flows. Eurodad and members proposals go further than the limited reforms agreed at the G20 (see Update 65) They include: the introduction of a requirement that businesses operating transnationally must reveal publicly how much profit they make and; the establishment of strong global rules to enable developing countries to determine whether they have been paid the right amount of tax. These rules would require all states to exchange automatically the information they hold on companies and individuals. Banning off-shore centers and tax havens should also be considered.

When added to the larger picture it is clear that extra funding is urgently needed, but so too is an overhaul of the global financial system and international financial institutions.