Strategy, Policy and Review Department April/May 2013

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Low-Income Countries in the Global Economic Recovery: Strengths, Vulnerabilities, and the Role of the IMF

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Outline

• Global & Low-Income Country (LIC) Trends

• Vulnerabilities in LICs

• IMF Responses to Diverse and Evolving Needs of LICs

0

1

2

3

4

5

1960s 1970s 1980s 1990s 2000–07 2008–11

LICs Emerging economies Advanced economies

Real GDP per Capita Growth (Median, in percent)

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Past Performance Since 2008, median LIC growth has outpaced both median AM and EM growth.

Source: April 2013 WEO, Chapter 4.

0

5

10

15

20

25

30

0

10

20

30

40

50

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Percent of LICs (left scale) Number of economies (right scale)

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Past Performance Growth take-offs in LICs have become more frequent and long-lived, ...

Frequency of New and Ongoing Growth Takeoffs

2011

Notes: A growth takeoff is identified as an upswing in LIC output per capita that lasts at least five years, with average annual growth in real output per capita during the upswing of at least 3.5%. The Harding and Pagan (2002) methodology is used to pick turning points in each LIC’s annual level of purchasing-power-parity (PPP)-adjusted real GDP per capita from 1950 to 2011 and then to identify the upswings.

Source: April 2013 WEO, Chapter 4.

-100

-50

0

50

100

150

200

250

300

Global conditions

Initial income

per capita

Initial economic

size

Openness and

integration

Structural conditions

Macro- economic conditions

Overall

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Past Performance ... on account of better macroeconomic and structural conditions.

Contributions to the Change in the Chances of a Growth Takeoff in LICs (Percent change in odds ratio; 2000s vs. pre-1990)

Source: April 2013 WEO, Chapter 4.

Global Economic Prospects 2013 Global recovery is uneven.

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Real GDP per Capita Growth (Median, in percent)

Projection

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Outlook Going forward, LICs are expected to maintain continued strong growth (although at

different paces across country groups), ...

Projection-6

-4

-2

0

2

4

6

2007 2008 2009 2010 2011 2012 2013 2014 2015

Fragile states Small states ASILAC MEU SSA

-6

-4

-2

0

2

4

6

2007 2008 2009 2010 2011 2012 2013 2014 2015

LICs Rest of the world

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Outlook ... also thanks to a pickup of external demand that is making up for a slowdown of

domestic demand, ...

LICs’ Domestic and External Demand (Median, in percent of GDP)

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

110

112

114

116

118

120

122

124

126

128

130

2007

2008

2009

2010

2011

2012

2013

2014

2015

Domestic demand (LHS)

External demand (RHS) Projection

Projection

Median

25th percentile

75th percentile

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Outlook ... and subdued inflationary pressures.

LIC Inflation (In percent)

0

5

10

15

20

2007 2008 2009 2010 2011 2012 2013 2014 2015

0

15

30

45

60

75

90

105

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total External Debt (In percent of GDP)

Projection

Median

25th percentile

75th percentile

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Outlook Also, a steady improvement of the external debt situation ...

0

3

6

9

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Poverty-reducing expenditure Debt service�11

Debt Service and Poverty-Reducing Expenditure (In percent of GDP)

Outlook ... has led to the desired substitution of poverty-reducing spending for debt service.

Projection

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015

All LICs Net Oil Exporters Net Oil Importers

Fiscal Balance (Median, in percent of GDP)

Projection

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Outlook LICs are projected to continue to gradually rebuild buffers depleted during the crisis.

Projection

Current Account Balance + FDI (Median, in percent of GDP)

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

2007 2008 2009 2010 2011 2012 2013 2014 2015

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• Global & Low-Income Country (LIC) Trends

• Vulnerabilities in LICs

• IMF Responses to Diverse and Evolving Needs of LICs

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Assessing Vulnerabilities The VE-LIC has two principal components.

VE-LIC

Growth Decline

Vulnerability Index

Scenario Analysis

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Assessing Vulnerabilities The structure of the Growth Decline Vulnerability Index (GDVI).

Overall Economy Index

--------------------- including e.g.: - real GDP growth - CPIA - Gini index

Overall Vulnerability Index

Fiscal Sector Index

--------------------- including e.g.: - fiscal balance - public debt - revenue growth

External Sector Index

--------------------- including e.g.: - reserve coverage - export growth

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Assessing Vulnerabilities Scenario Analysis.

Scenario Analysis

Growth Module

-------------- key channels: • external demand • terms of trade

External Module

-------------- key channels: • exports • imports • FDI • remittances

Fiscal Module

-------------- key channels: • growth • commodity prices

Inflation Module

-------------- key channels: • commodity prices

Poverty Module

-------------- key channels: • commodity prices

0

20

40

60

80

100

end-2010 end-2011 end-2012 end-2013 end-2014 end-2015

Growth Decline Vulnerability Index (Percentage of countries with high, medium, and low vulnerabilities)

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Vulnerabilities As compared to a lower vulnerability to a shock-induced recession in the baseline, ...

Projection

LICs Real GDP Growth (Median, in percent)

Baseline

EM Hard Landing

Projection

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Vulnerabilities ... the materialization of risks to growth from a “hard landing” in emerging market

economies ...

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014

-1.5

-1.1

-0.8

-0.4

0.0

Med

ian

Aver

age

AS

I

ME

U

SS

A

Sm

all s

tate

s

Frag

ile s

tate

s

Net

oil

expo

rters

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Vulnerabilities ... would negatively impact LICs’ fiscal and external sectors due to adverse commodity

price movements and weaker global demand and ...

Fiscal Balance

-5.0

-3.8

-2.5

-1.3

0.0

Med

ian

Aver

age

AS

I

ME

U

SS

A

Frag

ile s

tate

s

Net

oil

expo

rters

External Balance in 2013

Impact of EM Hard Landing on LICs in 2013 (Difference from baseline, percent of GDP)

0

20

40

60

80

100

end-2010 end-2011 end-2012 end-2013 end-2014 end-2015 end-2013 end-2014 end-2015

Growth Decline Vulnerability Index (Percentage of countries with high, medium, and low vulnerabilities)

EM Hard Landing

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Vulnerabilities ... increase their vulnerability to a shock-induced recession.

Projection

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IMF Policy Advice

•Fiscal policy: - Fiscal consolidation over the next 3–5 years - Pace and composition of adjustment depends on fiscal space and cyclical conditions

• Monetary and exchange rate policies: - Reduce interest rates in the event of a persistent hard landing in emerging markets - External adjustment needed in countries with overvalued exchange rates

• Structural policies: - Importance of domestic engines of growth - Targeted investments in infrastructure - Social safety nets need to be more effective

How to address policy challenges? ‣ Rebuild policy buffers without compromising development needs ‣ Manage short-term consequences of shocks but take into account long-term objective

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• Global & Low-Income Country (LIC) Trends

• Vulnerabilities in LICs

• IMF Responses to Diverse and Evolving Needs of LICs

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Achieving Self-Sustained

Financing

Improving Facilities

Sharpening Policy Advice

IMF Responses Responding to diverse and evolving needs of LICs.

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Facilities Many LICs have had intensive IMF program engagement over extended period.

• Empirical study of macroeconomic impact of IMF program engagement

- Long term: higher growth, lower poverty, and greater resilience to shocks

- Short term: help navigating global financial crisis (esp. financial support for LICs with large short-term imbalances or shocks)

Number of Program Years (1986-2011)

-3

-2

-1

0

1

2

3

4

5

6

7

No LT engagement LT engagement

Real GDP per capita growth (Avg. decadal changes , 1986-2010)

Median

25th percentile

75th percentile

Median

25th percentile

75th percentile

Sources: IMF staf f calculation s using World Bank data.

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

No LT engagement LT engagement

Poverty gaps,(Avg. decadal changes, 1986-2010)

Median

25th percentile

75th percentile

Median

25th percentile

75th percentile

Notes: The sample is composed of 75 LICs and four overlapping decadal period averages:1986-95; 1991-00; 1996-05; 2001-10. A country is considered to have longer-term (LT) engagement in a given decade if in f ive or more years it had a f inancial arrangement or a PSI in place, for at least six months in each of these years. The chart shows the distribution of decadal changes across countries by quartiles. Poverty gap is def ined as the mean shortfall f rom the poverty line (counting the non-poor as having zero shortfall), expressed as a percentage of the poverty line. A more negative change in the chart implies a bigger reduction in the poverty gap.

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Facilities LICs with longer-term IMF program engagement had stronger macro performance.

Periodic fundraising

from member governments

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PRGT Financing Ongoing need for Fund support for countries with a balance of payments need:

Ensuring a self-sustained capacity for IMF concessional lending.

LICs

loan resources

concessional IMF loans

subsidy resources

Contributors

Self-sustained trust

2013–35

0.9

1.25

0.0

0.5

1.0

1.5

2.0

2013–35

1.1

1.7

Lower capacity (without windfall gold profits)

High demand

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PRGT Projected Average Annual Lending 2013–35 (In billions of SDRs)

Higher capacity (with windfall gold profits)

Demand Capacity

Low demand

PRGT Financing Baseline lending capacity with windfall gold profits.

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Facilities As new facilities were generally found to be working well, only refinements.

Target subsidy resources to the poorest/most vulnerable LICs

- continued graduating “better off” (six were graduated in 2010, two more this time)

- added microstates

- blending with nonconcessional resources for “better off”

Further increase flexibility

- higher cumulative limit on Rapid

Credit Facility (RCF)

- augmentations between reviews

- ease limitations on precautionary support

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Policy Advice Sharpening IMF policy support.

Strategic priority: achieving higher sustainable growth

Scaling-up

investment

Managing natural

resources

Creating broad-based

inclusive growth

Recognizing

fragile,small

states’

needs

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Thank you

• Hugh Bredenkamp, Deputy Director, Strategy Policy and Review Department, IMF, hbredenkamp@imf.org

• Chris Lane, Division Chief, Low-Income Countries Division, Strategy Policy and Review Department, IMF, clane@imf.org

• Robert Powell, Division Chief, Concessional Financing Division, Finance Department, IMF, rpowell@imf.org

• Laurence Allain, Deputy Division Chief, Debt Policy Division, Strategy Policy and Review Department, IMF, lallain@imf.org

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Information Resources References

- Impact of IMF programs: www.imf.org/external/pp/longres.aspx?id=4690

- VE-LIC: www.imf.org/external/np/pp/eng/2012/101012a.pdf

- Gold: www.imf.org/external/np/pp/eng/2012/091712.pdf

- Review of Facilities: www.imf.org/external/np/pp/eng/2013/031813.pdf

- Review of PRGT Eligibility: www.imf.org/external/np/pp/eng/2013/031813a.pdf

- Debt Limits: www.imf.org/external/np/pp/eng/2013/030113.pdf

- Small States: www.imf.org/external/np/pp/eng/2013/022013.pdf

- Fragile States: www.imf.org/external/np/pp/eng/2012/042512.pdf

- Three-Pillar Strategy: www.imf.org/external/np/pp/eng/2012/091712.pdf